HAMDARD UNIVERSITY

PREFACE

MBA program requires a student to undergo 6 weeks summer training in an organization so

as to give student an exposure to practical management and to make them familiar with
various activities taking place in corporate world.

I must say that being an MBA student, aspiring to take specialization in the field of Finance, I
was quite familiar with the business environment theory after completing one year of my
studies. But my summer training had enabled me to get an in depth knowledge of the realities
of corporate world.

There is no doubt that theoretical knowledge acquired by a student during the pursuance of
his MBA lays down a foundation with the help of which the student, in consideration, can
expect to have the widest exposure of the reality show of the corporate world. But, one
should not take it for granted that the so-called theoretical concepts can be applied to the
business environment in totality. This is to say that, there actually is a difference between the
theoretical and practical environment in totality.

One Part of the story is that one has to take into consideration, the feasibility of a specific
theoretical concept before one is to apply the same in the typical/complex business situation.
Decisions taken out of thin air, in an ad-hoc manner, may spell a disaster for the organization
as a whole. Another part of the story is that if one has applied a theoretical concept, in the
light of its feasibility and after effective consideration of the Cost and Benefit Analysis, the
same can prove to be very fruitful for the organization.

This report is about the practical training done at M/s Bharat Heavy Electricals Limited,
Corporate Office, New Delhi as per the curriculum of MBA of Hamdard University, New
Delhi.
 HAMDARD UNIVERSITY
2

ACKNOWLEDGEMENT

I wish to express my heart full gratitude to Shri Sumit Salhotra (Sr. Mgr. Finance)
for allowing me to do my summer training at BHEL and Shri S. M. Arora (Sr. DGM
Finance) and Mrs. Anita Bahri (DGM Finance) for extending his help during the completion
of my project. I would like to thank Shri Deepak Kumar (Manager Finance) for being
always readily available for all sorts of guidance, under whose gratitude I undertook this
project. I would like to thank all these people for extending their advice and direction that is
required to carry on a study of this nature and for helping me with the intricate details of the
project at every step. Their continued cooperation and encouragement have made it possible
for me to complete this report. They encouraged me and challenged me throughout summer
process, never accepting less than my best efforts.

I would like to thank all the other people at BHEL who always helped me in completion of
my project. I wish to thank my college supervisor, Shri P. S. Raychaudhuri at Hamdard
University for their constant motivation and help.

BHUPINDER PAL SINGH GUIDED BY:

MBA (GENERAL)
SHRI DEEPAK KUMAR
BATCH 2009-11

MANAGER (FINANCE)
HAMDARD UNIVERSITY
 HAMDARD UNIVERSITY
3

EXECUTIVE SUMMARY

This Project work gives an overview of the various sections of corporate finance at BHEL. It
showcases the financial analysis of the most well known PSU Bharat Heavy Electricals
Limited. Various aspects about the awareness of financial area have been made clear through
this project report.

This project focuses on different functions of corporate finance at BHEL. However, the main
focus is on financial analysis of BHEL, Debtors Management, Provident fund and capital
budgeting.

The financial analysis gives a comparative ratio analysis of BHEL for last 5 years. This part
also focuses on working capital and its associated ratios.

The debtor’s part of the project shows the system followed and project work undertaken for
finding out status of power sector projects for non liquidation of debtors.

The Capital budgeting part of the project analyses the various aspects that are considered
while checking the financial feasibility of a project. It analyses the various techniques and
tools that are used to see whether a project is worth investments and provides suggestions for
the betterment of this process.

The Provident fund part of the project shows the various policies followed by PF department
for investment.

The project will help in exploring those dimensions which were not known to many but study
of this project will bring those to the light. The basic purpose of preparing this project was to
make a detailed study and understand its various concepts and outcomes.

While working on this project various topics and concepts came to my knowledge which was
unheard and unknown to me before.
 HAMDARD UNIVERSITY
4

Table of Contents

EXECUTIVE SUMMARY...................................................................................................................3
Table of Contents..................................................................................................................................4
COMPANY OVERVIEW: BHEL.........................................................................................................6
SWOT ANALYSIS...............................................................................................................................7
I. BUSINESS SECTORS.........................................................................................8
(A) POWER SECTOR.........................................................................................9
(B) INDUSTRY.................................................................................................10
(C) INTERNATIONAL BUSINESS......................................................................11
..................................................................................................................... 11
II. RESEARCH AND DEVELOPMENT....................................................................12
III. QUALITY ASSURANCE...................................................................................12
IV. JOINT VENTURES..........................................................................................13
BHEL - The continuing growth momentum:.......................................................................................13
Strategic business initiatives in year 2009-2010..............................................14
Future Dimension.............................................................................................14
Corporate social responsibility in BHEL............................................................15
MOU signed by BHEL........................................................................................17
CAPACITY EXPANSION.......................................................................................17
GLOBAL FORAYS...............................................................................................18
WORKING CAPITAL........................................................................................................................18
The dangers of excessive working capital:.......................................................19
The dangers of inadequate working capital:.....................................................19
.............................................................................................................................................................20
FINANCIAL PERFORMANCE.........................................................................................................21
CHALLENGES:..................................................................................................................................21
BALANCE SHEET.............................................................................................................................22
PROFIT & LOSS ACCOUNT ............................................................................................................24
FINANCIAL RATIOS........................................................................................................................25
COMPARISON OF BALANCS SHEETS..........................................................................................37
OVERVIEW OF THE BHEL CORPORATE FINANCE DEPARTMENT........................................38
CASH MANAGEMENT.........................................................................................39
CORPORATE BOOKS..........................................................................................39
ESTABLISHMENT...............................................................................................39
 HAMDARD UNIVERSITY
5
INTERNAL AUDIT...............................................................................................40
FINANCIAL SERVICES DEPARTMENT..................................................................40
TAXATION......................................................................................................... 40
PROVIDENT FUND TRUST..................................................................................41
DEBTORS.......................................................................................................... 45
CAPITAL BUDGETING....................................................................................................................51
Techniques of capital budgeting ......................................................................55
CAPITAL BUDGETING AT BHEL...................................................................................................59
Objective of the investment proposal:..............................................................59
BEGINNING OF THE CAPITAL BUDGETING PROCEDURE....................................62
Five year plan................................................................................................62
Annual plan:.................................................................................................. 62
EVALUATION OF AN EXISTING PROJECT............................................................66
CONCLUSION...................................................................................................................................69
REFERENCES....................................................................................................................................70
 HAMDARD UNIVERSITY
6

COMPANY OVERVIEW: BHEL

Established in the late 50’s

BHARAT heavy electrical limited
(BHEL) is a name which is
recognized across the industrial
world. It is largest manufacturing
enterprise in India and one of the
leading international companies in
the field of power equipment
manufacturer.

BHEL offers a wide spectrum of

products and services to core sectors of the Indian economy, viz., power, transportation, oil &
gas, renewable energy, defence.etc.

A dynamic 45000 strong team embodies the BHEL philosophy of professional excellence to
take up future challenges.

With corporate headquarters at New Delhi, 14 manufacturing units, one subsidiary, a

widespread regional services network and project sites all over India and abroad, BHEL is
India’s industrial ambassador to the world with an export presence in more than 70 countries.

BHEL has a consistent track record of growth, performance and profitability. The world bank
in its report on the Indian public sector, has described BHEL “one of the most efficient
enterprise in the industrial sector at par with international standards of efficiency” BHEL has
already obtained ISO-9000 certification for quality management and all major units/divisions
of the company including the corporate office have been upgraded to the latest ISO-9000:
2000 VERSION.BHEL has secured iso-14001 certification for environmental management
system and OHSAS-18001 certification for occupational health & safety management
systems, for all its major units.
 HAMDARD UNIVERSITY
7

Value
Stakeholder
Enhancing
to
committed
enterprise
engineering
class

VISION
A world
VALUES
areas.
other
infrastructure and
transportation,
industry,
fields of energy,
and services in the
products, systems
through
business solutions
providing
enterprise
engineering
multinational
To be an Indian

MISSION
potential

quality

total

● ● ●

• Zeal to excel and zest for change.

• Integrity and fairness in all matters.

SWOT
• Respect for dignity and potential of individuals.

• Strict adherence to commitments.

• Ensure speed of response.

• Foster learning, creativity and team work.

• Loyalty and pride in the company

ANALYSIS

Strengths
 HAMDARD UNIVERSITY
8

➢ Good corporate image

➢ Complete range of products for transmission and distribution
➢ Established Brand Name
➢ Considered to be having design ability

Weakness
➢ The procurement process in the company is cumbersome and subject to auditing
➢ Low exposure to the needs and dynamics of distribution business
➢ Role clarity on the requirement of being an equipment supplier or a solution provider
➢ Acceptance of customers to execute low value high volumes jobs

Opportunities
➢ Huge investment leading to greater demand of goods and services
➢ Demand leading to industry operating at full and over capacity
➢ Better price realizations
➢ Earl birds to learn faster and achieve repeat orders
➢ Formation of business groups and tie ups for joint bidding
➢ Healthier working environment and increased private sector participation in operation of distribution
circles also.

Threats
➢ Purchased preference maybe extended to distribution sector
➢ Increased in number of small contractors leading to price wars
➢ Emergence of new player in market.
➢ Political pulls and pressures may jeopardize the hole process, raising alarm about the privatization
and being anti-people

I. BUSINESS SECTORS

BHEL’s operations are organized around three business sectors, namely Power, industry-
including Transportation, Transmission, Telecommunication & Renewable Energy and
Overseas Business. The major business (approx 80%) is from power sector.
 HAMDARD UNIVERSITY
9

(A) POWER SECTOR

BHEL manufactures a wide range of products and systems for thermal, nuclear, gas and
hydro based utility power plants to meet customer requirements for power generation and
transmission. Its capability ranges from supplying individual equipment to setting up
complete power plants on turnkey basis, packed by reliable after sale-services. BHEL turnkey
capabilities have been proved in a number of projects in India and abroad.

BHEL –built power generation sets account for nearly two-third of the overall installed
capacity and three-fourth of the power generated in India. The company has proven expertise
in plant performance improvement through renovation, modernization and upgrading of a
variety of power plant equipment, besides specialized know how of residual life assessment
(RLA), Health diagnostics and Life Extension Program (LEP) of plants.

o Thermal

BHEL supplies steam turbines, generators, boilers and matching auxiliaries up to 800 MW
rating including supercritical sets of 660/800 MW.

o Nuclear

BHEL has manufactured and supplied steam turbines and generators for 220 MWe, 235
MWe and 540 MWe ratings

o Hydro

BHEL engineers and manufactures custom-built hydro power equipment. Its range covers
turbines of Francis, pelton and Kaplan type. Pump turbines, bulb turbines.
 HAMDARD UNIVERSITY
10

(B) INDUSTRY

BHEL manufactures and supplies major capital equipment and systems like captive power
plants, centrifugal compressors, drive turbines, industrial boilers & auxiliaries, waste heat
recovery boilers, gas turbines, pumps, heat exchangers, electric machines, valves, heavy
castings and forgings, to a number of industries other than power utilities, like metallurgical,
mining, cement, paper, fertilizers, refineries and petro-chemicals. BHEL has also emerged as
a major supplier of controls and instrumentation systems especially distributed digital control
systems for industries, and simulators for various applications. BHEL is supplying X'mas tree
valves and well heads up to a rating of 10,000 psi to ONGC and Oil India. It can also supply
on-shore drilling rigs, sub-sea well heads, super deep drilling rigs, desert rigs and heli-rigs.

o Transportation

Today over 70% of the Indian Railways .one of the largest railway networks in the world is
equipped with traction equipment built with bhel .Most of the trains of the Indian Railways
are equipped with BHEL?s traction and traction control equipment. India's first underground
metro at Calcutta runs on drives and controls supplied by BHEL. The Company has
developed and supplied broad gauge 3900 HP AC locomotives, 5000/4600 HP AC/DC
locomotives, diesel shunting locomotives of up to 2600 HP, battery powered road vehicles,
including electrics & control electronics. BHEL has acquired the technology for 6000 HP 3-
phase AC Locos and started manufacturing the electrics & controls as well as those for 3-
phase AC EMUs, Diesel EMUs and OHE cars.

o Transmission

BHEL today is the leader in the field of power transmission in India with a wide range of
transmission systems and products. BHEL supplies a wide range of transmission products
and systems of up to 400 kV class. Those include: high-voltage power and distribution
 HAMDARD UNIVERSITY
11
transformers, instrument transformers, dry-type transformers, SF6 switchgear, capacitors and
ceramic insulators. Equipment for high-voltage direct current (HVDC) systems is also
supplied, for economic transmission of bulk power over long distances. Series and shunt
compensation systems are also manufactured to minimize transmission losses. BHEL has
developed and commercialized the country’s first indigenous 36 kV Gas Insulated Substation.

o Gas

BHEL is the only Indian company capable of manufacturing large size gas based power plant
equipment, comprising advance-class gas turbine up to 289 MW (ISO) rating for open and
combined cycle operations. BHEL is the largest supplier of well heads, X-MAS trees and oil
rigs to ONGC and oil

(C) INTERNATIONAL BUSINESS

BHEL has, over the years established its reference in more than 70 countries across all
inhabited countries of the world. These references encompass almost the entire range of
BHEL products and services, covering Thermal, Hydro and gas based turnkey power projects
,substation projects, rehabilitation projects, besides a wide variety of products like
transformers, compressors, valves and oil field equipment, electrostatic precipitators,
photovoltaic equipment, Insulators, Heat exchangers, Switch gears etc.

The company has been successful in meeting demanding requirements of international

markets in terms of complexity of works as well as technological ,quality and

Other requirements viz HSE requirements, financing packages and associated O&M services,
to name a few.

BHEL has proved its capability to undertake projects on fast track basis. BHEL has also
established its versatility to successfully meet the other varying needs of various sectors, be it
captive power, utility power generation or for the oil sector. Besides undertaking turnkey
 HAMDARD UNIVERSITY
12
projects on its own, BHEL also possesses the requisite flexibility to interface and compliment
other international companies for large projects and has also exhibited adaptability by
manufacturing and supplying intermediate products.

II. RESEARCH AND DEVELOPMENT

BHEL’s engineering and R&D efforts are focused on improving the quality of its products,
upgrading existing technologies, accelerating indigenization and developing new products for
diversification, reducing time-cycle and costs. A highly qualified and experienced team of
engineers and scientists are engaged in R&D activities at BHEL’s corporate R&D division,
Hyderabad, as well as at all the manufacturing units and they have close interaction with
other national research laboratories and academic institutions. R&D efforts have already
yielded several significant results in terms of better products and improved technologies.

A few among the many R&D accomplishments are: atmospheric bubbling fluidized bed
combustion(AFBC) boiler(up to 165t/h);ceramic honeycombs for catalytic convertors;
surface coating for erosion; renewable energy systems, including wide electric generators;
solar photovoltaic and solar water heating systems.

Recently, centers of excellence for simulators, computational fluid dynamics (CFD), and a
centre for development of permanent magnet machines, have been established.

III. QUALITY ASSURANCE

 HAMDARD UNIVERSITY
13
Quality of BHEL products is evidenced through state of-the-art design and technology
adopted from world renowned collaboration. BHEL gives emphasis to the highest standards
of quality at every stage of operation through implementation of quality management system
and procedures in line with international standards and practices.

BHEL, where quality systems as per ISO-9001 have taken deep roots, has now made
significant achievements in Total Quality Management by adopting CII/EFQM model for
business excellence.

BHEL shares the growing global concern on issues related to environment & occupational
health & safety. The units of BHEL have been accredited to ISO-14001 Environmental
Management System.

IV. JOINT VENTURES

a) BHEL-GE gas turbine services private limited (B

b) NTPC-BHEL POWER PROJECTS PVT. LTD. (NBPPPL)

c) UDANGUDI POWER CORPORATION LTD.

d) BARAK POWER PVT. LTD.

e) Power plant performance improvement ltd.

f) HEC & BHEL Joint Venture for Foundry Forge Company

BHEL - The continuing growth momentum:

 HAMDARD UNIVERSITY
14

Strategic business initiatives in year 2009-2010

• BHEL and Toshiba Corporation, Japan have signed a MoU to explore the possibility
of establishing a Joint Venture Company to address transmission and distribution
(t&d) business in India and other mutually agreed countries.

• MoUs have been signed with Alstom for participating in the tender for setting up a
factory for electric loco companies at Dankuni, West Bengal and with GE for
participating in the tender for setting up a Diesel loco factory at Marhowar, Bihar.

• BHEL has been nominated as the nodal agency for serial production of marine gas
turbines named Sagar Shakti Engine for propulsion of Indian Naval Ships, with rated
power of 12MW.

• BHEL and Maharashtra State Power Generation Company Limited have signed a
MoU for setting up a JV company to builddown and operate a 1500-1600 MW Power
plant at Latur in Maharashtra.

• BHEL and Madhya Pradesh power Generation Company limited have formed a JV
company to build, own and operate a 2*800 MW Thermal Power Plant with super
critical parameters at Khandwa in Madhya Pradesh.

Future Dimension

• The power sector is poised to remain in a growth trajectory even during XII and XIII
plan periods as the Govt. shifts gears on infrastructure’s a part of the plan to shift to
energy-saving technology and lower emissions, the share of thermal projects based
on supercritical technology will rise, going forward.

• To maintain a balanced growth, BHEL will focus efforts on Transportation and

Transmission sectors.

• To achieve time cycle reduction, BHEL is implementing companywide ERP covering

technical, commercial and manpower areas.
 HAMDARD UNIVERSITY
15

• The new paradigm of competitiveness calls for a strategic shift that that will require
enhancement of capabilities. With capacity expansion to 20,000 MW by March 2012,
we are building new foundation for BHEL by ensuring that investments are timely,
well planned, scalable and competitive.

• Engineering and technology have been BHEL’s core capabilities. Greater

standardization of components and subsystems that will drive competitiveness and
faster delivery is being pursued.

• The company is on track to become a $10-11 billion turnover company by 2011-12 in

line with its strategic plan. BHEL’s performance in the year gone by was made
possible by the confidence reposed by its stake holders including the government of
India.

Considering need of the country to transmit bulk power over long distance, BHEL
would continue its development of 1200 KV products such as transformer and CVT
which are slated to field trial at 1200 KV Bina Test State

Corporate social responsibility in BHEL

• As part of its corporate social responsibility, during the year BHEL undertook
socio-economic and community development programs to promote education,
improvement of living conditions and hygiene in villages and communities
located in the vicinity of its manufacturing plants &project sites spread across
the country.

• During the year, nine social & welfare projects were completed by various
units of BHEL. These include construction of community facilities in villages,
up gradation of schools, scholarship schemes for underprivileged children,
providing water facilities, organizing eye camps, and creation of self
employment opportunities for unemployed women from the downtrodden
community.
 HAMDARD UNIVERSITY
16

• Reaching out to the distressed victims in the flood ravaged areas of Andhra
Pradesh and Karnataka, BHEL has made a humble contribution to help
alleviate their suffering.

• As part of social commitment, 3626 act apprentices were trained in the

company. In addition, 70`` students/trainees from various professional
institutions underwent vocational training.

AWARDS AND PRIZES

Shri C.S Verma, Director

(Finance), BHEL Receiving
ICWAI National Award for
Excellence in Cost Management
from Shri Anurag Goel,
Secretary, Minister of Corporate
Affairs, GOI

Shri B.P.Rao, Director (IS&P),

BHEL receiving the DSIJ Most
Investor Friendly PSU Awards
2009 from Hon’ble Chief Minister
of Delhi, Smt. Sheila Dikshit

CMD, Shri Ravi Kumar

receiving the prestigious
‘ENERTIA’ Individual
Contribution Awards in Thermal
Power Sector’ from Shri R V
Shahi, Former secretary –Power,
GOI
 HAMDARD UNIVERSITY
17

MOU signed by BHEL

• BHEL signs MoU with Ministry of Heavy Industries & Public Enterprises
The Memorandum of Understanding (MoU) for the year 2010-11 between BHARAT
Heavy Electrical Limited (BHEL) and the Ministry of Heavy Industries & Public
Enterprises was signed by B. Prasada Rao, CMD (BHEL) and Dr. Satyanarayana
Dash, Secretary (Department of Heavy Industry, Ministry of Heavy Industries &
Public Enterprises) in the presence of Functional Directors on the board of BHEL and
other senior officials of the Ministry.

• A MOU has been signed in between BHEL and Nuclear Power Corporation of India
Ltd. To form a joint venture to carry out EPC activities for power plants based on
atomic energy both within the country and outside.

CAPACITY EXPANSION

• Capability to deliver 15,000 MW of power equipment per annum established and further
augmentation to 20,000 MW per annum by March 2012
 HAMDARD UNIVERSITY
18
• State-of-the-art manufacturing facilities established for supercritical equipment.

• Contemporary manufacturing facility set up for high-rating transformers.

• 31 new cranes procured to increase erection capability at various sites.

GLOBAL FORAYS

• Physical export orders of Rs 3571 crore

• Foray into a new market-Belarus

• Order for largest ever Hydro Project-1,200 MW Punatsangchhu Hydro electric projects,
Bhutan.

• 734 MW commissioned overseas – a new record.

WORKING CAPITAL

Working Capital Management is the process of planning and controlling the level and mix of
current assets of the firm as well as financing these assets. Specifically, Working Capital
 HAMDARD UNIVERSITY
19

Management requires financial managers to decide what quantities of cash, other liquid
assets, accounts receivables and inventories the firm will hold at any point of time.

The dangers of excessive working capital:

1. It results in unnecessary accumulation of inventories. Thus the
chances of inventory mishandling, waste, theft and losses increase
2. It is an indication of defective credit policy and slack collection period.
Consequently higher incidences of bad debts occurs which adversely
affects the profits.
3. It makes the management complacent which degenerates into
managerial inefficiency
4. Tendencies of accumulating inventories to make speculative profits
grow. This may tend to make the dividend policy liberal and difficult to
copes within future when the firm is unable to make speculative profits.

The dangers of inadequate working capital:

1. It stagnates growth .It becomes difficult for the firms to undertake
profitable projects for non-availability of the WC funds.
2. It becomes difficult to implement operating plans and achieve the firms
profit targets
3. Operating inefficiencies creep in when it becomes difficult even to meet
day-to-day commitments.
4. Fixed assets are not efficiently utilized.
5. It renders the firm unable to avail attractive credit opportunities etc.
6. The firm loses its reputation when it is not in position to honor its short-
term obligations. As a result the firm faces a tight credit terms
 HAMDARD UNIVERSITY
20

CALCULATION OF WORKING CAPITAL OF BHEL

2010 2009 2008 2007 2006 2005

429348 369010.7 279061.8 210629.7 163307.8 133429.79
Total Current Assets
324417 283329 200223 144201.1 103200.2 99213.58
Total Current Liabilities
NET W/CAPITAL ( CA - CL 34216.2
104931 85681.7 78838.8 66428.6 60107.6
) 1

1000000

900000

800000

700000

600000
NET W/CAPITAL ( CA - CL )
500000 Total Current Liabilities
Total Current Assets
400000

300000

200000

100000

0
2005 2006 2007 2008 2009 2010
 HAMDARD UNIVERSITY
21

FINANCIAL PERFORMANCE

2008-2009 2009-2010 PERCENTAGE

CHANGE

Turnover
28033 34154 22
(Rs. Crore)

Profit Before
Tax 4849 6590 36
(Rs. crore)
Net profit
3138 4310 37
(Rs. crore)

Net worth
12939 15721 22
(Rs. crore)

Earnings Per
Share 64.11 88 37
(Rs.)
Value addedper
employee 21.67 27.70 28
(Rs. Lakh)
Capital
Investment 1082 1767 63
(Rs. Crore)

CHALLENGES:

o Technology Transition – As BHEL moves to supercritical business need to have a

strong vendor base to support also existing vendors require technology upgrade as
present setup is not sufficient to support this.

o Increased international competition.

o Increased domestic competition like, L&T JV with Mitsubishi.

 HAMDARD UNIVERSITY
22

BALANCE SHEET
for the year ended 31st March, 2009

Schedule For the year ended For the year ended

31.03.2009 31.03.2008
SOURCES OF FUNDS
Shareholder' Fund
Share Capital 1 489.52 489.52
10284.69
Reserves & Surplus 2 12449.29 12938.81 10774.21
Loan Funds
Secured Loans 3 0.00 0.00
95.18
Unsecured Loans 4 149.37 149.37 95.18
13088.18 10869.39
APPLICATION OF FUNDS
Fixed Assets
Gross Block 5 5224.87 4443.47
Less: Depreciation/Amortisation to-date 3713.25 3403.08
1511.62 1040.39
Less: Lease Adjustment Account 41.22 59.13
Net Block 1470.4 981.26
658.03
Capital Work -in-Progress 6 1156.97 2627.37 1639.29
Investments 7 52.34 8.29
Deferred Tax Assets Net 1840.30 1337.93
(Refer note no.20 of Schedule 19)
Current Assets, Loans& Advances
Current Assets 8
Inventories 7837.02 5736.40
Sundry Debtors 15975.50 11974.87
Cash & Bank Balance 10314.67 8386.02
Other Current assets 350.21 421.09
Loans and Advances 2423.67 1387.80
36901.07 27906.18
Less:
Current Liabilities & Provisions
1
Current Liabilities 0 23357.32 16576.45
1
Provisions 1 4975.58 3445.85
28332.90 20022.30
Net current assets 8568.17 7883.88
13088.18 10869.39
HAMDARD UNIVERSITY
23
PROFIT & LOSS HAMDARD UNIVERSITY
ACCOUNT 24
for the year ended 31st March, 2009

Schedule For the year ended For the year ended

31.03.2009 31.03.2008
EARNINGS
Turnover (Gross) 12 28033.19 21401.01
Less: Excise duty & Service Tax 1820.86 2096.37
Turnover (Net) 26212.33 19304.64
Other Income 12A 1497.36 1444.76
Accretion/Decretion to Work-in-
progress & 13 1151.54 827.26
Finished Goods
28861.23 21576.66
OUTGOINGS
Consumption of Material, Erection
and Engineering
Expenses 14 17620.05 11820.87
Employees' remuneration & benefits 15 2983.68 2607.69
Other expenses of Manufacture, 16 1835.77 1644.23
Administration, selling and Distribution
Provisions (net) 17 1280.97 778.25
Interest & other borrowing costs 18 30.71 35.42
Depreciation and amortisation 5 334.27 297.21
Less: Cost of jobs done for internal use 61.18 38.32
24024.27 17145.35
Profit before prior period items 4836.96 4431.31
Add/(Less): Prior period items (Net) 18A 11.89 -0.92
Profit before tax 4848.85 4430.39
Less: Provision for taxation
For Current Year
:- Current tax 2250.17 1934.95
(incl. wealth tax Rs. 0.17 crore
(Previous year Rs. 0.07 crore)
:- Fringe Benefit Tax 40.00 27.1
:- Deferred Tax -502.37 -402.77
1787.80 1559.28
For earlier years
:- Tax -77.72 11.77
(includes Income Tax abroad Rs. 8.48
crore)
:- Fringe Benefit Tax 0.56 0.00
1710.64 1571.05

Profit after tax 3138.21 2859.34

Add: Balance of profit brought 429.69 442.72
forward from last year
Foreign Project Reserves written back 1.17 1.02
Profit available for appropriation 3569.07 3303.08
Less: Appropriation-
:- General Reserve 2000.00 2000.00
:- Dividend (incl interim dividend of 832.18 746.52
 HAMDARD UNIVERSITY
25

FINANCIAL RATIOS

1. CURRENT RATIO

/
CURRENT RATIO = CURRENT ASSETS CURRENT LIABILITY

YEARS 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

CURRENT 1.58 1.46 1.40 1.30 1.32

RATIO
 HAMDARD UNIVERSITY
26

Liquidity and debt-equity ratios are widely used financial ratios. Liquidity ratio, also
called the 'short-term solvency' ratio shows the adequacy. It is calculated as current
assets/current liabilities. An ideal current ratio would be 2, indicating that even if the
current assets are to be reduced by half, the creditors will be able to able to get their
money in full.

2. QUICK RATIO

QUICK RATIO = LIQUID ASSETS / CURRENT LIABILITY

YEARS 2005 – 2006 2006 - 2007 2007 - 2008 2008 - 2009 2009 – 2010

QUICK 1.21 1.16 1.11 1.10 1.52

RATIO
 HAMDARD UNIVERSITY
27

Quick ratio (or "acid test"): Quick Assets (cash, marketable securities, and receivables) /
Current Liabilities—provide a stricter definition of the company's ability to make
payments on current obligations. Ideally, this ratio should be 1:1. If it is higher, the
company may keep too much cash on hand or have a poor collection program for
accounts receivable. If it is lower, it may indicate that the company relies too heavily on
inventory to meet its obligations.

3. DEBTOR TURNOVER RATIO

DEBTOR TURNOVER = GROSS SALES / TOTAL DEBTORS

YEARS 2005 - 2006 2006 - 2007 2007 - 2008 2008 - 2009 2009 – 2010

DEBTOR 2.02 1.93 1.79 1.75 1.65

TURNOVER
RATIO
 HAMDARD UNIVERSITY
28

This is also called Debtors Velocity or Average Collection Period or Period of Credit
given.

(Average Debtors/Sales) x 365 for days

(52 for weeks & 12 for months)

4. PROFIT MARGIN

PROFIT MARGIN (%) = PROFIT AFTER TAX / NET SALES

YEARS 2005 - 2006 2006 - 2007 2007 - 2008 2008 - 2009 2009 – 2010

PROFIT 12.5% 14.00% 14.60% 12.00% 12.8%

MARGIN(%)
 HAMDARD UNIVERSITY
29

The two basic components of the net profit ratio are the net profit and sales. The net
profits are obtained after deducting income-tax and, generally, non-operating expenses
and incomes are excluded from the net profits for calculating this ratio. Thus, incomes
such as interest on investments outside the business, profit on sales of fixed assets and
losses on sales of fixed assets, etc are excluded.

5. EARNING PER SHARE

EARNING PER SHARE = PROFIT AFTER TAX / NUMBER OF EQUITY SHARES

YEARS 2005 - 2006 2006 - 2007 2007 - 2008 2008 - 2009 2009 – 2010

EARNING 68.60 98.70 58.00 64.10 88.05

PER SHARE
 HAMDARD UNIVERSITY
30

Earnings per share is generally considered to be the single most important variable in
determining a share's price. It is also a major component used to calculate the price-to-
earnings valuation ratio.

6. AVERAGE DEBT COLLECTION PERIOD

AVERAGE DEBT COLLECTION PERIOD (DAYS) =

TOTAL DEBTORS * 360 / GROSS SALES

YEARS 2005 – 2006 2006 - 2007 2007 - 2008 2008 - 2009 2009 – 2010

AVG DEBT 178 186 201 205 218

COLLECTION
PERIOD(DAYS)
 HAMDARD UNIVERSITY
31

The approximate time it takes for a business to receive payments owed, in terms of
receivables, from its customers and clients.

7. INVENTORY TURNOVER RATIO

INVENTORY TURNOVER RATIO = GROSS TURNOVER / INVENTORIES

YEARS 2005 - 2006 2006 - 2007 2007 - 2008 2008 - 2009 2009 – 2010

INVENTORY 3.87 4.44 3.73 3.57 3.70

TURNOVER
RATIO
 HAMDARD UNIVERSITY
32

A ratio showing how many times a company's inventory is sold and replaced over a
period. The days in the period can then be divided by the inventory turnover formula to
calculate the days it takes to sell the inventory on hand or "inventory turnover days".

8. DEBT EQUITY RATIO

DEBT EQUITY RATIO = TOTAL DEBT / TOTAL EQUITY

YEARS 2005 - 2006 2006 - 2007 2007 - 2008 2008 - 2009 2009 – 2010

DEBT 0.07 0.01 0.01 0.01 0.01

EQUITY
RATIO
 HAMDARD UNIVERSITY
33

Debt/equity ratio is equal to long-term debt divided by common shareholders. Typically

the data from the prior fiscal year is used in the calculation. Investing in
a company with a higher debt/equity ratio may be riskier, especially in times of
rising interest rates, due to the additional interest that has to be paid out for the debt.

9. PRICE EARNING RATIO

PRICE EARNING RATIO =

MARKET PRICE PER EQUITY SHARE / EARNING PER SHARE

YEARS 2005 - 2006 2006 - 2007 2007 - 2008 2008 - 2009 2009 – 2010

PRICE 20.20 23.29 44.24 21.25 27.32

EARNING
RATIO
 HAMDARD UNIVERSITY
34

A valuation ratio of a company's current share price compared to its per-share

earnings. Also sometimes known as "price multiple" or "earnings multiple".

10. INTEREST COVERAGE RATIO

INTEREST COVERAGE RATIO =

PROFIT BEFORE INTEREST & TAX / INTEREST EXPENSES

YEARS 2005 - 2006 2006 - 2007 2007 - 2008 2008 - 2009 2009 – 2010

INTEREST 43.65 86.22 125.08 120.60 197.73

COVERAGE
RATIO
 HAMDARD UNIVERSITY
35

A ratio used to determine how easily a company can pay interest on outstanding
debt. The interest coverage ratio is calculated by dividing a company's earnings
before interest and taxes (EBIT) of one period by the company's interest expenses of
the same period.

COMPARISON OF CURRENT AND QUICK RATIO

 HAMDARD UNIVERSITY
36

Particulars Mar 2010 Mar 2009 Mar 2008 Mar 2007 Mar 2006 Mar 2005

SOURCES OF FUNDS
Share Capital 4895.00 4895.2 4895.2 2447.6 2447.6 2447.60
Share warrants & Outstanding 0.00 0.00 0.00 0.00 0.00 0.00
Total Reserve 154278.00 124492.90 102846.90 85435.00 70566.2 57821.34
Shareholder's Funds 159173.00 129388.10 107742.10 87882.60 73013.38 60268.94
Secured Loans 0 0 0 0 5000.00 5000.00
Unsecured Loans 1278.00 1493.70 951.80 893.30 582.40 369.82
Total Debts 1278.00 1493.70 951.80 893.30 5582.40 5369.82
Total Liabilities 160451.00 130881.80 108693.90 887759.00 78596.2 65638.76

APPLICATION OF FUNDS :
Gross Block 52248.70 44434.70 41350.50 38220.6 36289.37
Less: Accumulated Depreciation 37132.50 34030.80 31170.50 28527.6 26193.47
Less: Impairment of Assets 0.00 0 0 0 0 0
Net Block 15116.20 9812.6 10180.00 9693.00 10095.90
Lease Adjustment A/c -412.20 -591.30 -292.60 129.80 346.51
Capital Work in Progress 11569.70 6580.03 3025.40 1845.72 953.18
Pre-operative Expenses pending 0.00 0 0 0 0 0
Assets in transit 0.00 0 0 0 0 0
Investments 798.00 523.40 82.90 82.90 82.93 89.52

Current Assets, Loans & Advances

Inventories 92355.00 78370.20 57364.00 42176.70 37443.7 29161.07
Sundry Debtors 206887.00 159755.00 119748.70 96958.2 71680.7 59721.42
Cash and Bank 97901.00 103146.70 83860.20 58089.10 41339.7 31778.62
Other Current Assets 4068.00 3502.1 4210.9 1997.00 845.00 471.76
Loans and Advances 28137.00 24236.7 13878.00 11408.7 11998.7 12296.92
Total Current Assets 429348.00 369010.7 279061.8 210629.7 163307.8 133429.79

Less : Current Liabilities& Provisions

Current Liabilities 280237.00 233573.20 165764.50 118978.7 88077.4 71204.46
Provisions 44180.00 49755.8 34458.5 25222.4 15122.8 13254.47
Total Current Liabilities 324417.00 283329 200223.00 144201.1 103200.2 99213.58
Net Current Assets 104931.00 85681.70 78838.80 66428.6 60107.6 48970.85
Miscellaneous Expenses not written off 0.00 0 0 0 0 0
Deferred Tax Assets / Liabilities 15272.00 18403.00 13379.30 9351.60 6737.20 5182.79
Total Assets 160451.00 130881.80 108693.90 88775.9 78596.2 65638.76
 HAMDARD UNIVERSITY
37

COMPARISON OF BALANCS SHEETS

NOTE: the data for the year 2009-10 is provisional.
 HAMDARD UNIVERSITY
38

OVERVIEW OF THE BHEL CORPORATE

FINANCE DEPARTMENT

Basically the whole set up of the finance department is made so as to cover all the aspects
involved in the financial decisions. BHEL is a debt free company and has its own accounting
policies. While to get a project, BHEL presents its quote like other participants and the whole
procedure is carried on.

Firstly, we will analyze the various departments of finance at BHEL. These can be depicted
as follows:

• Cash management

• Corporate books

• Internal audit

• Establishment and payroll

• Financial services department

• Taxation (direct and indirect)

• Provident fund trust

• Debtors

• Budgeting

• Administration and insurance

 HAMDARD UNIVERSITY
39
CASH MANAGEMENT

o Collections and disbursements are made to the units on the basis of their needs and
allocations.

o Management of inflow and outflow of cash.

o Banking arrangement, cash credit limit, working capital requirements.

o Informing other departments about the deficit or surplus of funds.

o Making daily, weekly and yearly reports on the basis of data collected from different
manufacturing units.

CORPORATE BOOKS

o Finalization of accounts of corporate finance.

o Reconciliation of balance sheets of various accounts with the units.

o Preparation of Annual Report of BHEL as a whole after collecting annual reports of

various units, duly certified by chartered accountant.

o Government audit of balance sheet

ESTABLISHMENT

o Preparation of payroll and pay slips.

o Check and pass

• Medical bills

• Entertainment bills & Telephone bills

 HAMDARD UNIVERSITY
40

• Conveyance bills

INTERNAL AUDIT

o Information of audit observation of all the divisions under the unit.

o Finalization of audit report after scrutiny of replies submitted by the various divisions
against the audit observations.

o Collection with various divisions under the unit for the collection of replies for annual
submission to government auditor.

FINANCIAL SERVICES DEPARTMENT

This department deals with financial services and therefore it has to invest as well as borrow
funds from different companies. BHEL borrows funds from different financial
institutions/banks and invest in different securities. The functions of financial services
department are listed below:

o Placement of short term funds

o Arrangement of funds

o For-Ex risk management

o Lease financing

o Funds management.

TAXATION

The direct tax department of BHEL works as per the income tax act. The tax payment is
made in advance as per the income tax rules. Since the total income of BHEL is greater than
40 lakh rupees, an audit u/s 44AB known as Tax audit is done by the external auditors after
the statutory audit. Usually the statutory auditors are the ones who undertake the tax audit.
 HAMDARD UNIVERSITY
41
The company prepares all the documents for the audit. The documents contain details which
are more or less the same as prepared for the statutory audit except for certain changes that
are made as per the Income Tax Act. For instance, depreciation as per the companies act for
P&M is say 25%, but as per IT Act it is 15%. So the changes are accommodated for.

An important concept to be followed in direct taxes is TDS i.e. Tax Deducted at Source.
During the financial year 2010-11, tax to be deducted at source at the following rates.

PROVIDENT FUND TRUST

Provident fund:

A fund built by a contribution made by the employee during his working life and an equal
contribution by his employer @ 12% of his salary at present and is payable back to him all together
with interest on exit from employment. Originally set up to provide monetary security to employees
after retirement, it has, over the years developed into a broad plan for social security which covers the
retirement, buying house, medical/marriage/education expenses etc.

Types of provident fund:

1) Statutory provident fund: all industries and establishments whose number of regular
employees exceeds 20 or more people are bound to contribute towards these funds. Such
provident fund is compulsory for employees drawing salaries (basic +DA) of up to Rs.6500/-
p.m.

2) Voluntary provident fund: in VPF scheme the employee contributes more towards the PF
over and above the 12% as mandated by the government. This additional voluntary
contribution enjoys all the benefits of PF, except that the company does not contribute an
equal amount. But still, the interest rate is equal to the rate of interest for PF and the
withdrawal on retirement is tax free. The benefit of such PF is voluntary and the benefit of
provident fund can be extended by setting up a private PF trust and by getting the same
recognized under Income tax act, 1961 or by getting the establishment/employees covered
under the EPF scheme, 1952 on voluntary basis.
 HAMDARD UNIVERSITY
42
Besides these two categories there are various types of provident funds listed as under:

1) Public Provident Fund: this kind of provident fund is designed for self employed people like
doctors, lawyers, businessmen etc.

2) Exempted provident funds: an establishment covered under the EPF&MP Act 1952 is
required to comply with the statutory provisions of the schemes framed under the act.
However, the act provides for grant of exemption from the operation of EPF scheme, 1952 to
the establishment, if it fulfills the 31 conditions prescribed in the said act.

3) Unrecognized Provident Funds: it is the provident fund which is not recognized by the
commissioner of income-tax. The employee and the employer both contribute towards this
fund. The employee’s contribution to URPF is not treated as deductible expenditure.

BHEL employee’s provident fund

Formation and constitution of PF trust:

BHEL has a total of nine PF trusts. Information regarding BHEL EPF trusts is given below:
 HAMDARD UNIVERSITY
43

Particul New Delhi Hardwar Bhopal Hyderaba Trichy Ranipet Bangalor Jhansi Chennai
ars d e
Name of BHEL EPF BHEL EPF BHEL BHEL EPF BHEL BHEL BHEL BHEL BHEL
the trust trust, trust, EPF trust, EPF EPF EPF trust, EPF EPF trust,
Delhi Hardwar trust, Hyderabad trust, trust, Bangalore trust, Chennai
Bhopal Trichy Ranipet Jhansi
Units Delhi based HEEP, Bhopal Hyderabad, Trichy, Ranipet EDN- Jhansi PS-SR,
covered Divisions,RO CFFP, IP- R&D-Hyd. piping Bang, PS-WR,
Ds,PS-NR Jagdish, centre- EPD- PS-ER
HERP- Chenna Bang,
Varan, i ISG-Bang
CFP-
Rudra.

The chairman of the trust is usually the head of the finance function and there is a separate secretary
for each trust.

BHEL, New Delhi Employees Provident Fund was formed on 1-10-1981, for the benefit of employees
of the company. Employees of Delhi/Noida based units and their branches/sites, IVP Goindwal,
EMRP Mumbai are members of the fund.

The board of trustees consists of

1) 4 representatives of the management

2) 4 representatives of the employees

Management trustees are appointed with approval of CMD and employee’s trustees are nominated by
elected trade unions. The term of office of trustees is five years.

BHEL, New Delhi Employees Provident Fund has been granted relaxation from the provisions of the
Employees Provident Fund Scheme, 1952 and is recognized under fourth schedule to IT act, 1961.

The group is mainly responsible for matters relating to:

• Provident Fund managed by the trust.

• Pension under employee’s pension scheme, 1995, being managed by EPFO.

 HAMDARD UNIVERSITY
44
Provident fund responsibilities:

The responsibilities with respect to PF mainly include:

Management of Funds

o Managing of monthly PF contribution from the participating Units/Divisions.

o Monitoring timely collection of interest/maturity proceeds of securities.

o Timely processing of refundable/ non-refundable withdrawals of members.

o Final settlements/transfer-out in respect of persons who cease to be member of the fund.

o Attending to the queries of members either in person or in writing.

o Ensuring the transfer of PF accumulations of new members/transferee

from previous trust/EPFO to avoid problem at later stage.

Investment of surplus funds:

o Effective portfolio management of surplus funds on monthly basis ensuring the full
compliance of guidelines/investment pattern issued by the Ministry of Labour.

o Bids are called from the empanelled arrangers and funds are placed with the H1 bidder. All
the investments are duly approved by the Board of Trustees.

o At present the corpus of the fund is Rs.400 crores.

Interest to members:

o Interest on member’s funds is credited to members a/c annually at the statutory rate declared
by EPFO and approved by board of trustees.

o Till date the trust has managed to pay interest to its members from its own resources.

Accounts and audit:

o Maintenance of accounts of provident fund.

 HAMDARD UNIVERSITY
45
o Preparation of annual accounts statements viz. receipt and payment a/c, income and
expenditure a/c and balance sheet of the fund.

o Issue of Annual PF statements to members.

o Annual audit of PF accounts by statutory auditors.

Compliance of statutory provisions:

o Compliance of statutory provisions like returns (monthly/annual) under EPF & MP acts 1952.

o Deduction/deposit of TDS, filing of e-TDS return quarterly and issue of TDS certificates.

o Timely payment of statutory dues like monthly inspection & EDLI charges to EPFO account.

o Submission of audited annual accounts to EPFO

o Inspection of PF records by enforcement officers of EPFO and reply of

queries raised by them.

Meetings of PF trust:

o Agenda items for meeting of board of trustees are prepared.

o Meeting of board of trustees as per the statutory provisions is held.

o Minutes and other related work is recorded.

o Meeting of all PF trust is held to discuss the common issues to bring uniformity in handling
of these issues.

DEBTORS

Debtors Management System:

At present, in BHEL business organization, a web based system is in operation for debtor’s
management at the corporate level encompassing storage, analysis and follow up of debtors
which is wholly based on Excel. As a requirement of top management information sharing,
 HAMDARD UNIVERSITY
46
consolidated project level data for audit, exchange of information with units, business sectors
project wise outstanding along with the provisions, to start with, at the end of each quarter
and the end of the year to enable the auditor to check whether units/regions have created the
provisions in line with sector advice and adequacy of the provisions with reference to total
outstanding amount. As the existing system was not able to cater these needs, BHEL
introduced an oracle based system with the help of CIT.

The following requirements are fulfilled by the system:

• Sector wise outstanding along with provisions.

• Account code wise outstanding.

• Generation of standard MIR’s through system.

• Generation of customized reports.

• Reports for company as a whole as well as for units also.

• Unit-wise and customer/project wise provisions with outstanding.

• Provisions counter checked with sectors advice.

• Accurate reporting through standard formats to management committee (MCM)

• Strengthening the business sectors efforts in cash collection.

• Ultimate liquidation of customer outstanding.

• Faster liquidation of withheld amount.

A diagrammatical model of the web based debtors management system indicating the
mechanics of information flow is given below.
HAMDARD UNIVERSITY
47
 HAMDARD UNIVERSITY
48

The debtors in BHEL are classified as follows:

1) Collectible debtors:

2) Deferred debtors: Debts which are collectible on the basis of certain punch points are
known as deferred debts. Certain punch points are given below:-

a) MRC (material receipt certificate): Debts which are to be paid within three months
from the month of issuing the certificate of material receipt.

b) Milestone: part of debtors certain on some events or time as mentioned in the

contract. E.g. trial operation, boiler lifting etc.

c) Final payment: Due after conducting say the performance guarantee test (PG test)
i.e. after the customer checks the performance of the product, a time period is
specified in the contract in which the debtors must be paid.

3) Accrued revenue: debtors under this section are classified into two parts:

a) GDPB i.e. goods dispatched pending billing which are to be ideally paid within 6
months after billing.

b) PVC i.e. Price Variation Clause which are the debtors that are a result of certain
impacts. There may be a variation or increase in price that need to be accounted
for accordingly as per the contracting rules.

Scope of debtor’s management:

• Collectible Debtors project/sector/account code wise

 HAMDARD UNIVERSITY
49
• Ageing and verification/collection plan for unverified and verified amount with respect to
each project
• Project wise Withheld and age-wise analysis.
• Deferred Payments category-wise/account code wise and their ageing
• Status and liquidation plan for accrued revenue (GDPB and PVC)
• Opening and closing balance of valuation adjustment and other debts
• Status of all contractual provisions. (CO/LD/BD/SS) along with the ageing

Submission of data by units/regions:

The debtor’s data from each unit is required in the form of eight files:

Reports:
Top management is likely to assess the status and movement of sundry debtors from time to
time. This web based system enables retrieving different types of reports for information at
the end of each reporting month. Generally, customer wise, project wise, business sector
wise, unit/region wise, account code wise etc. debtors analysis with verification and
liquidation plan are required for review.
The report modules in the web based debtors management system provide the facility to
generate the above mentioned reports. The reports can be generated using various selection
criteria.

PROJECT WORK DONE AT DEBTORS MANAGEMENT

OJECTIVE

There are projects for power sector at BHEL some of them have pending debtors of
more than 50 crore and above. The status report of these projects has to be made so that
reasons for non-liquidation of debtors could be found and problem areas could be rectified.

TARGET PROJECTS
 HAMDARD UNIVERSITY
50
SECTOR: POWER SECTOR ONLY

AMOUNT OF DEBTORS: 50 CRORE AND ABOVE AS ON 31ST MARCH, 2010

PROCEDURE

1. Collecting the project wise breakup of debtors as on 31st march, 2010 from web
based debtor’s management system

2. Power Sector (Marketing) to collect the information like zero date of the project,
date for trial operation, date for PG test, reason for delay in liquidation (if any).

CONCLUION

DOCUMENTATION PENDING SUPPLY

INCOPLETNESS 8%
5%

SHORTFALL IN PG
TEST
7%
NO DELAY
30%

WITHHELD AGAINST
LD
50%
 HAMDARD UNIVERSITY
51

CAPITAL BUDGETING

The most important function of financial management is not only the procurement of external
funds for the business but also to make efficient and wise allocation of these funds. The
allocation of funds means the investment of funds in various assets and other activities. It is
also known as investment decision, because a choice is to be made regarding the assets in
which the funds will be invested. The assets which can be acquired fall into two broad
categories;

i) Short term or current assets

ii) Long term or fixed assets

Accordingly, two types of investment decisions are to be taken. First type of investment
decision related to short term assets are called short term investment decisions or current
assets management. This is termed as working capital management. Second type of
investment decision related to long term assets are called long term investment decisions.
These are known as Capital budgeting or Capital expenditure decisions.

Meaning of Capital budgeting:

Capital budgeting is the technique of making decisions for investment in long term assets. It
is a process of deciding whether or not to invest the funds in a particular asset, the benefit of
which will be available over a period of time longer than one year.

Capital budgeting consists in planning the deployment of available capital for the purpose of
maximizing the long term profitability of the firm.

Thus, a capital budgeting decision is a firm’s decision to invest its funds in long term assets
in anticipation of an expected flow of benefits over the lifetime of the asset. These benefits
may be either in the form of increased sales or reduced costs. Capital expenditure decisions
generally include decisions regarding expansion, acquisition, modernization and replacement
of long term assets.
 HAMDARD UNIVERSITY
52
Features of Capital Budgeting:

1. Funds are invested in long term assets.

2. Funds are invested in present times in anticipation of future profits.

3. The future profits will occur to the firms over a series of years.

4. Capital budgeting decisions involve a high degree of risk because future benefits are
not certain.

Importance of Capital budgeting:

1. Such decisions affect the profitability of a firm: capital budgeting decisions affect
the long term profitability of a firm because of the fact that they relate to fixed assets.
The fixed assets, in a sense, reflect the true earning capacity of a firm. They enable a
firm to produce finished goods which is ultimately sold for profit. Hence a correct
investment decision can yield spectacular profits, whereas, an ill-advised and
incorrect decision can endanger the very survival of the firm.

2. Long time periods: the effect of capital budgeting decision will be felt by the firm
over a long time span, and thus, affects the future cost structure of the firm. To
illustrate, if a company purchases a new plant to manufacture a new product, the
company will have to incur a sizable amount of fixed costs, in terms of labor,
supervisor’s salary, insurance, rent of building etc. If in future, the product turns out
to be unsuccessful or if it yields less profit than anticipated, the company will have to
bear the burden of heavy fixed costs. Hence, the future costs, sales and profits will be
determined by the capital budgeting decisions.

3. Irreversible decisions: Capital budgeting decisions once taken are not easily
reversible without heavy financial loss to the form. This is because it is very difficult
to second hand plant.

4. Involvement of Large Amount of Funds: Capital budgeting decisions require large

amount of funds and most of the firms have limited financial resources. Hence, it is
absolutely necessary to take thoughtful and correct investment decisions because an
incorrect decision will not only result in losses but also prevent the firm from earning
 HAMDARD UNIVERSITY
53
profits from the alternative investments which had to be dropped because of the
paucity of funds.

5. Risk: Investment in fixed assets may change the risk complexion of the firm. This is
because different capital investment proposals have different degrees of risk. If the
adoption of an investment proposal increases average gain, but causes frequent
fluctuations in the profits of the firm, the firm will become more risky. As such,
investment decisions shape the basic character of a firm.

6. Most difficult to make: these decisions are among the most difficult decisions o be
taken by a firm. This is, because they require an assessment of future events which are
uncertain and difficult to predict. For example, estimating the future cash inflows and
life of the project is really a complex problem.

Kinds of Capital Budgeting Decisions:

A firm may have various investment proposals for its consideration. It may select all of them,
one of them, or some of them depending upon the various types of proposals.

i. Accept-reject decisions: this is a fundamental decision in capital budgeting.

If a proposal (or project) is accepted, the firm would invest in it and if the
proposal is rejected, the firm would not invest in it. In general, all those
proposals, or projects which yield a rate of return higher than a certain
required rate of return are accepted and the rest are rejected. By applying this
criterion, all independent proposals are either accepted or rejected.
Independent proposals are those which do not compete with other proposals
and all proposals can be accepted simultaneously. Hence, all the proposals
which satisfy the minimum investment criterion should be implemented.

ii. Mutually competitive decisions: these are related to the proposals which
compete with other projects in such a way that the acceptance of one will
automatically result in the rejection of others. For example, a company is
considering two sites X and Y for the construction its plant. If site X is
selected, site Y will be automatically rejected.
 HAMDARD UNIVERSITY
54
iii. Priority order Decisions: In case a firm has unlimited funds, all those
independent projects are accepted which yield a higher rate of return as against
some predetermined rate. However, in actual practice most of the firms have
limited funds. The firm, therefore, must fix a priority order for investing these
funds. The firm allocates funds to various projects in a manner that the long
term profits are maximized. The priority of the projects will be determined in
the basis of predetermined criterion such as the rate of return. In this way, the
projects yielding maximum return will be selected and all other projects will
be rejected.

Techniques of Capital Budgeting

There are two criteria’s for capital expenditure decisions

1. Accounting profit criteria

2. Cash flow criteria

Under accounting profit criteria there is only one method for making capital
expenditure decision. This method is known as Average Rate of Return method.

Under cash flow criteria, several methods are included. These are as under:

I. Pay back method

II. Methods based on discounted cash flows

(i) Discounted pay back method

(ii) Net present value method

(iii) Internal rate of return method

(iv)Profitability index method

In case of cash flow criteria cash inflows and cash outflows of the proposal are considered for
making the capital expenditure decisions. Cash inflows include cash coming in from a project
 HAMDARD UNIVERSITY
55
and cash outflows include cash invested in a project. Cash flow criteria are preferred as
compared to accounting profit criteria for the following reasons:

1. In case of cash flow criteria it is possible to consider the time value of money.

2. Cash flow criteria are based in cash flows rather than accounting profit,
therefore, it avoids accounting uncertainties.

Techniques of capital budgeting

Accounting profit criteria Cash flow criteria

Accounting Rate of Return

NON-DISCOUNTING TECHNIQUE DISCOUNTING TECHNIQUES

1. PAY BACK PERIOD 1. DISCOUNTED

PAYBACK PERIOD

2. NET PRESENT VALUE

3. PROFITABLITITY
INDEX

4. INTERNAL RATE OF
RETURN

Average rate of return method (ARR):

This method is also known as accounting rate of return method. It is based upon accounting
information rather than cash flows. It is calculated as follows:

ARR = Average annual profit after taxes * 100/ investment

 HAMDARD UNIVERSITY
56
Average annual profits after taxes = Total of after tax profits of all the years/number of years

Here profit after tax means profit after depreciation and taxes.

The average rate of return calculated is compared with a predetermined rate of return. A
project is accepted if the actual ARR is higher than the predetermined rate. Otherwise, it is
liable to be rejected.

Pay back method:

The payback method is the simplest and most widely applied traditional method for
appraising capital investment decisions. This method calculates the number of years required
to pay back the original investment in a project. In other words, payback period is the period
which is required to recover original investment in a project.

Actual payback period calculated according to this method is compared

with the pre-determined payback period fixed by the management in terms of maximum
period during which the original investment must be recouped. If the actual payback period is
less than the pre determined payback period, the project will be accepted, if not, it will be
rejected. Alternatively, when many projects are under consideration, they should be ranked
according to the length of the payback period.

Payback period (PB) = investment/constant annual cash flow

When the project generates unequal cash inflows every year, the payback period is
calculated by adding up the cash inflows till the time they become equal to the original
investment.

Discounted payback method:

 HAMDARD UNIVERSITY
57
An investment decision rule in which cash flows are discounted at an interest rate and then
one determines how long it takes for the sum of the discounted cash flows to equal the initial
investment. In investment decisions, the number of years it takes for an investment to recover
its initial cost after accounting for inflation, interest, and other matters affected by the time
value of money, in order to be worthwhile to the investor. It differs slightly from the payback
rule, which only accounts for cash flows resulting from an investment and does not take into
account the time value of money. Each investor determines his own discounted payback
period rule, and as such, it is a highly subjective rule. In general, however, short term
investors use a short number of years for their discounted payback period rules, while long
term investors measure their rules in years, or even decades.

Net present value method:

Under this method, present value of cash outflows and cash inflows is calculated and the
present value of cash outflow is subtracted from the present value of cash inflows. This
difference is called net present value or NPV.

Thus, NPV = PV of Inflow – PV of outflow

NPV can thus be calculated using the following formulae:

NPV = [ cash inflow in 1st year*1/(1+r)1] + [ cash inflow in 2nd year*1/(1+r)2] + [ cash inflow
In 3rd year*1/(1+r)3] + …………………………………. + [ cash inflow in nth year*1/(1+r)n] –
[initial cost outflow * 1/(1+r)0]

Here r= rate of interest (i.e., cost of capital)

n= expected life of the proposal

If there is some salvage value of the project, it is added in cash inflows in last year. Similarly,
if some working capital is needed, it will be added to the initial cost of project. Similarly, if
some working capital is needed, it will be added to the initial cost of the project and also to
the cash inflows in last year.

If NPV is positive, the project may be accepted. If NPV is negative, the project may not be
accepted. If NPV is zero, the project may be accepted only if non-financial benefits are there.
To choose one out of various investment proposals, the project with highest NPV is preferred.
 HAMDARD UNIVERSITY
58

Internal rate of return method:

The internal rate of return on an investment or potential investment is the annualized effective
compounded return rate that can be earned on the invested capital.

In more familiar terms, the IRR of an investment is the interest rate at which the costs of the
investment lead to the benefits of the investment. This means that all gains from the
investment are inherent to the time value of money and that the investment has a zero net
present value at this interest rate. Because the internal rate of return is a rate quantity, it is an
indicator of the efficiency, quality, or yield of an investment. This is in contrast with the net
present value, which is an indicator of the value or magnitude of an investment.

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

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

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

Profitability index:

Profitability index method is very similar to the NPV approach. It measures the present value
of returns per rupee invested. A major drawback of the NPV method is that it does not give
satisfactory results while evaluating the projects requiring different initial investment. PI
method provides solution to this problem. NPV method is therefore, considered good when
the initial investment in various projects is the same, whereas, PI method is adopted when the
initial cost of different projects are different.
 HAMDARD UNIVERSITY
59
PI can be calculated as follows:

PI = present value of cash inflows / present value of cash outlay (or outflows)

If PI is more than one, the project is accepted. If PI is less than one, the project will be
rejected. If PI is equal to one, the project may be accepted only on the basis of non financial
considerations.

CAPITAL BUDGETING AT BHEL

Capital budgeting process is the most important tool to evaluate the financial feasibility of a
proposal or to select one among various proposals. As such different organizations may
follow different capital budgeting procedures to evaluate their projects. To understand the
capital budgeting procedure followed at BHEL an insight of the following is essential:

1. How are the proposals identified?

2. How are the proposals screened?

3. How are the proposals short listed for further consideration?

4. What information is collected for the purpose of evaluating proposals?

5. What methods of evaluation are used?

6. How are the decisions reviewed?

BHEL units come up with proposals for investment with an objective that is in line with the
company objectives and policies. As such, an investment scheme is formulated with a holistic
approach considering the overall requirement. For instance BHEL has a current capacity of
15000 MW of power equipment and is going for a capacity augmentation to 20000 MW. As
such considering this capacity BHEL units formulate proposals as per unit requirements.

Objective of the investment proposal:

 HAMDARD UNIVERSITY
60
The proposals by various units for investment have one of the following objectives:

• Capacity expansion

• Modernization and rationalization

• Investment for new product

• Science and technology

• Quality

• Township and staff welfare

• Enabling works/tools and plant (power sector)

However, according to the nature of the project and amount involved, different guidelines
have been laid for approval of capital expenditure proposals. The information on processing
and competent approval authorities’ category wise is described below:

Financial limits

• Major capital items

Major capital investments mainly of more than Rs. 5 crore rupees are are approved by the
concerned authorities and all these proposals are supported by a feasibility report.

• Minor capital items

For minor capital items, an annual lump sum provision of Rs 20 lakhs to Rs 5 crores is made
for various units/divisions. For such expenditures a brief justification is given to the
divisional head and approval is obtained from the same. However this provision is to be
obtained subject to the following conditions viz:

1. Provision is to be utilized for production related/ technology

development/emergency requirement etc.

2. The provision should not be utilized for vehicles, welfare related items.
 HAMDARD UNIVERSITY
61
3. Rs 5 lakhs to Rs 20 lakhs is the limit for cost of the individual item that can be
procured under minor capital.

• Excess over sanctioned cost

The cumulative expenditure on the capital projects is periodically reviewed with reference to
the total sanctioned cost; taking into account expenditure already incurred and anticipated
expenditure. If it is found during the review that the sanctioned cost is likely to exceed, the
anticipated excess is worked out and such excess is regularized by obtaining sanction of the
competent authority prior to expenditure.

The proposal for cost revision explicitly brings out all the changes made with respect to the
original proposal. The cost difference between the revised and original (approved) estimates
is explained in detail especially whether they are due to fiscal or other reasons. Fiscal and non
fiscal reasons are defined as:

Fiscal

i. Price escalation (inflation or increase by supplier)

ii. Statutory reasons (customs duty & excise)

iii. Exchange rate variation

Non-fiscal

i. Change of scope

ii. Change of technical design, specification of main equipment

iii. Under estimation

Capital investment in Rs. crore

 HAMDARD UNIVERSITY
62

BEGINNING OF THE CAPITAL BUDGETING

PROCEDURE

Five year plan

BHEL formulates a five year plan that should be in line with the government policies and
objectives which is followed by the formation of an annual plan.

Funding:

The present trend indicates an emphasis on utilization of more internal resources for capital
funding. This necessitates a rigorous and critical budget formulation exercise.

Annual plan:
The capital budget process begins with the formulation of Annual plan in the month of
September / October every year. The annual plan comprises yearly capital investment funds
budget of the company. It reviews capital budget for the current year and consolidates
proposals for the next. Annual plan exercise enables consolidation of all capital items with
cash flows during a particular year.

However expenditure on capital equipment like cranes, material handling equipment etc,
which are required at project sites for erection and commissioning are considered as non plan
capital expenditure and is, classified under three categories:
 HAMDARD UNIVERSITY
63
I. Tools and plants which are used for more than one project.

II. Tools and plants unlikely to be available for more than one project.

III. Tools and plants supplied by subcontractor.

All such equipments are required to execute the erection and commissioning commitments
under various types of contracts of the company with customer and such expenditures are
charged off to the customer contracts for which these equipments are used as per the
accounting policies of the company. Such expenditures are normally required to be made
primarily by the services divisions like ISG, TPG projects etc. for erection and
commissioning. The budget for all such non plan capital expenditures is submitted by the
concerned divisions along with the capital budget. Although approval in principle is obtained
for the total non plan budget from the board of directors along with the capital funds budget,
it is still necessary for the division to obtain separate approval for each individual item from
the director (Finance) and chairman of the company. Complete details of all the items are
submitted by the division to corporate office through proper channel for making the
necessary budgetary provision. The unit that comes up with a proposal needs to present it to
the Directors and the corporate team comprising the CMT&IP, Finance, HR, Quality,
Business sectors etc. The presentation must also include details of the cash flow of the
ongoing schemes and about schemes to be formulated. In short, the unit heads need to give a
synopsis of the proposal/scheme to the concerned authority.

After the proposal obtains approval from the Directors and the corporate team, the units
formulate individual investment proposals on the basis of which the proposals are screened
and short listed.
 HAMDARD UNIVERSITY
64

Annual plan process

 HAMDARD UNIVERSITY
65

DISCOUNTED CASH FLOWS

Financial analysis
Investment = 47495
capital
expenditu materia direct overhea incom total cash net cash
year cash inflow re l labor ds e tax outflows inflow IRR
2011
-12 4018 4018 -4018
2012
-13 40885 40885 -40885
2013
-14 28680 2593 19796 888 4278 4000 31555 -2875
2014
-15 51715 0 26403 949 5897 9525 42773 8942
2015 23.65
-16 63567 0 24819 1044 6053 8659 40574 22993 %
2016
-17 63784 0 23906 1148 7105 12031 44190 19594
2017
-18 52689 0 13065 1263 5506 3555 23389 29300
2018
-19 34500 0 11542 1389 5888 4116 22935 11565
2019
-20 34500 0 12225 1528 6308 4054 24115 10385
2020
-21 34500 0 12225 1681 6771 3955 24632 9868
2021
-22 34500 0 12225 1849 7279 3821 25174 9326
2022
-23 31050 0 12225 2034 7839 3651 25749 5301

Pay Back
period is 5.81
years.
ROI is 22.68%
 HAMDARD UNIVERSITY
66

EVALUATION OF AN EXISTING PROJECT

 HAMDARD UNIVERSITY
67
The above given table gives the cash flow analysis of a project with an
initial investment of Rs. 47495. The ROI and IRR as calculated are 23.65%
and 22.68% respectively. The profit after tax is taken to be equal to
107738. The payback period for the project is 5.81 years.

Now the calculations for the discounted payback period are as follows.

Discounted pay back period

PVF @ Discounted Cumulativ
year net cash inflow 14% cash inflows e DCF
2011
-12 -4018
2012
-13 -40885 0.877
2013
-14 -2875 0.769
2014
-15 8942 0.674 6027 6027
2015
-16 22993 0.592 13612 19639
2016
-17 19594 0.519 10169 29808
2017
-18 29300 0.455 13332 43140
2018
-19 11565 0.399 4614 47754
2019
-20 10385 0.351 3645 51399
2020
-21 9868 0.308 2987 54386
2021
-22 9326 0.27 2518 56904
2022
-23 5301 0.237 1256 58160

Discounted payback period

= 8.006 years
 HAMDARD UNIVERSITY
68
The discounting factor is taken to be 14% which is BHEL’s cost of capital. The
discounted payback period comes out to be 8.006 years which is 2.15 years
more than the payback period of the project. This can give a better picture of the
years taken to get the investment back.

The calculations of NPV and the profitability index are given as follows. The PV
factor is 14% .

Net present value

net cash PVF @ Discounted
Year inflow 14% cash flows
2011-12 -4018 -4018
2012-13 -40885 0.877 -35856
2013-14 -2875 0.769 -2211
2014-15 8942 0.674 6027
2015-16 22993 0.592 13612
2016-17 19594 0.519 10169
2017-18 29300 0.455 13332
2018-19 11565 0.399 4614
2019-20 10385 0.351 3645
2020-21 9868 0.308 2987
2021-22 9326 0.27 2518
2022-23 5301 0.237 1256

Net present value =

present value of cash inflows-present
value of cash outflow
58160-42085 = 16075
The net present value of the project is Rs 16075 which is positive. Therefore the
project is feasible.

Profitability Index
year net cash PVF @ 14% Discounted cash
 HAMDARD UNIVERSITY
69

inflow flows
2011-12 -4018 -4018
2012-13 -40885 0.877 -35856
2013-14 -2875 0.769 -2211
2014-15 8942 0.674 6027
2015-16 22993 0.592 13612
2016-17 19594 0.519 10169
2017-18 29300 0.455 13332
2018-19 11565 0.399 4614
2019-20 10385 0.351 3645
2020-21 9868 0.308 2987
2021-22 9326 0.27 2518
2022-23 5301 0.237 1256

Profitability index = PV of cash inflow/PV of cash outflow

58160/42085
P.I. = 1.38, Which is Positive

CONCLUSION

BHARAT HEAVY ELECTRICALS LIMITED (BHEL) is a public sector giant of

‘NAVRATNA’ status. It is the largest engineering and manufacturing
enterprise in India in the energy related infrastructure sector. Today BHEL
caters to the core sectors of Indian economy viz. power generation and
transmission, industry, transportation, telecommunication, renewable
energy, defense, etc.

My summer training at BHEL has been a truly learning experience. The

wide exposure has really helped me to understand BHEL in a better
perspective especially regarding its financial performance. I understood
the workings of various sections of BHEL corporate finance. My study was
mainly inclined to Working capital, debtor’s management, overall financial
analysis and capital budgeting procedure as followed in BHEL. The study
reveals that BHEL has a strong system relating to implementation of the
Company Policy and procedure. . These techniques followed are well
planned and structured and same are reflected in the Company Manuals.

The department of corporate finance is divided into various sections that

handle different areas. Capital Budgeting is one of the sections of
corporate finance which deals with capital investment decisions in long
term assets to meet its long terms targets.
 HAMDARD UNIVERSITY
70
Capital projects, which are approved in order to achieve targets keeping
in mind the company’s objectives and policies as well as the growth of the
economy. The whole system works as per the government parameters
special focus with five year plan.

The debtor’s management is another department of corporate finance

that deals in debtors and report generation that is discussed in
management committee meeting.

The basic purpose of preparing this project report was to make a detailed
study of various procedures and concepts that are implemented in the
industry with special focus to BHEL.

The summer training at BHEL gave me a better understanding and

overview of the industry. The on job training gave a practical bend to my
theoretical concepts of finance.

It was great to experience the work culture and environment in BHEL. My

association with BHEL taught me the values and ethics that are adopted in
such a large Public Sector Undertaking.

REFERENCES

• BHEL annual reports 2008-09

• Capital Budgeting manual of BHEL

• Flash Results 2009-10

• BHEL – The Industrial Giant

• Chairman address 42nd general meeting

WEBSITES:

http.//www.bhel.co.in

http://www.wikipedia.com
 HAMDARD UNIVERSITY
71
http://finance.indiamart.com/

http://www.moneycontrol.com/

www.valueresearchonline.com/