Pallavi Verma

Summer Training Project Report on
“WORKING CAPITAL MANAGEMENT

&
UNDERSTANDING OF EVA”
AT
BHEL ( NOIDA)
Submitted in Partial Fulfillment of the requirement for
the award of the degree of
MASTER OF BUSINESS ADMINISTRATION
(2013-2015)
Submitted To: Submitted By:
---------------------- ---------------------
Dr. Alok Gupta PALLAVI VERMA
HOD MBA III FINANCE
Roll No. 13085760060
S.D. COLLEGE OF MANAGEMENT STUDIES, MUZAFFARNAGAR

(Affiliated to Uttarakhand Technical University)
1
ACKNOWLEDGEMENT
A research study cannot be completed without the guidance,

assistance, inspiration and co-operation from various quarters. This
study also bears the inspiration from many important persons.
I wish to acknowledge my indebtedness to,

Mr. S.B. Narang, Deputy General Manager (Finance) for his
guidance without which the accomplishment of this project may not
have been possible.
We are also thankful to Mr.Anoop Bhatia Dy. Manager

For his help and co-operation during the period of training and who
reviewed the outline for the project at various stages and made
valuable suggestions.
2
BHARAT HEAVY ELECTRICALS LIMITED
Brightening lives…
… Powering progress
SUMMER PROJECT REPORT

INDEX
CHAPTER 1 - COMPANY PROFILE ……………………… (6 - 23)
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1) BACKGROUND & MANAGEMENT…………………………………………….7
2) VALUES, MISSION & OBJECTIVES……………………………………………12
3) BHEL’S PRODUCT PROFILE……………………………………………………14
4) ACTIVITY PROFILE……………………………………………………………...16
5) FINANCIAL PROFILE OF BHEL………………………………………………...19
6) SHAREHOLDING PATTERN…………………………………………………….21
CHAPTER 2 – INTRODUCTION TO THE PROJECT..(24 - 38)
1) IMPORTANCE OF THE PROJECT……………………………………………….25

2) OBJECTIVE AND METHODOLOGY OF PROJECT WORK……………………27
3) WORKING CAPITAL PREVIEW………………………………………………....28
4) CONCEPT OF WORKING CAPITAL……………………………………………..29
5) NEED AND IMPORTANCE OF WORKING CAPITAL MANAGEMENT……...30
6) DETERMINANTS OF WORKING CAPITAL…………………………………….32
7) STRUCTURE OF WORKING CAPITAL………………………………………….34
8) METHODS OF ANALYSIS………………………………………………………..38
CHAPTER 3 – ANALYSIS OF BHEL’S WORKING

CAPITAL & ITS COMPETITORS…….(39 -119)
1) STRUCTURE OF BHEL’S WORKING CAPITAL……………………………40

2) LAST 5 YEAR PATTERN OF BHEL WORKING CAPITAL………………...42
3) INVENTORY MANAGEMENT……………………………………………….45
4) DEBTOR MANAGEMENT……………………………………………………53
5) CASH MANAGEMET………………………………………………………… 62
6) LOAN AND ADVANCES…………………………………………………….. 67
7) CURRENT ASSET CONVERSION PERIOD ANALYSIS ............................. 74
8) CREDITORS………………………………………………………………...... 79
9) ADVANCE FROM CUSTOMERS…………………………………………… 84
10) PROVISIONS……………………………………………………………….. 89
11) ANALYSIS OF DIFFERENT RATIOS…………………………………….103
CHAPTER 4 – CONCLUSIONS & SUGGESTIONS..(112-114)
4
CHAPTER 5- UNDERSTANDING OF EVA……………(115 -133)
 INTRODUCTION……………………………………………………...116
 THE CONCEPT………………………………………………………..118
 RELATIONSHIP BETWEEN EVA AND MVA……………………...119
 SIGNIFICANCE OF EVA……………………………………………..121
 EVA VS TRADITIONAL MEASURES………………………………122
 CALCULATION OF EVA & ITS COMPONENTS…………………..125
 METHODS TO EMPLOY EVA……………………………………….128
 SOURCES OF VALUE ADDED………………………………………129
 IMPROVING OF EVA…………………………………………………129
 IMPLEMENTING OF EVA……………………………………………133
CHAPTER 6 – EVA ANALYSIS OF BHEL & ITS

COMPETITORS……………………………………………….(134 -141)
 EVA COMPARISON……………………………………………………135
 MVA COMPARISON…………………………………………………..136
 ROCE COMPARISON………………………………………………….138
 NOPAT COMPARISON………………………………………………..140
CHAPTER 7 – SUMMARY AND CONCLUSION OF

EVA…………………………………………(142 – 144)
BIBLOGRAPHY……………………………………………….(145)
ANNEXURES………………………………………………….(146 – 154)
 WORKING CAPITAL DETAILS AND RATIOS OF THERMAX INDIA LTD, LARSEN

AND TUBRO, TATA POWER, RELIANCE ENERGY.
5
CHAPTER – 1
COMPANY PROFILE
 Background & Management

 Values, Mission & Objective
 BHEL’s product profile
 Financial profile of BHEL
 Shareholding pattern
BHEL ----- AN OVERVIEW
BHEL is the largest engineering and manufacturing enterprise in India in the energy related
infrastructure sector today. BHEL was established more than 40 years ago ushering in the
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indigenous Heavy Electrical Equipment industry in India, a dream which has been more
than realized with a well- recognized track record of performance. It has been earning
profits continuously since 1971-72 and achieved a sales turnover of Rs 14525 Crore with a
profit before tax of Rs 2564 Crore 2012-13. In 2007 BHEL has achieved an all time high
turnover of Rs 18739 crores, notching a growth of 29% over the previous year. Net profit
has soared by 44% to 2415 crore over 1679.2 crore of last year. BHEL has been paying
dividends over a quarter century and in line with the excellent performance during the
financial year 2012-13, an all time high dividend of 145% has been paid.
BHEL caters to core sectors of the Indian Economy viz. Power Generation and
Transmission, Industry, Transportation, Renewable Energy, Defense, etc. The wide
network of BHEL’s 14 manufacturing divisions, 4 power sector regional centers, 8 service
centers, 15 regional, offices and a large number of Projects Sites spread all over India and
abroad enables the Company to promptly serve its customers and provide them suitable
products, systems and services-efficiently and at competitive prices.
BHEL has already attained ISO 9001 certification and all the units/divisions of BHEL have
been upgraded to the latest ISO-9001; 2000 version quality standard. All the major
units/divisions of BHEL have been awarded ISO 14001 certification for environmental
management systems and OHSAS 18001 certification for occupational health and safety
management systems
Major Miles stones in the history of BHEL
 FEB. 1947 – The planning board felt the need for electrical machinery in India.
 MAR. 1948 – Sir J.C.Ghosh set up heavy electrical generating equipment factory in
the state sector.
 JAN. 1955 – S.A.Gadkary committee reiterates the need for heavy electrical
factory.
 AUG. 1956 – Heavy Electrical (Pvt.) LTD, was incorporated which was later
renamed as HE (I) LTD.
 NOV. 1964 – Bharat Heavy Electrical Ltd, was established and plants at Haridwar,
Hyderabad & Trichy were set up.
 JULY. 1972 – Action committee of public Enterprises recommends integration.
 JAN. 1974 – HE (I) LTD and BHEL were formally merged and the corporate plan
of the company was prepared.
 JAN. 1980 – BHEL was set up 3rd generation plants at
TRICHY – steel tube plant
HARIDWAR – casting and forging plant
JHANSI – transformer plant
 In 1982
- BHEL also entered into power equipments, to reduce its dependence on the power
sector. So, it developed the capability to produce a variety of electrical, electronic
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and mechanical equipments for all sectors, including transmission, transportation,
oil and gas and other allied industries.
 In 1992,
- During the year, 10 thermal sets, 2 gas sets and 11 hydro sets were commissioned.
Government of India’s liberalization policy and disinvestments policy on its pattern

of shareholding in PSUs.
 In 1994,
- During the year the company established Asia’s largest fuel evaluation test facility
at Tiruchi
- The Company commissioned ten industrial power plants resulting in power

generating capacity addition of 293 KW.
 In 1995,
- The country’s premier state owned undertaking, BHEL, has commissioned India’s
first 250 mw capacity thermal generating unit at Dahanu power station in
Maharashtra. BHEL won this World Bank contract against competition from
multinationals.
 In 1997,
-In Feb. Greater autonomy was given to PSUs. 9PSUs including BHEL were
Selected as Navratnas to become Global Giants
- The public sector Bharat Heavy Electricals Ltd (BHEL) has won the national
best exporter award for 1995-96, instituted by the Engineering Export Promotion
Council, of the eighth consecutive year, from Madurai.
 In June, Govt. announces first autonomy package for Navratnas
 In 1998,
- The public sector Bharat Heavy Electricals Ltd (BHEL) has entered into an
agreement with the Indian Space Research Organization (ISRO) for manufacture
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and supply of solar panels for upcoming Indian Satellites.
 In 1999,
- Bharat Heavy Electricals Ltd (BHEL) has entered into a technical collaboration
agreement with Babcock Borsig Power GmbH of Germany for the manufacture of
`once through boilers`.
 In 2000
- The Company has won the top exporters award among the public and private
sector companies in India for the 11th Consecutive year.
- The Company is considering a proposal to launch a voluntary retirement scheme

(VRS) to `select` employees who have been under performing and not managed any
promotions or those who have consistently taken leave or any other proficiency
related criteria.
- The Company has bagged the `Samman Patra` award from the Finance Ministry
for its unblemished track record with Airport Customs in regard to payment of
customs duties.
 In 2001,
- Bharat Heavy Electricals Ltd. has bagged the prestigious `Golden peacock`
national quality award for the second consecutive year for achieving excellence in
quality conforming to global standards.
 In 2002,
-Awarded the top exporters` award by Engineering Export Promotion Council for the
year 1999-2000
-Receives award from Confederation of Indian Industry (CII) becoming the first PSU
to win this honour
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 In 2003
-BHEL and TCS tie-up to develop IT-based solutions for power sector
 In 2004
-Bhel has joined hands with a UN body `Global Compact` to share experiences with
global corporate houses for greater focus on corporate social responsibility
-Appoints A K Puri as the chairman and managing director of Bharat Heavy

Electricals Ltd (Bhel).
 In 2005
-Delists equity shares from the Madras Stock Exchange Ltd (MSE) w.e.f. January 19,
2005.
- Delists equity shares of the Company voluntary from The Stock Exchange,
Ahmedabad (ASE) with effect from January 28, 2005.
-BHEL, TCS jointly working on marketing initiative `Power Pack`
-Appoints Dr V. Gopalakrishnan as Chief of the Bharat Heavy Electricals Ltd at

Tiruchi
-Bhel`s Trichy, Bangalore plants win five National Safety Awards
 In 2006,
-BHEL inks agreement with IIT Madras for new courses
-Bechtel signs Dabhol agreement with BHEL
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 In 2007,
- BHEL has raised its research & development spend to Rs 238 crore during fiscal
2006-07, up from Rs 152 crore last year.
- BHEL gets ICWAI national award for excellence in cost management 2006.
- In Feb. BHEL pays all-time high 125% interim dividend for fiscal
2006-07.
- BHEL employees win maximum number of Prime Minister’s Shram
- BHEL achieved an all time high turnover of Rs.18739 crore in

Comparison to last year of Rs 14525 crore
- Net profit has soared by 44% to Rs. 2415 crore in comparison to last year
of Rs. 1679.20 crore.
- BHEL has announced 245 % of dividend on its original equity.
- An issue of bonus share in the ratio of 1:1 has been declared by

the company.
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BHEL
VISION
A World – Class Engineering Enterprise Committed to Enhancing Stakeholder Value.
BUSINESS MISSION
To be an Indian Multinational Engineering Enterprise providing Total Business Solutions
through Quality Products, Systems and services in the fields of Energy, Industry,
Transportation, Infrastructure and other potential areas.
VALUES
 Zeal to Excel and Zest for change
 Integrity and fairness in all Matters
 Respect for Dignity and Potential of Individuals
 Strict Adherence to Commitments.
 Ensure speed of Response.
 Foster Learning, Creativity and Teamwork.
 Loyalty and Pride in the Company.
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OBJECTIVES
GROWTH
To ensure a steady growth by enhancing the competitive edge of BHEL in existing

businesses, new areas and international operations.
PROFITABILITY
To provide a reasonable & adequate return on capital employed, primarily through

improvement in operational efficiency, capacity utilization & productivity and generate
adequate internal resources to finance the company’s growth
CUSTOMER FOCUS
To build a high degree of customer confidence by providing increased value for his money
through internationals standards of products quality, performance and superior customer
services.
PEOPLE ORIENTATION
To enable each employee to achieve his potential, improve his capabilities, perceive his
role & responsibilities and participate & contribute positively to the growth and success of
the Company. To invest in human resources continuously and be alive to their needs
IMAGE
To fulfill the expectations which stakeholders like government as owner, employees and
the country at large have from BHEL.
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BHEL PRODUCT PROFILE
1. Power Generation
Power Generation Sector comprises thermal, hydro and nuclear power plant
business. As of 31.3.2006.BHEL supplied sets account for 76741 MV in the
country, as against nil till 1969-70
Custom- made hydro sets of Francis, Pelton and Kalpan for different head-
discharge combinations are also engineered and manufactured by BHEL
In all, orders for more than 880 utility sets of thermal, hydro, gas and nuclear have
been placed on the company as on date. The power plant equipment manufactured
by BHEL is based on contemporary technology comparable with the best in the
world, and is also internationally competitive
2. Industries
BHEL manufactures and supplies major capital equipment and system like captive
power plant, centrifugal compressor, drive turbines, industrial boilers and
auxiliaries etc. BHEL has also emerged as a major supplier of controls and
instrumentation systems, especially distributed digital control systems for various
power plants and industries.
3. Transportation
Most of the trains on Indian Railways, whether electric or diesel powered are equipped
with BHEL’s traction propulsion system and controls. India’s first underground metro
at Kolkata runs on drives and controls supplied by BHEL. Almost all the EMUs in
service are with electrics manufactured and supplied by BHEL. BHEL has also
diversified into the area of track maintenance machines for Indian Railways.
4. Renewable Energy
BHEL has been manufacturing and supplying a range of Renewable Energy systems
and products. It includes Solar Energy systems namely, PV modules, PV power plants,
solar lanterns, solar pumps etc.
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5. Oil and Gas
BHEL is supplying onshore drilling rigs’ equipment viz. drawworks, rotary table,
traveling block, swivel, mast and sub structure, mud systems and rig electrics and
X’mas tree valves
6. Transmission
BHEL supplies a wide range of products and systems for transmission and
distribution application. The products manufactured by BHEL include power
transformers, instrument transformers, dry type transformers etc.
15
ACTIVITY PROFILE
Power Generation and Transmission
 Steam Turbines-Generator sets and Auxiliaries

 Boilers and Boilers Auxiliaries
 Nuclear Power Generation Equipments
 Hydro Turbines-Generator Sets & Auxiliaries
 Gas Turbines-Generator Sets
 Heat Exchangers
 Condensers
 Bag Filters
 Valves
 Pumps
 Electrical Machines
 Power, Distribution and Instrument Transformers
 Reactors
 Porcelain
Industries/Transportation/Oil & Gas /Renewable Energy
 Steam Turbine-Generators Sets

 Gas Turbine-generators Sets
 Diesel Engine-Based Generators
 Drives Turbines
 Marine Turbines
 Industrial Heat Exchangers
 Industrial Valves
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 Industrial Fans
 Capacitors
 Broad Gauge AC, AC/DC Locomotives
 Diesel-Electric Shunting Locomotives
 Traction Motors & Control Equipment
 Electric Trolley Buses
 Battery operated Passenger Vans
 Oil Rigs and Oil Field Equipment
 Wind Electric Generators
 Stand-alone and Grid-Interactive
 Solar Power Plant
 Solar Water Heating Machine
Systems and Services
 Turnkey Utility Power Station/EPC contracts

 Captive Power Plant
 Consultancy Services
 Construction Services
 Software packages for Utilities
17
BHEL’s MANUFACTURING UNITS / SERVICE CENTRES &
REGIONS AND THEIR PROFILE
Steam turbine, Turbo turbine, Hydro

turbine, Hydro generator, Large EM,
Traction machines, Power transform,
Hydrogenerator, Switchgear, Capacitor,
Power transformer, Control Equipment,
BHOPAL Instrument transformer, Traction Machine.
Power transformer, ESP transformer, Loco
transformer, dry transformer, Diesel
JHANSI shunter, AC locomotive.
Steam turbine, Turbo turbine, Gas turbine,
Hydro turbine, GT generator, Hydro
HEEP HARDWAR generator, Light aircraft.
CFFP HARDWAR Casting, Forgings
Steam turbine, Turbo generator, Pump, Oil

HYDERABAD Rig, Switch gear, gas turbine, Gas TG
TIRUCHY BLRS & Valves, Seamless steel tubes
RANIPET Boiler auxiliaries, Windmills.
Insulators & Bushings, Assembled
EPD BANGALORE production, ceralin
Energy meters, Water meters, Devices, PV

EDN BANGALORE Panel, Silicon, Telecom, Defence elecricals
JAGDISHPUR Insulators, Ceralin
GOINDAL Valves
RUDRAPUR SWHS, Solar Lanterns
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FINANCIAL PROFILE OF BHEL
BHEL’s LAST 5 YEAR SUMMARY
(In crores)
2012-13 2012-11 2003-04 2002-03 2001-02
TURNOVER 14525.49 10336.00 8662.47 7482.22 7286.60
VALUE ADDED 5682.80 4254.00 3680.00 3247.50 3074.00
PBT 2564.40 1581.60 1014.80 802.40 662.80
DEBTORS 7168.06 5972.10 4608.48 4075.78 4584.10
CURRENT ASSETS, LOAN
16330.78 13343.00 10424.70 8348.40 8051.40
AND ADVANCES
CURRENT LIABILITIES &
10320.02 8445.90 6336.85 4752.93 4713.50
PROVISION
NET WORKING CAPITAL 6010.76 4897.10 4087.85 3595.47 3337.90
INTERPRETATION
In last five years BHELs Turnover increased from 7286.6 crore in 2001-02 to
14535.49 crore in 2012-13. The increase in % is 99.34; it is the result of turnover
and profit. Its Value Added has also showed a continuous increased from 3074
crore to 5682.8 in 2001-02 to 2012-13 increase % being 84.87.
Its inventory also increased from 1994.23 in 2001-02 to 3744.37 in 2012-13

increased % being 87.76. Its creditors showed a decrease from 1857.15 in 2001-
02 to 1563.38 in 2002-03, and then it increases from 1563.38 in 2002-03 to
2804.09 in 2012-13 overall increase % being 50.99. Its debtors showed a dip in
first year i.e. from 4584.1 crore in 2001-02 to 4075.78 crore in 2002-03,after this,
it continuously increased from 4075.78 crore in 2002-03 to 7168.06 in 2012-13,
56.37 being the overall increase %.
Current Assets, Loans and Advances increases from 8015.4 crore in 2001-02 to
16330.78 crore in 2012-13, increase in % is 102.83. Current Liabilities and
Provision has shown a continuous increase from 4713.5 crore in 2001-02 to
10320.02 crore in 2012-13. Increase in % is 118.95.
Net working capital increases from 3337.9 crore in 2001-02 to 6010.76 crore in
2012-13, increase % being 80.07.
After viewing above data, we can say that overall performance of BHEL in last
five years is quite satisfactory and it is continuously heading towards
improvement.
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WHAT THE COMPANY OWNED
( in crore) 2012-13 2012-11 2003-04 2002-03 2001
Gross Block Including Capital WIP 4006.7 3724.2 3568.2 3408 323
Net Block Including Capital WIP 1166.9 1139.5 1202.7 1229.2 123
Investments 8.3 9 29 10.3 10
Current Assets & Loan and Advances
Total Net Assets 17506 14491.5 11656.40 9587.9 92
WHAT THE COMPANY OWNED
(in crores)
Borrowings 558.2 537 540 531 66
Current Liabilities & Provision
Total Liabilities 10878.2 8982.9 6876.9 5287.1 537
NET WORTH
(in crores)
Share Capital 244.8 244.8 244.8 244.8 244
Reserves and Surplus 7056.6 5782.1 5051.2 4558.9 422
Net Worth 7301.4 6026.9 5278.1 4708.2 422
VALUE ADDED
(in crores)
Capital employed 6993.03 5941.33 5181.99 4765.98 451
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SHAREHOLDING PATTERN OF BHEL
SL %AGE OF
NO. CATEGORY SHAREHOLDING
2012-13 2006-07
A PROMOTER'S HOLDING
PRESIDENT OF INDIA 67.72 67.72
B NON PROMOTER'S HOLDING

a) MUTUAL FUNDS AND UTI 4.79 5.08
BANKS,FINANCIAL
INSTITUTIONS AND
b) INSURANCE COMPANIES 2.52 3
FOREIGN INSTITUTIONAL
c) INVESTORS 22.42 19.49
d) OTHERS - 2.55 4.71
PRIVATE CORPORATE
BODIES 1.37 2.81
INDIAN PUBLIC 1.09 1.8
NRIs AND OCBs 0.06 0.10
TRUST 0 0
SHARE IN TRANSIT 0.03 0
(OCB – Overseas Corporate Bodies).
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PIE CHART SHOWING SHAREHOLDING PATTERN OF BHEL FOR THE YEAR 2012-13
PRESIDENT OF INDIA
MUTUAL FUNDS AND UTI

2.55, 3%
22.42, 22% BANKS,FINANCIAL
INSTITUTIONS AND
INSURANCE COMPANIES
FOREIGN INSTITUTIONAL
INVESTORS
2.52, 3%
OTHERS -
4.79, 5% 67.72, 67%
22
PIE CHART SHOWING SHAREHOLDING PATTERN OF BHEL FOR THE
YEAR 2006-07
PRESIDENT OF INDIA
MUTUAL FUNDS AND UTI
BANKS,FINANCIAL
INSTITUTIONS AND
5% INSURANCE COMPANIES
22% FOREIGN INSTITUTIONAL

INVESTORS
OTHERS -
2%
66%
5%
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Chapter 2
: Introduction
To
The project
 Importance of project
 Objective & methodology of project work
 Working capital preview
 Concept of working capital
 Need and importance of working capital
 Determinants of Working Capital
 Structure of working capital
 Methods of analysis
24
INTRODUCTION TO THE PROJECT
Sound financial management practices followed by an industrial corporate firm form

the backbone of its survival, profitability and gaining competitive edge. In other words,
the financial performance of a firm is also influenced by the sound financial
management policies, decisions and practice its follows. The subject assumes greater
significance now then ever before for business firms, in the view of the present
dynamic and turbulent business environment, economic scenario of liberalization and
globalization causing more intense competition and less profit margins.
The significance of the financial appraisal of any business undertaking in general and of
a public enterprise, in particular can not be ignored. However it becomes all the more
important especially in a developing economy like India, which is striving for rapid
socio-economic transformation through a vibrant public sector. Well financial appraisal
not only helps largely in detecting goal deviation of business enterprise but also guides
in ensuring effective and efficient utilization of available financial resources along with
other resources.
IMPORATANCE OF THE PROJECT WORK
The problems of general management and organization are procedural in practice, but
the problem of transmutation of working capital into income and profit and bank into
working capital are dynamic and vital aspect of the management. It is an internal and
important part of financial management as short term survival is prerequisite for long
term success. The need for working capital to run the day- to-day business activities can
not be overemphasized. We will hardly find a business firm, which does not require any
amount of working capital. Indeed, firm differs in their requirements of the working
capital. That is the reason why largest portion of a finance manager’s time is devoted to
the management of this segment of capital. Thus an effective and efficient management
of working capital is the basic and continuing process.
25
Working Capital management considers a number of aspects that make it an
important topic for study. Among them are following:------
1. Working Capital management requires much of the financial manager’s

time.
2. Working Capital represents a significant portion of the total investment in
Assets.
3. The need for the working capital is directly related to sales growth.
TIME DEVOTED TO WORKING CAPITAL MANAGEMENT

Surveys indicate that the largest portion of a financial manager’s time is devoted to
the day-to-day internal operations of the firm. Since so much time is spent on working
capital decisions, it is appropriate that the subject be cared carefully, in order to reach a
well- framed and exhaustive conclusion.
INVESTMENT IN CURRENT ASSETS

The financial manager should determine the optimum level of current assets, so that the
wealth of shareholders can be maximized. Characteristically, current assets represent
more than one half the total assets of a business firm. Because they represent a large
investment and this investment tends to be relatively volatile, current assets are worthy
of financial manager’s careful attention.
Importance for big firms
Working capital management is important for both small and big firms. A firm may
minimize its investment in fixed assets by renting or leasing plant and equipment, but
there is no way it can avoid an investment in cash ,receivables and inventories ,
Therefore current assets are particularly significant for the study.
The sufficient working capital is a must to make available to Customers, products of

right quality at right time, at reasonable price and at closely conveniently situated sales
point. The above facts therefore encouraged us to study the management of working
capital in a public sector undertaking – BHEL and to compare the same with its
competitors.
26
OBJECTIVES OF UNDERTAKING THE PROJECT WORK
1. To have an insight into the working capital strengths and weakness of BHEL
and to compare the same with its competitors, Viz., L&T, THERMAX, TATA
POWER, RELIANCE ENERGY, etc.
2. To highlight and sharpen the ability of the firm to identify areas of
inefficiency and then to SUGGEST TO improve and maintain it.
3. A look into some of the situations, in working capital sphere, which can be
useful for the manager in improving the efficiency of BHEL and secure its
future Competitive advantage.
METHODOLOGY
While studying, particularly public sector undertaking, we are confronted with

many problems in comparison with MNC’s and private companies, eliminating the
elements of bias in the information collected, obtaining documentary evidence and
planning the work. In view of the distinct nature of the analysis a mixed
methodology has been adopted for the present study.
Sample Size - sample size selected was five namely BHEL, THERMAX,
LARSEN AND TUBRO, TATA POWER, RELIANCE ENERGY
Method of Sampling – it was Cluster Sampling method
Area of Work – area of work selected was BHEL , NOIDA
Parameters of Study - includes all the figures of working capital and current
assets and current liabilities of above mentioned companies
Method of Data Collection – it was secondary data collection method. The data
was collected from annual reports, magazines and websites.
Limitations – There were many limitation, mainly being the non availability of
data by the concerned authorities as the data was confidential to the organization.
27
WORKING CAPITAL –A PREVIEW
An Integral Part
Working Capital Management is in integral part of overall corporate Management.

Not infrequently does one come across the pessimist, the uninitiated or the
excuse-finder who laments about the imponderables and the obstacles. For the
finance managers who is ready to pay his role and has a working knowledge of
tools and techniques he can employ to carry out his task, the working capital sphere
throws open a welcome challenge and an opportunity.
There is an obvious relationship between operating efficiency of a company

and its working capital positions, waste elimination, improved coordination to cut
delay, higher efficiency in operation and full utilization of recourses are among a
multiplicity of factors exerting varied degree of influence on working capital status.
Companies, which enjoy a dominant, hold on its market, feels little obliged to strain
beyond a measure in satisfying customer requirements. For a company operating in
a highly competitive market, the emphasis will have to be winning and retaining
customer satisfaction on a continuing basis. This involves extra costs and creates a
verity of working capital problems.
One of the most important goals of finance manager is the maximization of

shareholder’s wealth. This can be achieved through sustained growth. The scarce
funds are to be increasingly deployed to the priority sector. The management has to
be alert to the developments internal, external and environmental, and has to plan
and review constantly working capital needs and strategy.
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CONCEPT OF WORKING CAPITAL
There are two concepts of working capital--- Gross Concept and Net Concept.
1. Gross Working Capital

2. Net working
1. Gross working capital: - Gross working capital refers to the firm’s investment
in current assets. Current assets are the assets which can be converted into cash
within an accounting year and include cash, short term securities, debtors, (account
receivable or book debts) bills receivable and stock (inventory).
2. Net working capital: - Net working capital refers to the difference between
current assets and current liabilities. Current liabilities are those claims of outsider
which are expected to mature for payment within an accounting year and include
creditors (account payable), bills payable, and outstanding expenses. Net working
capital can be positive. Or negative. A positive net working capital will arise when
current assets exceed current liabilities. A negative net working capital occurs when
current liabilities s are in excess of current assets.
The two concepts of working capital –gross and net-are not exclusive rather, they
have equal significance from the management viewpoint.
29
Needs and Importance
Working capital is a must for a business enterprise, but the quantum of its
requirements may vary from enterprise to enterprise. A business enterprise
carries out its operations to earn profit there from. The current assets are
required because the operations do not convert into cash instantaneously. There
is always an operating cycle which converts cash into finished goods, finished
goods into debtors through credit sales and debtors into cash.
Thus a business enterprise requires working capitol because its production,

sales, cash payments and realizations are not instantaneous. Cash is required to
purchase raw materials and pay for expenses, as there may not be perfect
matching cash inflows and outflows.
Working capital is also required to meet capital exigencies. The stock of raw
material is to be kept ensure smooth production and safeguard against the risk of
their unavailability. Similarly, stock of finished goods has to be carried to meet
to meet the demands of customers on continuous basis against abrupt rise in
their demands. Goods are sold on credit to increase the volume of sales. If the
receipts and disbursements are perfectly synchronized the firm can maintain
operations with a little amount of initial working capital. However in a dynamic
economy, perfect synchronization with zero working capital is not possible
therefore managements attempts to maintain an adequate balance of working
capital at all times.
A firm drives many advantages when its working capital is adequate. An

adequate working capital cushions a business enterprise from the adverse effect
of shrinkage in the value of current assets and enables it to pay promptly all
current obligations and to take advantage of cash discounts. It ensures to a great
extent the maintenance of the enterprise’s credit standing and permit the
carrying of inventories to serve the needs of customer satisfactorily and to
extend favorable credit terms to its valued customer and to operate business
efficiently. In both private and public sector undertaking in the country the
working capital (total current assets) occupies a substantial portion of total
assets. It is also rule that the largest portion of a finance manager’s time is
devoted to the management of working capital. The management of working
capital is a delicate affair and there is a greater scope for managerial
maneuverability in its management to reduce cost and enhance return.
30
OPERATING CYCLE:-
Sufficient working capital is necessary to sustain sales activity. Technically this

is referred to as a operating/ cash cycle. It can be said to be at the heart of the
need of working capital.
Cash /operating cycle is the length of time necessary to complete
following event.
 Convert cash into raw material.

 Raw material into goods in process.
 Goods in process into finished goods.
 Finished goods into debtors through credit sales, and debtor into
cash.
The cycle is a continuous process
DEBTORS SALES
FINISHED
CASH GOODS
WORK
RAW
IN
MATERIAL
PROGRESS
OPERATING CYCLE
31
Determinants of working capital
The requirements of working capital generally vary from industry to industry, concern
to concern and time to time. Comparing the production cycle of BHEL with any of the
FMCG Company we will notice that, BHEL takes considerably longer period to
manufacture a turbine while in FMCG companies’ like HLL or P&G takes few minutes
to manufacture their product. Working capital in these companies can be even negative
as they take credit from suppliers and sell their products on cash. So current liabilities
are higher due to which figure of working capital can be negative. The various factor
which influence the amount of working capital required by a business enterprises, may
be grouped under two heads.
1) Internal factor: - The factor which are within the control and competence of
management. These may include the risk taking attitude of management, turn over of
receivable and inventories terms of purchase and sale s and credit rating etc.
2) External factor: - these may include the nature of business, volume of production
and sales and business cycle.
Internal factor:
As the volume of business expands the quantum of working capital. Needed for
the business grows up but the increase may not be in the same proportion of the growth
of business. The requirements of working capital depend upon the efficiency of the
management.
In more concrete terms working capital requirements depends upon the turnover
of the receivable and inventories. The greater the number of times the inventories are
sold and replaced, the lower is the amount of working capital required. An effective
inventory turnover program results in a higher rate of inventory- turnover.
Time taken in conversion of receivable into cash also determine the amount of
working capital required. If less time is taken in collection of receivables, the lower will
be the requirement of working capital. The effective control of receivable is
accomplished by wise administration of policies relating to credit extension term of
sales, business – customer relation and maximum collection. An efficient credit
administration results in a higher turnover of receivable and reduces the requirements
of working capital.
The working capital requirements of a business are also affected by the terms of
purchase and sales. If the term of credit on which purchase are made of favorable, less
cash will remain invested in inventory. If payment for purchase is required within a
short time after its delivery, a larger amount of cash is needed to a given volume of
business. If credits are granted to customer on more liberal terms, a larger amount of
working capital will remain in the form of receivable.
32
Credit standing that a business enterprise build up in the world of business also
determine the amount of working capital required. The management of working capital
in an enterprise takes into account its own credit rating in respect of a borrowing at a
short notice. A firm with a high credit rating is required to have less working capital
than the firm with the lower credit rating.
External factor:
Working capital requirement of a concern is basically related to the nature

of a business it conducts. The public utilities have the lowest requirement of current
assets partly because of the cash nature of their business and partly because their
investment in inventories and receivable are rapidly converted into cash. An
outstanding characteristic of these industries is that they have much larger investment
in fixed assets like plants and equipments and much smaller investments in current
assets.
The amount of working capital is directly related to the time taken by an

enterprise in process of production. The longer the time required for manufacture of the
goods, the larger is the amount of working capital. The reason is that a larger amount of
inventory remains tied up in its manufacture. Beside
This, the range of product also influences the requirement of working capital. It is
possible for a single product enterprise to operate on a lower working capital than the
enterprise with a wide variety of product.
Business cycle
Besides the nature of business cycle, seasonal change also influences the size and
behavior of working capital. During the upswing of the cycle and the busy season there
is usually a need for a larger amount of working capital to cover the lag between
increased sales and receipts.
Besides these external and internal factor discussed above there are some several
other factor such as contingencies, amount of profit earned, depreciation and dividend
policies and means of transport and communications etc. which influence the
requirement of working capital.
Thus we find that both external and internal factors influence the requirement of
working capital of an enterprise. Consequently the policy regarding the size of working
capital must take into account the external factors and internal expediency. But the
attitude of management towards risks and the operational requirement of business have
greater impact on the size of the working capital.
33
STRUCTURE OF WORKING CAPITAL
The structure study of working capital involves the analysis of composition of

current assets and current liabilities. The current assets consist of inventory, cash,
receivable, and marketable securities. Current liabilities usually comprise the
borrowing, trade credits, assessed tax and unpaid dividend.
INVENTORY
Inventories constitute the most significant part of current assets of majority of

companies in India. Because of the large size of inventories maintained by the firms
considerable amount of fund is required to be committed in them. It is therefore
absolutely imperative to manage inventories efficiently and effectively in order to avoid
unnecessary investments in them and undertaking neglecting the management of
inventories will be jeopardizing its long run profitability and may fail ultimately. It is
possible for a company to reduce its level of inventories to a considerable degree, e.g.:
10 to 20%, without any effect on production and sales by using simple inventory
planning and controlled techniques.
Inventories are the stock of the product a company is manufacturing for sale and
component that make up the product. The various forms n which inventories exists in
manufacturing company are, raw materials working process hand finished goods. Raw
materials are those basic inputs that are converted into finished product through the
manufacturing process. Raw materials inventories are those units, which has been
purchased ad stored for future productions. Work in process inventories are semi
manufactured products. They represent products that need mode work before they
become finished products, which are ready for sale. Stock of raw material and work in
process facilitate production while stock of finished goods is required for smooth
marketing operations .thus, Inventories serve as a link between the production and
consumption of the goods.
NEED TO HOLD INVENTORIES
1. The transaction motives, which emphasizes the need to maintain inventories to

facilitate smooth production and sales operations.
2. the precautionary motive, which necessitates holding of inventories to guard
against the risk of unpredictable changes in demand and supply forces and other
factors
3. The speculative motives which influence the decision to increase are reducing
inventory levels to take advantage of price.
34
OBJECTIVE OF INVENTORY MANAGEMENT
1. To maintain a large size of inventory for efficient and smooth production and
sales operations.
2. To maintain a minimum investment in inventories to maximize the profitability.
Both excessive and inadequate inventories are not desirable, there are two
dangers within which the firm should operate. The objective of inventory
management should be to determine and maintain optimum level of inventory
investment. The optimum level of inventory will lie between two danger points
of excessive and inadequate inventories.
COST INVOLVED IN HOLDING INVENTORY
 Carrying cost: the cost incurred for maintaining a given level of inventory
called carrying cost. They include storage, handling, insurance, recording
and inspection. It increases in proportion to the volume of inventory.
 Ordering cost: The cost associated procurement called ordering cost, which
consist of cost of processing a purchase order, transportation and inspection
cost and general administration at overhead cost.
The cost of carrying inventory and ordering cost operate inversely to each other. The
optimum inventory size is commonly referred to as Economic Order Quantity. It is
that order size at which annual total costs ordering and holding are minimum.
CASH
Cash is the most important current assets for operating of the business
Cash is the business input need to keep the business running on a continuous basis .It
also the ultimate output expected to be a realized by selling the service are product
manufactured by the firm. The firm should keep sufficient cash neither more nor less.
Cash shortage will disrupt a firm manufacturing operation while excessive cash will
simply remain idle, without contributing anything towards the firm profitability. Thus,
a major function of financial manager is to maintain a sound cash position.
35
RECEIVABLE
Receivables holds and important place in the working capital and arise out of the
delivery of the goods or rendering of services on credit. Receivable includes:
1. Sundry debtors.
2. Loans and advances.
They also represent all claims held against the future receipts of money, goods and
services. Receivables are considered earning asset like inventory because the farmer is
required to finance sales. But the contribution of receivable to profit earning of business
enterprise is an indirect one.
The quantum of receivable depends upon the volume of credit sales and the policy of
collection of credit. Consequently funds tide up with receivable increase with the
increase in the volume of sales and credit period granted. The terms of collection of
credit and the time taken by the customers to make payment also influence the volume
of receivable that exist in a business enterprise.
It needs to be emphasized that working capital is one segment of the capital structure of
the business and constitute and interweaving part of the total integrated business
system.
Working capital policy is concerned with two set of relationships among balance sheet
items. First is the policy question of there level of total current assets to beheld. Current
asset vary with sales, but the ratio of current asset to sales is a policy matter. If the firm
elects to operate aggressively, it will hold relatively small stock of current assets. This
will reduce the required level of investment and increase the expected rate of return on
investment. However and aggressive policy also increased likely hold running out of
cash or inventories or of losing sales because of an excessive tough credit policy.
The second policy question concerns the relationship between types off asset and the
way these assets are financed. One policy calls for matching assets and liabilities
maturities, financing short term assets with short term debt and long term asset with
long term debt or equity. If this policy is followed the levels of fixed current assets
determine the maturity structure of debt. However short term debt is frequently less
expensive than a long term debt, so the expected rate of return may be higher if short
term debt is used. Offsetting this return advantage is the fact that a large amount of
short term credit increases the risk
1. Of having to renew this debt at higher interest rates
2. Of not being able to renew the debt at all if the firm expense difficulty.
Both this aspect of working capital policy involves/ risk/return trade off.
36
3. Handling Receivables (Debtors)
Cash flow can be significantly enhanced if the amounts owing to a business are collected
faster. Every business needs to know.... who owes them money.... how much is owed....
how long it is owing.... for what it is owed.
Late payments erode profits and can lead to bad

debts.
Slow payment has a crippling effect on business; in particular on small businesses who can
least afford it. If you don't manage debtors, they will begin to manage your business as
you will gradually lose control due to reduced cash flow and, of course, you could
experience an increased incidence of bad debt .

ADEQUACY IS A VIRTUE, SURFEIT IS NOT
The finance manger is constantly engaged in endeavoring to maintain sound working

capital positions. In the dynamic business setting, the current assets constantly change
composition but the level of current assets and current liabilities in relation to the level of
business activity of the company and the rate at which the current assets keep changing
composition are factors for continuous review and direction of the finance manager. If
excessive working capital leads to unremunerative use of scarce funds, inadequate working
capital interrupts the smooth run of business activity and impairs profitability.
Surfeit of working capital poses dangers too. Seeming abundance of funds promotes
unchecked accumulation of inventories, permissive credit policies and slack collection
procedure. Increased risks of inventory losses and higher incidence of bad debts gradually
appear on the scene with obvious adverse affects on profits. Complacency develops at
various operating levels and management efficiency deteriorates.
Conscious management of working capital, therefore, involves constant vigilance to

ensure that the quantum and the right composition of working capital are available on a
continuing basis to support and promote the activities of the enterprise.
4. Managing Payables (Creditors)
Creditors are a vital part of effective cash management and should be managed carefully to
enhance the cash position. Purchasing initiates cash outflows and an over-zealous
purchasing function can create liquidity problems.
There is an old adage in business that if you can buy well then you can sell well.
Management of your creditors and suppliers is just as important as the management of your
debtors. It is important to look after your creditors - slow payment by you may create ill
feeling and can signal that your company is inefficient (or in trouble!).
37
Remember, a good supplier is someone who will work with you to enhance the future
viability and profitability of your company
Methods of Analyzing working capital
The analysis of working capital is a must on many counts. The analysis is of great
importance to both insiders (management) and outsiders such as creditors; particularly
short-term creditors are primarily concerned with the analysis of working capital. It is also
a valuable aid to management in measuring the efficiency with which working capital is
employed in the business. Thus the analysis is an operational necessity for the management
of an enterprise to detect trends and take corrective measures. It is also important for
shareholders and long term creditors in determining the prospects of payment of dividend
and interest. Probably the most important tool for analyzing the working capital is ratio
analysis.
CIRCULATION OF WORKING CAPITAL
An analysis of the circulation aspect of working capital indicates the efficiency with which
working capital is being utilized in an enterprise. The important ratio here is inventory
turnover ratios, days of inventory holdings.
LEVEL OF WORKING CAPITAL
The analysis of level throws light on the size of working capital. It shows whether the
size of working capital of an enterprise is excessive or adequate or inadequate to its needs
The most important ratio-tests in this regard are the amount of working capital In
terms of month’s cost of production or month’s average sales turnover. The result of these
tests when compared with the competitors indicates whether the level is adequate or
inadequate.
38
CHAPTER -3
: Analysis of BHEL’s
Working Capital
& it’s Competitors
 Structure of BHEL’s Working Capital

 Last 5 Year Pattern Of BHEL’s Working Capital
 Inventory Structure
 Debtor Management
 Cash Management
 Loans And Advances
 Conversion Period Analysis
 Creditors
 Advances from Customers
 Provisions
 Analysis of some other financial ratio
39
Structure of Working Capital of BHEL
The analysis of structure of working capital enables management of an enterprise to

know as to how the working capital is being administered. It also furnishes valuable
information to the short term creditors and others regarding the strength of working
capital of the undertaking.
The structure of working capital can also be analyzed by measuring the change the
proportion of cash, receivable, inventory and other items to the total current assets in
course of time.
This analysis points out the components which have over grown and where unduly high
fund has been tied up. This analysis may be carried further to each component of
current assets to study the changes in its sub-divisions.
Investment in working capital is generally considered as dead investment as in, does

not contribute towards company’s profit generating capacity but are also required, so
it should done in such a way that does not create any side-effects like blockage of
money. In comparison to working capital, investments should be more in fixed assets
which are productive and contribute towards firm’s profit.
40
WORKING CAPITAL PATTERN OF BHEL
(In crores)
CURRENT
ASSET 2012-13 2012-11 2003-04 2002-03 2001-02
Inventory 3744.37 2916.11 2103.88 2001.06 1994.23
sundry debtors 7168.06 5972.14 4608.48 4075.78 4584.07

cash & bank
balance 4133.98 3177.86 2659.64 1320.91 476.59
other C.A. 84.49 47.17 13.51 0.99 0.005
loans & advances 1199.87 1229.69 1039.19 949.64 996.49
TOTAL C.A. 16330.77 13343 10424.70 8348.38 8051.385

CURRENT
LIABILITIES
Creditors 2804.08 2099.68 1737.97 1563.37 1857.14

advances from
customers 5479.16 4584.99 3133.02 1801.56 1895.42
other liabilities 317.68 295.24 216.61 238.29 216.23
interest accrued 16.89 16.88 17.12 17.09 18.89
Others 189.92 123.64 92.17 75.98 81.16
Provision 1512.27 1325.45 1139.94 1056.62 644.6
TOTAL 10320 8445.88 6336.83 4752.91 4713.44

WORKING
CAPITAL 6010.77 4897.09 4087.87 3595.47 3337.945
TURNOVER 14525.49 10336.4 8662.47 7482.22 7286.62

W.C.
CONVERSION
PERIOD (in days) 151 173 172 175 167
(Working Capital = Total current assets – Total current liabilities)
41
WORKING CAPITAL PATTERN OF BHEL OF LAST 5 YEARS
7000
6010.77
6000
4897.09
5000
4087.87
3595.47
4000 WORKING
3337.945
CAPITAL
3000
2000
1000
2001-02 2002-03 2003-04 2012-11 2012-13
42
WORKING CAPITAL CONVERSION PERIOD
Conversion Conversion
Working Working Period Period
Capital Capital Turnover Turnover (in days) (in days)
(In crores) 2012-13 2012-11 2012-13 2012-11 2012-13 2012-11
BHEL 6010.77 4897.09 14525.49 10336.39 151 173
THERMAX -67.43 -0.2 1498 941.16 -16 0
L&T 2624.9 3238.84 15198.63 13748.26 63 86
TATA
POWER 1579.89 1209.13 6004.66 5303.17 96 83
RELIANCE
ENERGY 8301.37 6752.69 4607.89 4592.55 658 537
Working capital conversion period of BHEL in year 2012-13 is 151 days which has
improved with respect to year 2012-11. In that year it was 173 days. In its competitors
L&T has its conversion period under control that is 63 days followed by TATA POWER
with 96 days and highest being of RELIANCE ENERGY with 658 days.
43
GRAPH SHOWING THE TREND OF WORKING CAPITAL CONVERSION PERIOD
OF BHEL AND ITS COMPETITORS FOR THE YEAR 2005-06 AND 2004-05
700 658
600
537
500
CONVERSION PERIOD ( in days)
400
2005-06
300
2004-05
200 173
151
86 96 83
100 63
0
0
BHEL -16 THERMAX L&T TATA POWER RELIANCE
-100 ENERGY
COMPANIES
44
MANAGEMENT OF INVENTORY
PERCENTAGE OF INVENTORY TO WORKING CAPITAL
(In crores) 2012-13 2012-11 2003-04 2002-03 2001-02
Inventory 3744.37 2916.11 2103.88 2001.06 1994.23
W.C. 6010.76 4897.09 4087.85 3595.47 3337.92
Ratio of
inventory/ W.C. 62.29% 59.55% 51.47% 55.65% 59.74%
Above table shows the inventory and working capital relationship in BHEL .It appears from
the analysis that the percentage of inventory to WC is reasonable considering the nature and
the size of the business, for the given period i.e. 01-02 to 04-05 .How ever in 05-06 it has
increased marginally. Generally inventory in any business enterprise should be kept at
minimum. Inventory in excess of this limit is a sign of excessive buying and slow use of
material reason being the large production cycle, taking an e.g. of turbine take
considerably longer period to manufacture, which leads to high holding cost that hampers
company’s performance. Although the percentage has been increased from last year that is,
04-05 to 05-06, which needs to be reduced down. How ever this ratio can differ from
Industry to industry. Heavy manufacturing industries characterized by a long production
cycle invariably have higher inventory to working capital ratio as indicated by the figure
inventory to working capital ratio as indicated by the figure.
45
GRAPH SHOWING THE TREND OF INVENTORY, WORKING CAPITAL
AND THEIR RELATIONSHIP
7000.00 70.00%
62.29%
59.74% 6010.76
6000.00 59.55% 60.00%
Inventory
PRCENTAGE OF INVENTORY TO WORKING

55.65%
51.47% 4897.09
5000.00 50.00%
4087.85
4000.00 3595.47 3744.37 40.00% W.C.
AMOUNT
3337.92 CAPITAL
2916.11
3000.00 30.00%
2103.88 Ratio of
1994.23 2001.06
2000.00 20.00% inventory
/ W.C.
1000.00 10.00%
0.00 0.00%
2001-02 2002-03 2003-04 2004-05 2005-06
YEAR
46
INVENTORY TURNOVER RATIO
(In crores) 2012-13 2012-11 2003-04 2002-03 2001-02
Inventory 3744.37 2916.12 2103.88 2001.06 1994.23
Turnover 14525.5 10336.4 8662.47 7482.2 7286.63
% of Inventory/T.O. 25.78% 28.21% 24.29% 26.74% 27.37%
Conversion periods
(days) 94 103 89 98 100
Analysis of table reveals that inventory has been increased over the period with decrease in
no. of days except from 03-04 to 04-05. If we look at last year data, inventory has increased
with decrease in conversion period, which is a positive sign and depicts company’s better
performance. But the actual reason behind this is that, the % increase in inventory is less
than % increase in turnover. So the inventory turnover ratio is maintained between 25% to
28%.
Hence we can conclude that position of inventory in BHEL is quite satisfactory.
47
48
GRAPH SHOWING THE TREND OF INVENTORY, TURNOVER AND
THEIR RELATIONSHIP
16000.00 29.00%
14525.49
14000.00 28.21%
28.00%
27.37%
12000.00 Inventory
27.00%
26.74% 10336.4
% of Inventory / T.O.
10000.00
8662.47 25.78% 26.00% Turnover
AMOUNT
8000.00 7286.63 7482.22
25.00% % of
6000.00 Inventory/
24.29% T.O.
3744.37 24.00%
4000.00
2916.12
1994.23 2001.06 2103.88
23.00%
2000.00
0.00 22.00%
2001-02 2002-03 2003-04 2004-05 2005-06
YEAR
49
GRAPH SHOWING TREND OF INVENTORY, TURNOVER AND
INVENTORY CONVERSION PERIOD
16000.00 105
14525.49
103
14000.00
100 100
12000.00
98 10336.4
CONVERSION PERIOD (in days)

10000.00 Inventory
8662.47 95
94
AMOUNT
8000.00 7286.63 7482.22

Turnover
90
6000.00
89
3744.37 Conversion
4000.00
2916.12 periods
85
1994.23 2001.06 2103.88 (days)
2000.00
0.00 80
2001-02 2002-03 2003-04 2004-05 2005-06
YEAR
INVENTORY CONVERSION PERIOD
Inve Inventory Turno Turnover Con Conversion

version Period
ntory ver
50
Period
(in days) (in days)
(In crores) 2012-13 2012-11 2012-13 2012-11 2012-13 2012-11
BHEL 3744.37 2916.12 14525.49 10336.39 94 103
THERMAX 118.74 85.92 1498 941.16 29 33
L&T 2210.27 2261.26 15198.63 13748.26 53 60
TATA
POWER 496.55 323.76 6004.66 5303.17 30 22
RELIANCE
ENERGY 295.05 353.09 4607.89 4592.55 23 28
BHEL has inventory conversion period of 94 days in 05-06 that has been declined from
last year that was 103 days, which implies an improvement but in comparison to other
companies like THERMAX (29 days), L&T (53 days), TATA POWER (30 days), and
RELIANCE ENERGY (23 days), it needs to be further improved. As long conversion
period means capital is blocked in inventory for longer period of time.
51
GRAPH SHOWING INVENTORY,TURNOVER AND CONVERSION PERIOD OF
BHEL AND ITS COMPETITORS FOR 2005-06
16000 15198.63 100
14525.49
90
14000 94
80
12000
70
CONVERSION PERIOD
INVENTORY (05-
06)
10000
60
53
AMOUNT
TURNOVER (O5-
8000 50
06)
6004.66 40
6000
CONVERSION
4607.89 PERIOD (05-06)
29 30 30
3744.37
4000 23
20
2210.27
2000 1498
10
496.55 295.05
118.74
0 0
BHEL THERMAX L&T TATA RELIANCE
POWER ENERGY
COMPANIES
52
GRAPH SHOWING THE TREND OF INVENTORY ,TURNOVER AND
CONVERSION PERIOD FR 04-05
16000 120
13748.26
14000 103
100
12000

INVENTORY
10336.4 (04-05)
80
10000
AMOUNT
TURNOVER
8000 60 60 (O4-05)
6000 5303.17
4592.55 40 CONVERSION
PERIOD (04-05)
33
4000 28
2916.12
2261.26 22 20
2000
941.16
85.92 323.76 353.09
0 1 0
POWER ENERGY
YEAR
MANAGEMENT OF DEBTORS
53
PERCENTAGE OF DEBTORS TO WORKING CAPITAL
(In crores) 2012-13 2012-11 2003-04 2002-03 2001-02
Debtors 7168.06 5972.14 4608.48 4075.78 4584.07
Working
capital 6010.76 4897.09 4087.85 3595.47 3337.92
% of
debtors to
working
capital 119.25% 121.95% 112.74% 113.36% 137.33%
The study of debtors and working capital relationship is shown in above table. The analysis
of the table reveals that the amount of debtors in BHEL is on an average 118.25% of
working capital during the above stated period, which means large amount of working
capital, is blocked in debtors, which need to be reduced down.
Looking at the trend during the period BHEL’s debtors to working capital ratio has
fluctuated so far. It has decreased from 01-02 (137.34%) to 02-03(100%), and then it
increased in 03-04 to112.74% and then in 04-05 to 121.95%. However in 05-06 there is an
improvement in data that shows a decline from 121.95% (04-05) to 119.25% (05-06)
54
GRAPH SHOWING TREND OF DEBTORS, WORKING CAPITAL AND THEIR
RELATIONSHIP
8000 160.00%
7168.06
7000 137.33% 140.00%
5972.14 6010.76
6000 120.00%
113.36% 112.74% 121.95% 119.25%
PERCENTAGE OF DEBTORS TO WORKING

Debtors
4897.09
5000 4608.48 100.00%
4584.07
4075.78
4087.85
AMOUNT
4000 80.00%
3595.47 CAPITAL Working
3337.92 capital
3000 60.00%
% of
2000 40.00% debtors
to
working
capital
1000 20.00%
0 0.00%
2001-02 2002-03 2003-04 2004-05 2005-06
YEAR
55
TREND OF DEBTORS
(In crores) 2012-13 2012-11 2003-04 2002-03 2001-02
Debtors 7168.06 5972.14 4608.48 4075.8 4584.07
Turnover 14525.49 10336.4 8662.47 7482.22 7286.63
Conversion Period
( in days) 180 211 194 199 230
Above table shows the relative increase in sundry debtors except for first year i.e. 01-02 to
02-03. In 2001-02 debtors conversion period were 230 days, which improved to 175 days
in 2002-03 but increased in 03-04 and 04-05. Efforts were made and finally it reduced to
180 days in 05-06.
Reason for improvement by 31 days in 05-06 over previous year is mainly due to increase
in turnover but other fact is, debtors have also increased.
It suggests that along with increase in turnover debtors should also be controlled. There
should be lesser amount held up with debtors through faster debt collection.
56
GRAPH SHOWING THE TREND OF DEBTORS, TURNOVER AND DEBTOR
CONVERSION PERIOD
16000 250
14525.49
230
14000
211
199 200
194
12000
180

10336.4
10000 Debtors
150
8662.47
AMOUNT
8000 7286.63 7482.22

7168.06
Turnover
5972.14 100
6000
4584.07 4608.48
4075.8
4000 Conversion
Period ( in
50
days)
2000
0 0
2001-02 2002-03 2003-04 2004-05 2005-06
YEAR
DEBTORS CONVERSION PERIOD
57
Co
nversion Conversion
Debt Turno
period period
ors Debtors ver Turnover (in days) (in days)
(In crores) 2012-13 2012-11 2012-13 2012-11 2012-13 2012-11
BHEL 7168.06 5972.14 14525.49 10336.39 180 211
THERMAX 226.3 172.86 1498 941.16 55 67
L&T 4814.16 4027.57 15198.63 13748.26 116 107
TATA
POWER 1242.26 838.87 6004.66 5303.17 76 58
RELIANCE
ENERGY 1092.79 930.96 4607.89 4592.55 87 74
BHEL’S debtor conversion period is the highest among all the companies (180 days in 05-
06), where as THERMAX has the lowest (55 days in 05-06) .the debtor conversion period
of L&T is 116 and TATA POWER is 76 and RELIANCE ENERGY is 87 days for the
same year.
Analyzing the trend, BHEL has shown a decline in its debtor’s conversion period, over last
it has cut down its debtor’s conversion period from 211 days in 04-05.
Still it is very large and requires extensive effort towards speedier debt collection as the
amount blocked in debtors is a dead investment thus should be bare minimum. Reason
behind long conversion period of BHEL as compared to other is that it deals with SEB’S
Govt. agencies which are financially not very strong hence collection becomes difficult. In
case of THERMAX it is 55 days in 05-06 and was 67 days in 04-05,while in case of L&T,
TATA POWER, and RELIANCE ENERGY have increased from 04-05 to 05-06.
58
GRAPH SHOWING TREND OF DEBTOR,WORKING CAPITAL AND DEBTOR
CONVERSION PERIOD OF BHEL AND ITS COMPETITORS FOR 2005-06
16000 15198.63 200
14525.49
180 180
14000
160

12000
140
10000
120 DEBTORS
116
AMOUNT
8000 7168.06 100

87
6004.66 80 TURNOVER
6000 76
4814.16 4607.89
60
55
4000
40 CONVERSION
PERIOD
2000 1498 1242.26 1092.79 20
226.3
0 0
POWER ENERGY
COMPANIES
59
GRAPH SHOWING TREND OF DEBTORS,WORKING CAPITAL AND DEBTOR
16000 250
13748.26
14000
211
200
12000

10336.4
10000 DEBTORS
150
AMOUNT
8000 TURNOVER
107
5972.14 100
6000 5303.17
CONVERSION
4592.55 PERIOD
4027.57 74
67
4000
58
50
2000
941.16 838.87 930.96
172.86
0 0
POWER ENERGY
COMPANIES
2012-13 2012-11 2003-04 2002-03 2001-02
Electricity Board 1363.15 976.4 1087.67 862.7 969.4
Power Project 1572.81 1071.36 878.55 804.4 828.9
Public Sector Undertaking 696.33 586.71 601.3 505.9 472.8
Railways 274.4 261.12 177.83 140.8 73.1
60
Government Departments 183.72 249.71 138.18 69.1 101.5
Private Parties 424.18 351.65 308.91 358.4 389.8
Exports 135.3 561.97 74.58 65.3 193.6
COLLECTIBLE DEBTS 4649.89 4058.92 3267.02 2806.6 3029.1
OTHERS LIKE FREIGHT ETC. 34.08 19.47 35.04 36.5 28.2
DEFERRED DEBTS 2376.51 1766.93 1541.18 1468.9 1468.8

(incl. Def.Cr. Arrgt.)
VALUATION ADJUSTMENT 246.32 271.57 451.52 451.4 699.5
ACCRUED REVENUE
AWAITING FORMAL
BILLING 802.62 609.82
TOTAL SUNDRY
DEBTORS 8109.42 6726.71 5294.76 4753.4 5225.6
PROVISION FOR BAD AND

DOUBTFUL DEBTS 941.36 754.57 686.27 677.6 683.3
NET SUNDRY DEBTORS 7168.06 5972.14 4608.49 4075.8 4584.2

BREAKUP OF SUNDRY DETORS IN BHEL
If we look the above figures carefully, it becomes quite clear that Electricity Board, Power
projects and Public Sector undertaking are the major debtors carrying the percentage of
29.32%, 33.82% and 14.98% respectively of total collectible debts, this come to 78.12% of
the total, which is quite high. Since realization of debts from such customer dependent on
funds from govt., various approvals etc., generally there is delay in collecting money from
such customers that is the reason why BHEL has such a long conversion period in
comparison to its competitors.
Above data shows the break-up of Debtors in BHEL. If we look at the figure of 2012-13,
which are Total Sundry Debtors 8109.42 Crores and Net Sundry Debtors are 7168.06
61
Crores which majorly consists of collectible debts and deferred debts. Difference between
them is mainly on an account of deferred debts which can be claimed from customer on
completion of some milestone activities while others can be collected progressively.
Collectible debts are 4649.89 crores and break-up of this figure are as follows –
BREAKUP OF COLLECTIBLE DEBTS IN BHEL FOR THE YEAR 2012-13
Electricity Board
Power Project
3.95% 9.12% 2.91% 29.32%

Public Sector
Undertaking
5.90% Railways
Government
14.98% Departments
Private Parties
33.82%
Exports
MANAGEMENT OF CASH
PERCENTAGE OF CASH TO WORKING CAPITAL
62
(In crores) 2012-13 2012-11 2003-04 2002-03 2001-02
WORKING
CAPITAL 6010.76 4897.09 4087.85 3595.47 3337.92
CASH 4133.98 3177.86 2659.64 1320.91 476.59
% OF
CASH TO
WORKING
CAPITAL 68.78% 64.89% 65.06% 36.74% 14.28%
Above table shows the relationship of cash to working capital for the companies during the
period 01-02 to 05-06
On analyzing the table we find that cash was on an average 49.95% of working capital in
BHEL, which is not, a good sign as excess of liquidity is also harmful. It is clear from
above table that during 01-02 the ratio was affordable but from 02-03 to 05-06 it has
increased to 68.78% along with increasing cash.
This suggests that BHEL need to take some good steps for maintaining the adequate
liquidity along with sufficient cash generating power.
At the year end cash collection is high in comparison to whole year that is the reason
company has high percentage of cash to working capital.
63
GRAPH SHOWING THE TREND OF WORKING CAPITAL, CASH AND
THEIR RELATIONSHIP
7000 80.00%
6010.76
6000 64.89% 70.00%
65.06%
68.78% WORKING
4897.09 60.00% CAPITAL
PERCENTAGE OF CASH TO WORKING

5000
4133.98
4087.85 50.00% CASH
4000 3595.47
AMOUNT
3337.92 3177.86 40.00%
CAPITAL
36.74%
3000 2659.64 % OF
30.00% CASH TO
WORKING
2000 CAPITAL
14.28% 1320.91 20.00%
1000 10.00%
476.59
0 0.00%
2001-02 2002-03 2003-04 2004-05 2005-06
YEAR
CASH COLLECTION PERIOD
Col
lection Collection
C Turno Turnove
period Period
ash Cash ver r (in days) (in days)
(In crores) 2012-13 2012-11 2012-13 2012-11 2012-13 2012-11
64
BHEL 4133.98 3177.86 14525.49 10336.39 104 112
THERMAX 36.11 11.15 1498 941.16 9 4
L&T 583.2 828.02 15198.63 13748.26 14 22
TATA
POWER 1079.32 1074.36 6004.66 5303.17 66 74
RELIANCE
ENERGY 5652.90 6045.37 4607.89 4592.55 448 480
Cash collection period of BHEL is 104 days in 05-06, which is second highest among all its
competitors after RELIANCE ENERGY with 448 days, where as THERMAX has the
lowest of 9 days followed by L&T with 14 days and TATA POWER with 66 days.
65
GRAPH SHOWING TREND OF CASH,TURNOVER AND CASH COLLECTION
PERIOD FOR 05-06
16000 15198.63 500

14525.49
448 450
14000
400
COLLECTION PERIOD (in days)

12000
CASH
350
10000
300
AMOUNT
TURNOVER
8000 250
6004.66 200
5652.90
6000
4607.89 COLLECTION
4133.98 150
PERIOD
4000
104 100
2000 1498 66
1079.32 50
583.2
36.11 14
0 9 0
POWER ENERGY
COMPANIES
66
GRAPH SHOWING TREND OF TURNOVER,CASH AND CASH COLLECTION
PERIOD FOR 2004-05
16000 600
13748.26
14000
500
480
12000
COLLECTION PERIOD (in days)

CASH
10336.4 400
10000
AMOUNT
TURNOVER
8000 300
6045.37
6000 5303.17
4592.55 200 COLLECTION
PERIOD
4000 3177.86
112 100
74
2000 941.16 828.02
1074.36
11.15 22
4
0 0
POWER ENERGY
COMPANIES
67
LOANS AND ADVANCES
LOANS AND ADVANCES AS A % OF WORKING CAPITAL
(In crores) 2012-13 2012-11 2003-04 2002-03 2001-02
Working
Capital 6010.76 4897.09 4087.85 3595.47 3337.92
loans and
advances 1199.87 1229.69 1039.19 949.65 996.5
% of loan
and
advances to
W.C. 19.96% 25.11% 25.42% 26.41% 29.85%
Table shows the relationship of loans and advances as a percentage of working capital in
BHEL during the period 01-02 to 05-06. During this period loans and advances accounted
an average increase of 25.35 %. According to common norms loans and advances should
be made as low as possible unless they earn reasonable returns.
During the above period percentage has been consistently declined along with loans and
advances in last year it has decline from 25.11% to 19.96%, which is a positive sign.
68
GRAPH SHOWING THE TREND OF W.C., LOANS AND ADVANCES AND THEIR
RELATIONSHIP
7000 35.00%
29.85% 6010.76
6000 30.00%
26.41%
25.42% 4897.09
% OF LOANS AN ADVANCES TO W.C.

5000 25.11% 25.00%
Working
4087.85
Capital
4000 3595.47 20.00%
AMOUNT
3337.92 19.96%
loans
3000 15.00%
and
advances
2000 10.00%
% of loan
1229.69 1199.87 and
996.5 949.65 1039.19
1000 5.00% advances
to W.C.
0 0.00%
2001-02 2002-03 2003-04 2004-05 2005-06
YEAR
69
PERCENTAGE OF LOANS AND ADVANCES TO TURNOVER
(In crores) 2012-13 2012-11 2003-04 2002-03 2001-02
loans and
advances 1199.87 1229.69 1039.19 949.65 996.5
Turnover 14525.49 10336.4 8662.47 7482.22 7286.63
Conversion
period
(in days) 30 43 44 46 50
From the above, it is clear that loans and advances have been declined over the period and
turnover has been increased. The main point here is that conversion period has been
consistently declined during the span of 5 years i.e. from 01-02 to 05-06.
70
GRAPH SHOWING THE TREND OF LOANS AND ADVANCES, TURNOVER
AND CONVERSION PERIOD
16000 60
14525.49
14000 50
46 50
44 43
12000 loans and
10336.4 advances
40
CONVERSION (in days)

10000
8662.47
30
AMOUNT
7482.22 Turnover
8000 7286.63 30
6000
20 Conversion
4000 period (in
days)
10
2000 996.5 949.65 1039.19 1229.69 1199.87
0 0
2001-02 2002-03 2003-04 2004-05 2005-06
YEAR
71
LOANS AND ADVANCES CONVERSION PERIOD
Conve
Loans Loans rsion Conversion
Turno Turno
& & Period Period
Advances Advances ver ver (in days) (in days)
(In crores) 2012-13 2012-11 2012-13 2012-11 2012-13 2012-11
BHEL 1199.87 1229.69 14525.49 10336.39 30 43
THERMAX 86.73 69.96 1498 941.16 21 27
L&T 1911.63 1674.61 15198.63 13748.26 46 44
TATA
POWER 453.62 531.13 6004.66 5303.17 28 37
RELIANCE
ENERGY 3161.69 1170.11 4607.89 4592.55 250 93
If we look the above data carefully its states that conversion period of BHEL has been
decline from 43 days in 04-05 to 30 days in 05-06. BHEL has pretty fine figures but need
to improve more against its competitors which are THERMAX with 21 days and TATA
POWER with 28 days. Highest being the RELIANCE ENERGY with 250 days followed
by L&T with 46 days. These two need to minimize there conversion period for the
betterment of the company.
72
GRAPH SHOWING THE TREND OF LOANS AND ADVANCES,TURNOVER AND
16000 15198.63 300

14525.49
14000
250 250
12000

LOANS AND
200 ADVANCES
10000
TURNOVER
AMOUNT
8000 150
CONVERSION
6004.66 PERIOD
6000
4607.89 100
4000
3161.69
1911.63
50
1199.87 46
2000 1498
30 21 453.62 28
86.73
0 0
POWER ENERGY
COMPANIES
73
GRAPH SHOWING TREND OF LOANS AND ADVANCES,TURNOVER AND
16000 100
93
13748.26 90
14000
80
12000

10336.4 70
10000
60
AMOUNT
LOANS AND
8000 50 ADVANCES
43 44 5303.17
40
6000 37 TURNOVER
4592.55
30
27
4000
20 CONVERSION
PERIOD
1674.61
2000 1229.69 1170.11
941.16 10
531.13
69.96
0 0
POWER ENERGY
COMPANIES
74
TOTAL CURRENT ASSETS
TOTAL CURRENT ASSET CONVERSION PERIOD
(In crores) 2012-13 2012-11 2003-04 2002-03 2001-02
Current Asset 16330.77 13342.98 10424.7 8348.4 8051.39
Turnover 14525.49 10336.4 8662.47 7482.22 7286.63
Conversion period
( in days) 410 471 439 407 403
Current assets and turn over of BHEL has been increased over the period. If we look at
conversion period it keeps on fluctuating. From 01-02 to 04-05 it has continuously
increased but in last year it has decreased from 471 to 410 days, nearly about 13.15%
decrease.
75
GRAPH SHOWING TREND OF TOTAL CURRENT ASSETS, TURNOVER AND
COVERSION PERIOD
18000 480
16330.77
471
16000
14525.49 460
13342.98
14000

12000 439 440
10424.7 10336.4 Current
10000 Asset
AMOUNT
8662.47
8051.39 8348.4 420 Turnover
8000 7286.63 7482.22
410
407
403 Conversion
6000 400
period ( in
days)
4000
380
2000
0 360
2001-02 2002-03 2003-04 2004-05 2005-06
YEAR
76
TOTAL CURRENT ASSETS CONVERSION PERIOD
(In crores)
Conversio Conversion
Turnov
Current Current n period period
assets assets er Turnover (in days) (in days)
2012-13 2012-11 2012-13 2012-11 2012-13 2012-11
BHEL 16330.77 13342.98 14525.49 10336.39 410 471
THERMAX 532.96 368.02 1498 941.16 130 143
L&T 9536.52 8795.41 15198.63 13748.26 229 234
TATA
POWER 3289.86 2780.99 6004.66 5303.17 200 191
RELIANCE
ENERGY 10515.33 8640.44 4607.89 4592.55 833 687
If we look at the above data, we will find that conversion period of BHEL with 410 days is
second highest after RELIANCE ENERGY with 833 days. The best being of THERMAX
with 130 days followed by TATA POWER with 200 days and L&T with 229 days. Reason
behind long conversion period in case of BHEL is the use of heavy industrial input in large
quantity but still it has been decreased from last year by 13.15%
77
GRAPH SHOWING THE TREND OF CURRENT ASSETS,TURNOVER AND
ASSETS CONVERSION PERIOD OF BHEL AND ITS COMPETITORS FOR
2005-06
18000 900
16330.77
833
16000 15198.63 800
14525.49
14000 700

12000 600
10515.33 CURRENT
ASSETS
10000 9536.52 500
AMOUNT
TURNOVER
8000 410 400
6004.66
6000 300 CONVERSION
229 PERIOD
4607.89
200
4000 200
130
3289.86
2000 100
532.961498
0 0
BHELTHERMAX L&T TATA RELIANCE
POWER ENERGY
COMPANIES
78
GRAPH SHOWING THE TREND OF CURENT ASSETS,TURNOVER AND
16000 800
13748.26
14000 13342.98 687 700
12000 600
10336.4
10000 500
471 8795.41
CONVERSION PERIOD
8640.44
AMOUNT
8000 400
(in days)
CURRENT
6000 5303.17 300 ASSETS
4592.55
234 TURNOVER
4000 191 200
CONVERSION
143 2780.99 PERIOD
2000 100
368.02 941.16
0 0
BHELTHERMAX L&T TATA RELIANCE
POWER ENERGY
COMPANIES
CREDITORS
79
CREDITORS AS A % OF WORKING CAPITAL
(In crores)
2012-13 2012-11 2003-04 2002-03 2001-02
Working Capital 6010.76 4897.08 4087.84 3595.47 3337.92
Creditors 2804.08 2099.68 1737.97 1563.38 1857.15
% of Creditors to
Working Capital 46.65 42.88 42.52 43.48 55.64
Above data shows the continuous increase in working capital over the period of five years
with an average increase of 80.07%. Increase in working capital can be because of two
reasons i.e. either increase in current assets or reduction in current liabilities. In second
option payments can be delayed but not at the cost of the reduced support/ increased price
from suppliers of the company. It should be up to optimum extent. If we look at the
creditors it has been increases by 51% that means as a % of working capital it has been
decreased over on the above stated period. So creditors should be delayed in payment up to
a reasonable period and maximum credit period should be enjoyed. So that company can
capitalize on its liabilities.
80
CHART SHOWING TREND OF WORKING CAPITAL,
CREDITORS AND THEIR RELATIONSHIP
7000 60.00
55.64
6010.76
6000
50.00
4897.08 46.65 Working
5000 43.48 42.52 42.88 Capital
% OF CREDITORS TO W.C.
40.00
WORKING CAPITAL
4087.84
4000 3595.47
3337.92 Creditors
30.00
3000 2804.08
2099.68 20.00
1857.15
2000 1737.97
1563.38 % of
Creditors
10.00 to
1000
Working
Capital
0 0.00
2001-02 2002-03 2003-04 2004-05 2005-06
YEAR
81
CREDITORS AS A % OF WORKING CAPITAL OF BHEL IN
COMPARISON TO ITS COMPETITORS
(In crores)
Wor
C king Working Per
reditors Creditors Capital Capital centage Percentage
2012-13 2012-11 2012-13 2012-11 2012-13 2012-11
BHEL 2804.08 2099.68 6010.76 4897.08 46.65% 42.88%
THERMAX 151.28 131.84 -67.43 -0.2 -224.35% -65920%
L&T 3046.28 2890.53 2624.9 3238.84 116.05% 89.24%
TATA
POWER 709.93 647.44 1579.89 1209.13 44.94% 53.55%
RELIANCE
ENERGY 662.05 739.09 8301.37 6752.69 7.98% 10.95%
Above table shows the percentage creditors on working capital of BHEL and its
competitors. After analyzing the above table we can say that absolute creditors are not
more than L&T, means L&T utilized their credit period in a very good manner comparison
to BHEL. Reliance Energy is not utilizing its credit period efficiently.
82
GRAPH SHOWING TREND OF CREDITORS,WORKING CAPITAL AND THEIR RELATIONSHIP
FOR 2005-06
9000 150.00
8301.37
116.05
8000
100.00
7000 6010.76
44.94 50.00
46.65
6000 CREDITORS
7.98
PERCENTAGEOFCREDITORSTO
0.00
5000
WORKINGCAPITAL
AMOUNT
4000 -50.00 WORKING

3046.28 CAPITAL
2804.08
3000 2624.9 -100.00
2000 1579.89 PERCENTAGE
-150.00 OF CREDITORS
709.93 662.05
1000 TO WORKING
151.28 -67.43
CAPITAL
-200.00
0
-224.35
-1000 POWER ENERGY -250.00
COMPANIES
83
GRAPH SHOWING THE TREND OF CREDITOR, WORKING CAPITAL AND THE
RELATIONSHIP FOR 2004-05
8000 10000.00
7000 6752.69
42.88 89.24 53.55 0.00
10.95
6000
-10000.00
4897.08
5000
-20000.00 CREDITORS
PERCENTAGEOFCREDITORTO
4000
ORKINGCAPITAL
3238.84
AMOUNT
-30000.00
2890.53
3000
WORKING
2099.68 -40000.00 CAPITAL
2000
W
1209.13
647.44 739.09 -50000.00
1000 PERCENTAGE OF
131.84 -0.2 CREDITORS TO
0 -60000.00 WORKING
-65920
BHEL THERMAX L&T TATA POWER RELIANCE CAPITAL
-1000 ENERGY -70000.00
COMPANIES
84
ADVANCE FROM CUSTOMERS
ADVANCE FROM CUSTOMERS AS A % OF WORKING CAPITAL

IN BHEL
(In crores) 2012-13 2012-11 2003-04 2002-03 2001-02
Working
Capital 6010.76 4897.08 4087.84 3595.47 3337.92
Advance from
customers 5479.16 4584.99 3133.03 1801.56 1895.42
% of Advance
from
customers to
Working
Capital 91.16% 93.63% 76.64% 50.11% 56.78%
If we see above table and analyzed then we see the % of advance from customer is high in
BHEL. In last five years the advance from customer is increased by 34.48 which is a good
sign for the BHEL because if the % of advance from customer increased it means BHEL
got more order in comparison to last year. The main reason behind this is goodwill of
company the goodwill of company is very good regarding the companies opinion. So
BHEL got maximum advance from the customer. The main reason behind maximum of
advance from customer is due to boom in the power sector that BHEL got many order from
the customer.
85
GRAPH SHOWING THE TREND OF ADVANCE FROM CUSTOMERS,WORKING CAPITAL AND
THEIR RELATIONSHIP
7000 100.00%
93.63%
6010.7691.16%90.00%
6000
5479.16
80.00%
76.64% Working
4897.08 Capital
5000 4584.99 70.00%
FROM CUSTOMERS TO WORKING

PERCENTAGE OF ADVANCES
4087.84
60.00%
4000 56.78%3595.47 Advance from
AMOUNT
3337.92 CAPITAL customers

50.11% 3133.03 50.00%
3000
40.00%
% of Advance
1895.42 1801.56 30.00%
2000 from
customers to
20.00% Working
1000 Capital
10.00%
0 0.00%
2001-02 2002-03 2003-04 2004-05 2005-06
YEAR
86
ADVANCE FROM CUSTOMERS AS A % OF WORKING CAPITAL
OF BHEL IN COMPARISON TO ITS COMPETITORS
Ad
vance Advance Wo
From From rking Working Per Per
Customers Customers Capital Capital centage centage
(In crores) 2012-13 2012-11 2012-13 2012-11 2012-13 2012-11
BHEL 5479.16 4584.99 6010.76 4897.08 91.16% 93.63%

-
THERMAX 247.01 123.31 -67.43 -0.2 36632.06% -61655%
L&T 1800.29 1403.82 2624.9 3238.84 68.59% 43.34%
TATA
POWER 18.15 56.27 1579.89 1209.13 1.15% 4.65%
RELIANCE
ENERGY 283.02 61.09 8301.37 6752.69 3.41% 0.90%
Above table shows the % of advance from customer to working capital of BHEL and its
competitors. After analyzing the above table we can say that BHEL has maximum advance
from customer in comparison to its competitors.
87
GRAPH SHOWING THE TREND OF ADVANCES FROM CUSTOMERS,WORKING CAPITAL AND THEIR
RELATIONSHIP FOR 2005-06
9000 5000.00%
8301.37
8000 91.16% 68.59% 1.15% 3.41% 0.00%
7000
-5000.00%
6010.76
ADVANCE FROM
PERCENTAGE OF ADVANCE FROM CUSTOMERS TO

6000
5479.16 -10000.00% CUSTOMERS
5000
WORKING CAPITAL
-15000.00%
AMOUNT
4000 WORKING CAPITAL

-20000.00%
3000 2624.9
-25000.00%
2000 1800.29
1579.89
PERCENTAGE OF
ADVANCE FROM
-30000.00%
1000 CUSTOMERS TO
283.02 WORKING CAPITAL
247.01
-67.43 18.15
0 -35000.00%
BHEL -36632.06%THERMAX L&T TATA RELIANCE
POWER ENERGY
-1000 -40000.00%
COMPANIES
88
GRAPH SHOWING THE TREND OF ADVANCE FROM CUSTOMERS,WORKING CAPITAL
AND THEIR RELATIONSHIP FOR 2004-05
8000 10000.00%
43.34%
7000 6752.69
93.63% 4.65% 0.00%
0.90%
6000
PERCENTAGE OF ADVANCE FROM CUSTOMERS TO

-10000.00% ADVANCE FROM
CUSTOMERS
4897.08
5000 4584.99
-20000.00%
WORKING CAPITAL
4000
AMOUNT
WORKING
3238.84 -30000.00% CAPITAL
3000
-40000.00%
2000
1403.82 PERCENTAGE OF
1209.13 ADVANCE FROM
-50000.00% CUSTOMERS TO
1000 WORKING
123.31 CAPITAL
-0.2 56.27 61.09
0 -60000.00%
-61655%
POWER ENERGY
-1000 -70000.00%
COMPANIES
89
PROVISIONS
PROVISIONS AS A % OF WORKING CAPITAL IN BHEL
(In crores) 2012-13 2012-11 2003-04 2002-03 2001-02
Working
Capital 6010.76 4897.08 4087.84 3595.47 3337.92
Provisions 1512.27 1325.45 1139.94 1056.62 644.6
% of
Provisions to
Working
Capital 25.16% 27.07% 27.89% 29.39% 19.31%
Above table shows the % of provision to working capital after analyzing the above table we
see the % of provision is increase in the span of five years. This provision shows
company’s conservatism and prudence in declaring profit. We know that
provision is made out of profits and company earn the profit that is the reason company
maintaining its provision.
90
GRAPH SHOWING THE TREND OF PROVISION, WORKING CAPITAL AND THEIR
RELATIONSHIP
7000 35.00%
6010.76
6000 30.00%
29.39%
27.89%
27.07%
PERCENTAGE OF PROVISION TO WORKING

4897.08 25.16% 25.00%
5000 Working
Capital
4087.84
4000 20.00%
19.31%3595.47
AMOUNT
3337.92 CAPITAL Provisions
3000 15.00%
% of
2000 10.00% Provisions to
1512.27 Working
1325.45
1139.94 Capital
1056.62
1000 5.00%
644.6
0 0.00%
2001-02 2002-03 2003-04 2004-05 2005-06
YEAR
91
PROVISIONS AS A % OF WORKING CAPITAL IN BHEL IN
COMPARISON TO ITS COMPETITORS
Working Working
Percentages Percentages
Percentages Provisions Capital Capital
2012-13 2012-11 2012-13 2012-11 2012-13 2012-11
BHEL 1512.27 1325.45 6010.76 4897.08 25.16% 27.07%
THERMAX 56.24 41.64 -67.43 -0.2 -83.40% -20820%
L&T 1015.37 795.75 2624.9 3238.84 38.68% 24.56%
TATA
POWER 596.47 582.9 1579.89 1209.13 37.75% 48.21%
RELIANCE
ENERGY 643.14 409.61 8301.37 6752.69 7.75% 6.06%
Above table is related with the % of provision to working capital of BHEL and its
competitors. After analyzing the above table we can say that BHEL has a good % of
provision in the company but if we compare it with the L&T and TATA POWER then we
see BHEL has less provision than him but if we see the working capital then we see that
working capital of BHEL is higher than its competitors.
92
GRAPH SHOWING THE TREND OF PROVISION, WORKING CAPITAL AND PERCENTAGE OF
PROVISION TO WORKING CAPITAL FOR 2005-06
9000 60.00%
8301.37
8000
38.68% 37.75% 40.00%
7000 25.16%
6010.76 20.00%
6000
7.75% PROVISION
PERCENTAGEOFPROVISIONTO
0.00%
5000
WORKINGCAPITAL
AMOUNT
4000 -20.00%
2624.9 WORKING CAPITAL

3000
-40.00%
2000 1512.27 1579.89
1015.37 -60.00%
1000 56.24 596.47 643.14 PERCENTAGE OF
-67.43 PROVISION TO
-80.00%
0 -83.40%
WORKING CAPITAL
-1000 POWER ENERGY -100.00%
COMPANIES
93
GRAPH SHOWING THE TREND OF PROVISION ,WORKING CAPITAL AND THEIR RELATIONSHIP
FOR 2004-05
8000 5000.00%
7000 6752.69
27.07% 24.56% 48.21% 6.06% 0.00% PROVISION
6000
PERCENTAGE OF PROVISION TO WORKING

4897.08
5000 -5000.00% WORKING
CAPITAL
4000
AMOUNT
CAPITAL
3238.84 -10000.00% PERCENTAGE OF
3000 PROVISION TO
WORKING
CAPITAL
2000 -15000.00%
1325.45 1209.13
1000 795.75
582.9
409.61
41.64 -0.2 -20000.00%
0
-20820%
POWER ENERGY
-1000 -25000.00%
COMPANIES
94
OTHER LIABILITIES
OTHER LIABILITIES AS A % OF WORKING CAPITAL IN BHEL
(In crores) 2012-13 2012-11 2003-04 2002-03 2001-02
Working
Capital 6010.76 4897.08 4087.84 3595.47 3337.92
Other
Liabilities 524.5 435.77 325.91 331.37 316.29
% of other
Liabilities to
Working
Capital 8.73% 8.90% 7.97% 9.22% 9.48%
Aove table shows the % of other liabilities to working capital after analyzing the above
data we can say that the % of other liabilities to working capital is reduce in comparison to
last years. So we can say that the company has to utilize their credit policy in a good
manner.
95
GRAPH SHOWING THE TREND OF OTHER LIABILITIES,WORKING CAPITAL AND THEIR
RELATIONSHIP
7000 10.00%
6010.76
6000
9.48% 9.50%
9.22% 4897.08
5000
PERCENTAGEOFOTHERLIABILITIESTO
9.00%
4087.84 8.90%
8.73% Working Capital
WORKINGCAPITAL
4000 3595.47
AMOUNT
3337.92 8.50%
Other Liabilities
3000
7.97% 8.00% % of other

2000 Liabilities to
Working Capital
7.50%
1000
435.77 524.5
316.29 331.37 325.91
0 7.00%
2001-02 2002-03 2003-04 2004-05 2005-06
YEAR
96
OTHER LIABILITIES AS A % OF WORKING CAPITAL OF BHEL
IN COMPARISON TO ITS COMPETITORS
Wor
Other Other king Working Perc
(In crores) Liabilities Liabilities Capital Capital entages Percentages
2012-13 2012-11 2012-13 2012-11 2012-13 2012-11
BHEL 524.5 435.77 6010.76 4897.08 8.73% 8.90%
THERMAX 145.86 71.43 -67.43 -0.2 -216.31% -35715%
L&T 1049.68 466.47 2624.9 3238.84 39.99% 14.40%
TATA
POWER 385.42 285.25 1579.89 1209.13 24.40% 23.60%
RELIANCE
ENERGY 625.75 677.96 8301.37 6752.69 7.54% 10.04%
Above table shows the % of other liabilities on working capital of BHEL and its
comparison to its competitors. After analyzing the data we can say that the % of other
liabilities is less in comparison to L&T, TATA POWER, and RELIANCE ENERGY. So
we can say that these companies are utilized their credit policy in good manner
97
CHART SHOWING THE TREND OF WORKING CAPITAL, OTHER LIABILITIES AND
THEIR RELATIONSHIP OF BHEL WITH ITS COMPETIOTRS for 05-06
9000 8301.37 100.00%
8000
50.00%
39.99%
7000 6010.76 24.40%
7.54% Working
8.73% 0.00%
% OF OTHER LIABILITIES TO W.C.

6000
Capital
5000
-50.00%
AMOUNT
4000
Other
2624.9 -100.00% Liabilities
3000
1579.89
2000 -150.00%
1049.68
1000 524.5 625.75 % of other
-216.31% 385.42 Liabilities to
-200.00%
0 Working
-67.43 145.86 Capital
-1000 -250.00%
POWER ENERGY
COMPANIES
98
GRAPH SHOWING THE TREND OF OTHER LIABILITIES,WORKING CAPITAL AND THEIR
RELATIONSHIP OF BHEL AND ITS COMPETITORS FOR 2004-05
8000 5000.00%
6752.69
7000 8.90% 14.40% 23.60% 10.04% 0.00%
OTHER
6000 -5000.00%
LIABILITIES
4897.08
PERCENTAGE OF OTHER LIABILITIES TO

5000 -10000.00%
WORKING
WORKINGCAPITAL
4000 -15000.00% CAPITAL
AMOUNT
3238.84
3000 -20000.00%
PERCENTAGE OF
2000 -25000.00% OTHER
LIABILITIES TO
1209.13
WORKING
1000 677.96 -30000.00% CAPITAL
435.77 466.47
71.43 -0.2 285.25
0 -35000.00%
-35715%
-1000 POWER ENERGY -40000.00%
COMPANIES
TOTAL CURRENT LIABILITIES
99
TOTAL CURRENT LIABILITIES CONVERSION PERIOD OF BHEL
(In crores) 2012-13 2012-11 2003-04 2002-03 2001-02
Total Current
Liabilities 10320.02 8445.89 6336.85 4752.93 4715.86
Turnover 14525.49 10336.4 8662.46 7482.22 7286.62
Conversion
period
(in days) 259 298 267 232 236
Above table shows a continuous increase in current liabilities. Conversion period is very
high but in last year it has decreased by 39 days which shows that the company is not
enjoying fullest credit period.
100
GRAPH SHOWING THE TREND OF TOTAL CURRENT LIABILITIES, TURNOVER
AND CONVERSION PERIOD
16000 350
14525.49
14000
298 300
12000 267
CNVERSION PERIOD (in days)

259
250 Current
236 10336.4 10320.02 Liabilities
232
10000
8662.46 8445.89 200 Turnover
AMOUNT
8000 7286.62 7482.22
6336.85 150 Conversion

6000 period
4715.86 4752.93
100
4000
50
2000
0 0
2001-02 2002-03 2003-04 2004-05 2005-06
YEAR
101
TOTAL CURRENT LIABILITIES CONVERSION PERIOD OF BHEL
IN COMPARISON TO ITS COMPETITORS
Current Current
Liabilities Liabilities Turnover Turnover Percentage Percentage
(In crores) 2012-13 2012-11 2012-13 2012-11 2012-13 2012-11
BHEL 10320.02 8445.89 14525.49 10336.39 259 298
THERMAX 600.39 368.22 1498 941.16 146 143
L&T 6911.62 5556.57 15198.63 13748.26 166 148
TATA
POWER 1709.97 1571.86 6004.66 5303.17 104 108
RELIANCE
ENERGY 2213.96 1887.75 4607.89 4592.55 175 150
By looking at above data BHEL has the longest conversion period and shortest being of
TATA POWER with 104 days Followed by THERMAX (146 days), L&T (166 days) and
RELIANCE ENERGY (175 days).
102
GRAPH SHOWING THE TREND OF CURRENT LIABILITIES
CONVERSION PERIOD OF BHELAND ITS COMPETITORS
350
298
300
259
250
AMOUNT
200 175
166 2004-05
143146 148 150
2005-06
150
108104
100
50
0
POWER ENERGY
COMPANIES
ANALYSIS OF SOME IMPORTANT FINANCIAL RATIOS
103
2012-13 2012-11 2003-04 2002-03 2001-02
PROFIT
AFTER TAX
TO CAPITAL
EMPLOYED 24.01% 16.05% 12.70% 9.33% 10.37%
EPS 68.6 38.95 26.89 18.16 19.12
NET WORTH 298.1 246.24 215.64 192.36 172.43
CURRENT
RATIO 1.58 1.58 1.65 1.76 1.71
LIQUID RATO 1.22 1.23 1.31 1.33 1.28
TOTAL
DEBT/EQUITY 0.08 0.09 0.1 0.11 0.16
DEBT EQUITY RATIO
104
2012-13 2012-11
BHEL 0.08 0.09
THERMAX 0 0
L&T 0.32 0.57
TATA POWER 0.86 0.87
RELIANCE ENERGY 0.54 0.59
If we see the overall scenario of last five year data of BHEL, than we can say that BHEL is
a zero debt company. It has reduced its debt equity ratio from 0.16 to 0.08 that is 100%
reduction. This means BHEL does not relies on outside capital and is funding its
requirements through internal resources only. Though it is a good sign for any company but
the advantage of borrowings (i.e. interest benefit, lower cost of capital etc.) are not enjoyed
by BHEL.
105
GRAPH SHOWING THE TREND OF DEBT EQUITY RATIO OF BHEL AND ITS COMPETITORS FOR
2004-05 & 2005-06
1
0.9 0.87 0.86
0.8
0.7
DEBT EQUITY RATIO
0.57 0.59
0.6 0.54 2004-05
0.5
2005-06
0.4
0.32
0.3
0.2
0.09 0.08
0.1
0 0
0
BHEL THERMAX L&T TATA POWER RELIANCE
COMPANIES ENERGY
CURRENT RATIO
106
2012-13 2012-11
BHEL 1.58 1.58
THERMAX 0.89 1
L&T 1.38 1.58
BHEL has current ratio of 1.58 in both the year i.e. 2012-13 & 2012-11 but if we see the
current ratio of RELIANCE ENERGY & TATA POWER which is 4.75 and 1.92 which is
very high. The reason behind such high ratio of RELIANCE ENERGY is due to high Cash
and Bank balance & Loans and Advances which need to be maintained. We can say that
BHEL has maintained its current ratio very efficiently and considering the production cycle
and nature of business the ratio of 1.50 to 1.70 is optimum.
107
GRAPH SHOWING NTHE TREND OF CURRENT RATIO OF BHEL AND ITS
COMPETITORS FOR 2004-05 AND 2005-06
5 4.75
4.58
4.5
4
3.5
CURRENT RATIO
3
2004-05
2.5
1.77 1.92
2005-06
2 1.58 1.58 1.58
1.38
1.5
1 0.89
1
0.5
0
ENERGY
COMPANIES
108
LIQUIDITY RATIO
2012-13 2012-11
BHEL 1.22 1.23
THERMAX 0.69 0.76
L&T 1.06 1.17
An ideal liquidity ratio is 1:1; less tan this can create problems in smooth working of
companies. BHEL has liquidity ratio of 1.22 in 2012-13 which has been decreased
from 1.23 in 2012-11, BHEL should reduce its liquidity ratio further. However if
debtors can be managed well, as mentioned in detail of debtors the ratio can be
more impressive. Looking at the ratio of other companies like RELIANCE
ENERGY & TATA POWER has the liquidity ratio of 4.61 & 1.63 respectively
which is very high as comparison to ideal liquidity ratio. While the ratio of
THERMAX is very low (0.69) and L&T has maintained its liquidity ratio
satisfactorily.
109
GRAPH SHOWING THE TREND OF LIQUIDITY RATIO OF BHEL AND ITS
COMPETITORS FOR THE YEAR 2004-05 AND 2005-06
5 4.61
4.39
4.5
4
3.5
LIQUIDITY RATIO
3
2004-05
2.5
2005-06
2 1.56 1.63
1.5 1.23 1.22 1.17 1.06
1 0.76 0.69
0.5
0
ENERGY
COMPANIES
110
EARNING PER SHARE
2012-13 2012-11
BHEL 68.6 38.95
THERMAX 10.34 6.73
L&T 68.58 75.74
EPS calculation made over the years indicates that the BHEL’S earnings power on per
share basis has increased considerably. While from 01-02 to 02-03 it has decreased by five
percent but then it increases continuously from 02-03 to 05-06 and reached RS.68.6 net
increase being 277.75%. L&T being the closest competitors of BHEL with an EPS of RS.
68.58.
111
GRAPH SHOWING THE TREND OF EARNING PER SHARE OF BHEL AND ITS
COMPETITORS FOR 2004-05 & 2005-06
80 75.74
68.6 68.58
70
60
50
EARNING PER SHARE
38.95 2004-05
40 32.2
29.74 27.97 30.62
30 2005-06
20
10.34
10 6.73
0
COMPANIES ENERGY
112
CHAPTER 4
: Conclusions
&
SUGGESTION
113
CONCLUSIONS AND SUGGESTIONS
Heavy Engineering Industry have an important place in the national economy, as

they provide basic inputs to the core of the economy, viz, power, transportation, industrial
products etc. BHEL being the largest heavy electrical company in India has to play a
leading role in bridging the gap between internal supply and demand for power in India,
which is a power deficit country.
The financial health of BHEL has been quite sound, expecting in one or two
areas and inductive to its rapid growth and expansion.
We have drawn conclusion regarding each component of working capital separately and
offered suggestions.
INVENTORY MANAGEMENT
We have seen that inventory as a % of working capital has fluctuated over the
period of 5 years. BHEL has been unable to convert it into finished goods efficiently. It has
an inventory conversion period of 94 days which has reduced over the period. Thus we can
saw that inventory management requires a bit attention. It has to control its inventory, as a
% of working capital and also should reduce its conversion period further, so that inventory
can be utilized efficiently. But BHEL being a heavy industry and has a long production
cycle inventory management becomes difficult. The modern methods of inventory control
such as preparation of vocabulary list, classification, codification, standardization and
variety reduction can be useful for BHEL.
DEBTORS MANAGEMENT
Debtors, which formed the largest segment of current assets in BHEL, have not
been managed satisfactorily. The quantum of receivables has been excessive and also its
debtor conversion period.
We have seen that on an average were 118.25% of working capital, which is very high and
its debtor conversion period ranging from 230 days in 2001-02 to 180 days in 2012-13,
which is highest among all the companies under study. The conversion period has
decreased over the period remains too high and has to be reduced considerably to below
100 days.
This scenario may be due to the fact that BHEL’s major customers are public
sector undertakings such as State Electricity Boards ( SEB’s), NTPC, power Grid
Corporation etc. Since realization of debts from such customer dependent on funds from
govt., various approvals etc., generally there is delay in collecting money from such
customers that is the reason why BHEL has such a long conversion period in comparison to
its competitor
114
BHEL has to make more efforts towards the collection of outstanding so as to bring
the debtors within the reasonable limits.
CASH MANAGEMENT
Cash position in BHEL is quite satisfactory as we seen from our calculations in

comparison to its competitors. BHEL has to maintain its cash positions to ensure good
liquidity position in future.
There is no denying the fact that these financial analyses like ratio analysis, turnover
analysis, working capital analysis etc. helps the organizations a lot in appraising and
improve its performance.
But now in a competitive environment where the monopoly of BHEL is almost

over with the arrival of global giants. Adding to that the weak financial position of SEB’s,
a major customer segment for BHEL, the World Banks decision to stop financing return on
assets criterion and continuing uncertainty regarding IPP, policy, it’s very necessary to take
some non financial measures along with financial ones to be in stiff competitions.
SUMMING UP:
We feel that BHEL in spite of being a Public Sector Undertaking and thus by it’s
very nature beset with political interference and bureaucratic control has fared impressively
against the MNC’s and other private companies
Especially significant is its performance in this period of recession where it has

shown improvement in all parameters whereas its competitors have not fared so
impressively, BHEL’s Capital Structure ratio are impressive and indicate the capacity of
the firm to undertake modernization and expansion as and when necessary.
These figures look even more impressive when we realize that BHEL has a large
amount of social costs which are not there in the case of it’s competitors.
BHEL has great future ahead because of boom in power sector. In 11 th plan govt.
has given tremendous opportunity to this sector and BHEL has high responsibility,
challenge and opportunity to perform better. For this BHEL has already taken some efforts
and we are quite hopeful it is doing well to meet the challenges
115
UNDERSTANDING
OF
ECONOMIC
VALUE
ADDED
116
Introduction

Every Company and its investors need to know how well it is doing. Measures of
performance based on accounting reports such as net profit growth, return on capital
employed, return on investment, return on equity and earning per share have a fleeting
connection with the pricing process undergone in the capital markets. The major limitations
of these measures is that each reveal different parameter of judging the company putting
investor into dilemma to look forward to which parameter for investing as these differ from
company to company. Further these measures have the valuation process as forward
looking but these measures look backward. The second reason for the dissonance is that
valuation is based on cash flows; the most of these measures depend on accounting profits
and doesn’t take into consideration the cost of capital and this accounting concept of
measuring business income doesn’t provide a single platform for comparison among
different companies.
They took your money as equity or as debt. But how many of them used it to
create. Wealth for you?
One man’s return is another man’s cost. If the shareholder’s expect a return it becomes a
cost to the Company. Suppliers of capital demand like always demand a return
commensurate with the level of risk borne by them in the business
Shareholder value is the essential measure of corporate performance. It is an accurate

reflection of the quantum of incremental value a company generates for its shareholders,
after accounting for its cost of operations, which includes the cost of capital, but isn’t easy
to measure, Balance sheet-based measures are veiled in accounting anomalies that, often,
measure notional profits, not real ones. And market-driven measures, like market
capitalization, are prone to the volatility of the bourses.
The solution thus is a mix-and-match measure-or families of measures-that can factor in
a market's assessment of a company's value and, at the same time, use real measures of its
financial performance that it extracts from its financial statements. The ideal family of
measures comprises the value-added twins: Market Value Added (MVA) and Economic
Value Added (EVA). The most convincing reason is that present methods of evaluating
performance such as EVA and SVA explicitly consider the pricing of capital beyond that of
interest paid on different forms of debt. Return by itself has no meaning. Return has to be
seen commensurate with the level of risk and returns being offered in similar risky
businesses.
117
The first is the perfect measure of a company's ability to create wealth. But it can be
calculated only at the level of the entire company, and is as volatile as any market index.
The second is the most accurate measure of the economic performance of a company.
EVA is just a way of measuring an operation's real profitability. EVA holds a company
accountable for the cost of capital it uses to expand and operate its business and attempts to
show whether a company is creating a real value for its shareholders. EVA is a better
system (than ROI) to encourage growth through investment -investment in new products,
new equipment and new manufacturing facilities, EVA measurement also requires a
company to be more careful about resource mobilization, resource allocation and
investment decisions, It effectively measures the productivity of all factors of production.
 EVA is simply the surplus generated on an investment over its cost of capital.
“EVA is the measure of total factor productivity whose growing. Popularity

reflects the new demands of the information age”.
- Peter Drucker in the Harvard Business Review

USING EVA AS A BUSINESS TOOL:

EVA is a valuable management tool. Doing more with less is the core of managing with
EVA. An explicit charge for capital on financial statements serves as a monthly reminder
that there is a cost involved in using the assets employed in them business. EVA reinforces
to managers that capital is not free and focuses their attention not just on profit, but also on
the level of investment used to generate that profit.
EVA encourages managers to operate their businesses as if they were owners by guiding
them to make business investments that earn returns above the cost of capital required to
make the investment. It provides an effective framework for making decisions about
equipment purchases, research and development programs, and new product development,
marketing campaigns, and acquisitions, Using EVA, managers are encouraged to think
through various trade-off and/or eliminate projects or business activities that are not
producing an adequate return on capital employed.
118
THE CONCEPT
The General Motor Corp. first introduced the concept of economic value added in the
1920’s.
The concept was reintroduced and popularized by New York based consulting firm Stern
Stewart & Co. in the 1980’s. EVA is the registered trademark of Stern Stewart & Co.
The acronym EVA stands for Economic Value Added; it conveys a new measure of
corporate performance. The word ‘Value’ has existed from time immemorial in trade,
industry and commerce. Over the years as trade, industry and commerce have developed
from subsistence level to higher value creation level, the term ‘value’ has emerged as a
consistent measurement tool for economic entitles, The concept of Economic Value Added
(EVA) has got wide acceptance as a key indicator of performance today since industry is
shifting from the product centric world of the past to a value centric world of the future.
The concept of EVA is well established in financial theory. But only recently has the term
moved into the mainstream of corporate finance, as more and more firms adopt it as the
base for business planning and performance monitoring. There is growing evidence that
EVA, not earnings, determines the value of a firm.
The basic idea behind EVA in not new. Alfred Marshall, the noted Cambridge economist,
developed the related concept of economic income or quasi rent more than 100 years ago.
This concept states that the Company earns genuine profits only when revenues are
sufficient to cover the firm’s operating costs and it’s cost of capital. This excess return was
called abnormal return and in today’s world it goes by the name of value addition.
Economic Value Added (EVA) = NOPAT – Capital x Cost of Capital
A necessary starting point for understanding the mechanics of EVA is the related concept
of market value added (MVA).
MVA is the difference between the total value of the firm and the total capital (including
equity and debt) contributed to the firm.
MVA = Total value of business – total capital
In the logic of value creation, the aim of the firm’s managers is to maximize MVA. The
aim is not to maximize the value of the firm, which is accomplished easily enough by
119
increasing amounts of capital. For example if the company raises Rs. 20 million in capital
and invest the capital in projects that are expected to earn the cost of capital, both total
value and total capital have increased by Rs. 20 million and MVA is unchanged. MVA
increases only when invested capital earns a rate of return greater than the cost of capital.
When newly raised capital is invested in value-creating projects (those with a positive net
present value) MVA increases. When capital is invested in value-destroying projects (i.e.
those with a negative net present value) MVA decreases.
MVA makes clear that growth for its own sake does not create value Growth creates value
only when the growth strategy leads to incremental value that increases the incremental
capital invested. In other words the net present value of the strategy must be positive.
Otherwise value is destroyed. Managers may create value by investing in capital projects
with positive net present value of all the firm’s activities and investments.
HOW DOES EVA RELATE TO MVA?
Market value added is equal to present value of all future EVA. Increasing EVA a company
increases its market value added, or in other words increases the difference between
company’s value and the amount of capital invested in it. The relationship with EVA and
MVA has its implications on valuation.
Market Value Added = Market Value of Equity
– Book Value Of equity
Market Value of Equity = Book Value of Equity
+ Present value of all future

EVA
Market Value Added = Present value of all future Eva
Book value of equity affects the periodic EVA figures in future via capital costs: If book
value of equity is too high then the capital costs in future are also too high and the periodic
120
EVA values too low. These opposite changes in the two terms cancel each other and thus
the market value of equity is always the same no matter of the original book value
MVA is the present value of the firm’s expected future Eva’s. EVA generates more interest
than MVA, however, because it measures performance annually; MVA is a static measure
that reports on the sum total of the company’s value creation from it’s beginnings to the
date the MVA is calculated and MVA is less practical than EVA for evaluating and
rewarding managerial performance. Also MVA can be calculated only for companies or
divisions of companies that are publicly traded. An important advantage of EVA over
MVA is that EVA can be used to measure performance at any level of a business firm, not
just at the group level.
What Does EVA Tell Us?

121
 How much value is the company adding?
 Why does the company need to add value?
 Is a business/division/operation viable (can it sustain on its own)
 Which division is performing better?
 EVA as a performance evaluation tool for managers
 What is the trend in EVA?
SIGNIFICANCE OF EVA
EVA is the centerpiece of a comprehensive financial management system. This implies that
all the policies, procedures, measures and methods companies use to guide and control their
operations and strategy center around EVA. EVA is not a macro concept. It can be applied
at a very micro level to gauge the divisional performance of a company. A regular
monitoring of EVA may throw light on the problem areas of a company and may helps
manager take corrective steps. EVA can also change a company’s attitude and behavior
from top to bottom. It has alerted companies about the misuse of expensive capital.
The success of EVA implementation depends on the kind of training given to each member
of the organization. EVA recognizes that even those with the smallest jobs in the
organization can help create value. A company having consistently high EVA implies that
it has been successful in creating value for the business. It has effectively utilized the
resources available and invested the scarce resources in the most profitable use. On the
other hand, a company having oscillating EVA or consistently negative EVA indicates that
there is something wrong with the company.
122
IS TREND OF EVA IS MORE IMPORTANT THAN ABSOLUTE
EVA?
Yes, Trend of EVA is more important than absolute EVA. Because, by knowing the trend
we know that EVA of a particular company showing increasing or decreasing in trend. If
EVA increasing regularly than it means that company is creating wealth of its shareholder.
But, If EVA showing a decreasing trend than it means erosion of wealth of shareholder.
Even the companies having negative EVA have been rated well because of trend of EVA.
EVA Vs TRADIONAL MEASURES

There are two concepts of evaluating of business income—accounting concept and
economic concept.
According to accounting concept income is measured by deducting expenses incurred from

income earned during the period.
According to economic concept, business income is considered to be the maximum

amount, which is capable of distributing to its shareholders while still remaining in the
same position at the end of the period as it was in the beginning.
EVA is a company's net operating profit after tax and after deduction the cost of capital.
Thus what makes EVA so revealing is that it takes into account a factor no conventional
measure includes- the total cost of capital. The traditional financial statements normally
show only one component of the total cost of capital to arrive at net profits, only the
explicit cost of borrowed capital is considered. EVA recognizes that to arrive at true profits
cost of borrowed capital as well as equity capital should be deducted from net operating
profits, When using traditional, profit-based performance measures, divisional managers of
a corporate entity tend to focus to much on the bottom line but under an EVA based
system, they are accountable not only for the earnings they generate, but also for the
amount of capital they employ Now, it is not enough to maximize earnings; at the same
time consumption of capital should be minimum/optimum.
123
The main differences between EVA, earnings per share, return on assets, and discounted
cash flow, the most common calculations, as a measure of performance are as follows:
 Earnings per share tell nothing about the cost of generating those profits. If the cost
of capital (loans, bonds, equity) is, say, 15 percent , then a 14 percent earning is
actually a reduction, not a gain, in economic value. Profits also increase taxes,
thereby reducing cash flow, so that engineering profits through accounting tricks
can drain economic value.
 Return on assets is a more realistic measure of economic performance, but it
ignores the cost of capital. In its most profitable year, for instance, IBM's return on
assets was over 11 percent, but its cost of capital was almost 13 percent. Leading
firms can obtain capital at low costs, via favorable interest rates and high stock
prices, which they can then invest in their operations at decent rates of return on
assets. That tempts them to expand without paying attention to the real return,
economic value-added. Maximizing rate of return doesn’t necessarily maximize the
return to shareholders.
 Return on Equity suffers from same shortcoming as ROI. Risk component is not
included and hence there is no comparison. The level of ROE doesn’t tell the owner
if company is creating shareholders wealth or destroying it.
 Discounted cash flow is very close to economic value-added, with the discount rate
being the cost of capital.

EVA superior to the measures of financial and corporate

Performance?
124
Traditional measures of corporate performance assume that there is no charge on
equity. The logic is dividends come out of profits it can skip paying out dividends. Thus
shareholders fund are for free. Assumptions like these constitute for disaster.
Shareholders expect at least a market rate of return when they buy a company’s share.

Secondly traditional measures of corporate performance argue that since a

company’s PAT in someway meant for it’s shareholders (part of it is tolled out as
dividend and rest is kept for company’s growth). They are comprehensive measures of
cooperative performance. However these measures encourage the company’s managers
to take decisions that will boot the bottom line. The first liability is likely to be related
to cost and R&D and market development which does not result in an immediate
increase in PAT. This approach will inhibit growth and eventually destroy shareholders
value. In contrast the EVA process requires that expenses like R&D and market
development be capitalized over a period of 5 years. EVA has standardized the
financial accounting process independent of the balance sheet approach. It is a potent
financial tool for the continued economic growth of an organization and all its
constituents. “This approach ensures that growth isn’t sacrificed at the altar of short
term results.

CACULATION OF EVA
Economic Value Added (EVA) = NOPAT – Capital x Cost of Capital
125

Thus EVA has three parts:
 NOPAT = Net Operating Profit After Taxes
 Capital Employed
 Cost of Capital
Net operating profit after tax (NOPAT)
 NOPAT is the cash operating profit net of depreciation and taxes, As if the
company was debt free.
 Net Operating Profit after Taxes = Net Sales – Cash Operating Expenses –
Depreciation – operating Taxes.
 Adjust for extra-ordinary income. More than 160 adjustments possible, but only the
relevant ones need to be used.
CAPITAL EMPLOYED
Who Provides The Capital And Where is It Used?
Who are the providers of Capital?
 Lenders and equity Investors.
Where does the company use it?
 Plant & Equipment + Working Capital + Other Assets.
 Capital is provided by BHEL’s common corporate cash pool to each individual

division/manager.
 Each division/manager uses the capital provided to generate returns.

How Is Each EVA Component Calculated?
126
Cost of Equity
 Models for calculating Cost of Equity:
Capital Asset Pricing Capital (CAPM), Arbitrage Pricing Theory,
Dividend Discount Model, Etc
 Each cost of equity measure looks at the risk adjusted return requirement for equity
investors.
 As per CAPM,
Cost of Equity = Risk free rate + Beta x (Market Return – Risk Free rate)
 Or, Re = Rf + Beta x (Rm- Rf)

Where,
Rf = Risk free return (normally 364 days Treasury Bills rates are considered as risk
free).
Rm = market expected rate of return (normally given by the growth rate of BSE Sensex).
B = Risk-coefficient (it measures the volatility of a given scrip with respect to the volatility
of the market).

Cost of Debt
127
 Cost of Debt : Marginal long term interest rate
Weighted Average Cost of Capital (WACC)
 The cost of capital can be measured by the weighted average of the return
required by lenders and shareholders (known as WACC)
 Weighted Average Cost of Capital (WACC) = We + WdRd
We: Equity portion of Capital Employed
Wd: Debt portion of Capital Employed
Re: Cost of Equity
Rd: Cost of Deb
Another Way to Calculate EVA

 EVA = NOPAT – Cost of Capital x Capital Employed
 EVA = (NOPAT/Capital Employed – Cost of Capital) x Capital Employed
 EVA = (ROIC – Cost of Capital) x Capital Employed
Return on Invested Capital (ROIC) = NOPAT/Capital Employed

How does EVA approach can be employed?

128
 As a measure of corporate performance, reflected in the stock price.
 Market Value Added (MVA): Difference between the Capital Employed on the
Balance Sheet and the current market value of the firm.
 Separates accounting profit from economic profit
 Capital Allocation
 Setting goals & targets.
 Common language for employees across all corporate functions
 Employee appraisal and compensation design
EVA in bonus system.
The idea of EVA bonuses is that if management can be paid some bonuses, the
shareholders have always earned higher return on their capital than they can expect. This
kind of bonus system is usually beneficial both to management and the shareholders,
because the performance level is likely to rise after introducing EVA bonus system. EVA
bonus paid is far from a cost to shareholders, because it is often a share in the discretionary
value created. With well-designed bonus plan, the higher the bonuses that are paid, and the
better it is for the shareholders.
Motivating bonus system normally encourages managers to exceed the normal performance
level and even after the payment of the management’s bonuses, the return to shareholders is
more than it would have been without the bonus system.

Sources of value added or Value drivers.
129
The sources of value-added are from basic economies:
Economies of scale: a given increase in production, marketing or distribution results in less

than proportional increase in cost (i.e., there are cost advantages to being large and there
are high capital requirements);
Economies of scope: efficiencies are gained when an investment can support many
activities
Cost advantages: companies enjoy cost advantages that are not available to new entrants.
Product differentiation: invest in capacity to differentiate products through patents

reputation (brand name) technologically innovative, service
Access to distribution channels: well-developed distribution channels provide a

competitive advantage.
Government policy: government regulations can limit entry of potential competitors
Improving and Increasing of EVA.

ACTIVITIES THAT REDUCE EVA: -
Capital invested in these activities by
o Continuing services that are consistently unprofitable;

o Unused or under-utilized assets and
businesses;
o Low value-adding work that doesn't pay off compared to other more
productive work you could do;
o Increasing working capital by collecting debtors at slow pace and extending
creditors' terms.
METHODS TO INCREASE/IMPROVE EVA: -
1. Identifying operating efficiencies-
130
Reducing waste, Simplifying processes, Cutting inventories, controlling expenses,
or operating equipment more efficiently.
2. Getting the most from capital expenditures-
Designing projects in the most cost effective configuration, bringing projects on-
line quickly, and periodically comparing performance to plan.
3. Generating revenues-
Increasing sales through better customer service improving product quality, or

seeking ways to gain a competitive advantage for the Company.
4. Improving the efficiency of the time you spend in work-
Focusing on tasks that add value and implementing ideas that allow you to work
more productively.
5. Operating efficiencies:-
Reducing cost or increasing revenues without spending any more money on capital,
thus increasing the rate of return on capital already tied up in the business.
6. Asset utilization:
Increasing inventory turns, changing product mix, and cutting back or

eliminating investments in things that aren't adding value to the Company.
7. Growth:
Investing in projects where the return is greater than the cost of capital
8. Downsizing the unprofitable divisions or units

Three ways To Increase Value:
o Increase returns from assets without investing new capital. For e.g.
BHEL’s defense products business at Trichy.
o Invest additional capital and aggressively build the business so long as
expected return on investment exceeds the cost of capital. For example creation
of BHEL’s industry sector.
o Release capital from existing operations, both by selling assets that are
worth more to others and by increasing the efficiency of capital by such things as
faster working capital turnaround and reduced cycle times.
131
Three Key EVA Drives And How to Work On Them
EVA = NOPAT – Capital Employed x Cost of capital
Increase NOPAT by:
o Better pricing on contracts

o Purchasing efficiency
o Better Technology
o R&D
o Customer Service
Lower Capital Employed Through:
o Investing only in value creating business

o Returning surplus cash to the common corporate cash pool
o Divesting Business whose return do not meet the cost of
capital
o Reducing Receivables, improving cash Flow
Lower Cost of capital Through:
o Optimizing capital Structure(debt/equity mix)
o Moving towards low-risk.

WEAKNESS:
 As with any metric, it’s hard to link precise EVA returns to a specific technology
investment. EVA is ideally suited to publicly traded Companies, not Private
132
Companies, because, it deals with the cost of equity for shareholders, as opposed to
debt capital.
 EVA is biased against new assets. When an investment is made its full cost is taken
at capital employed. Depreciation on that reduces profit & EVA remains artificially
low. As investment depreciates capital employed and depreciation is reduced
thereby increasing profits and EVA.
 EVA is biased in favour of large, low return investments. Large companies that
earn returns only slightly above cost of capital can have bigger EVA than small
businesses earning much higher return.
 Inflation can distort the values of EVA.
 EVA is poor in periodizing the returns of a single investment. It underestimates the

return in the beginning and overestimates it in the end of the period. Some growth
phase companies or business units have a lot of new investments. Such growth
phase companies are likely to have currently negative EVA although their true rate
of return would be good and so their true long-term shareholder wealth added (true
long-term EVA) would be positive. That is also the reason why EVA is criticized to
be a short-term performance measure. Ceasing investments can indeed increase
short-term EVA. Some companies have concluded that EVA does not suit them
because of their focus on long-term investments that do not occur in a continuous
stream.

Implementing EVA
A lot, as indicated by the fact that comprises doesn’t use EVA; they implement it. One of
the primary objectives of the company is the enhancement of EVA. Not sales, not profit but
EVA. The mathematical construct of EVA ensures that those companies trying to optimize
its sales revenues COC, ROCE, and net operating profits. Secondly the entire financial
reporting is based on the EVA methodology. This bestows the financial statement of the
133
company with a dash of reality. Though EVA are the moving force behind the company
existing and new projects. To justify their act every individual and department in the
company should not look at its impact on EPS, the PE-ratio or RONW but on it impact on
EVA. And their managers focus on optimizing the COC, inventory and accounts
receivable. Implementing EVA is a 3-step process.
MEASUREMENT. Any company, which wishes to implement EVA, should

institutionalize the process of measuring the matrix, regularly. This measurement should be
carried out after measuring out the prescribed accounting adjustments using the formula.
EVA = (ROCE – COC) x Capital employed
MANAGEMENT SYSTEM. The company should be willing to align its management

system to the EVA process. The EVA based management system is the basis on which the
company should take decision related to the choice of strategy, capital allocation, M&As,
divesting business and goal setting. In effect each one of the company’s activities should be
aligned to and derived from the company’s EVA process.
MOTIVATION. Companies should decide to implement EVA only if they are ready to
implement incentive plan that goes with it. This plan ensures the only way in which
managers can earn a high bonus is by creating more value for shareholders. Sales based
incentives reward managers for incremental sales with considering the cost evolved and
profit based incentive system can be the source of resentment, at least among those
managers who believe their rewards are based on variables beyond their control. An EVA
based operating system however encourage managers to operate in such a way as to
maximize EVA, not of the operation they oversee, but of the company as a whole. Thus it
aim to make every employee of an organization an entrepreneur who seeks not just to
perform his function well, but to do so in a way that will enhance the EVA of the
company.

134
CHAPTER – 6
: EVA ANALYSIS
OF BHEL
 EVA Comparison
 MVA Comparison
 ROCE Comparison
 NOPAT Comparison
135
CALCULATION OF EVA OF BHEL
(In crores) 2012-13 2012-11
PAT 1679.16 953.40
NOPAT 1650 975
AVG CAPITAL EMPLOYED 5000 4100
WACC 11.50% 11.50%
EVA 1075 503.5
(Eva=nopat-(capital employed*wacc)
136
MARKET VALUE ADDED (MVA) OF BHEL
AND IT’S COMPETITORS
(In crore)
COMPANIES 2012-13 2012-11
BHEL 23250.13 9380.11
THERMAX 1570.61 677.44
L&T 15819.04 8395.67
TATA POWER 3014.65 1132.69
(MVA = Market Capitalization – Net Worth)
137
GRAPH SHOWING THE TREND OF MVA
25000
23250.13
20000
15819.04
15000
AMOUNT
2004-05
9380.11 2005-06
10000 8395.67
5497.96
5000 3783.59
3014.65
1570.61 1132.69
677.44
0
POWER ENERGY
COMPANIES
138
RETURN ON CAITAL EMPLOYED
(Percentage)
COMPANIES 2012-13 2012-11 2003-04 2002-03

BHEL 36.37 26.89 23.55 19.89
THERMAX 44.53 24.14 21.90 15.69
L&T 24.16 22.12 16.77 11.50
TATA POWER 9.10 9.86 14.70 14.47
RELIANCE 9.68 8.52 10.13 6.98

ENERGY
139
GRAPH SHOWING THE TREND OF ROCE
50 44.53
45
40 36.37
35
30 26.89 24.14
22.12 24.16
PERCENTAGE
2004-05
25
20 2005-06
15 9.86 9.1 8.52 9.68
10
5
0
ENERGY
COMPANIES
140
NET OPERATING PROFIR AFTER TAX (NOPAT)
COMPANIES 2012-13 2012-11
BHEL 1627.82 861.09

THARMAX 115.07 47.18
L&T
806.21 617.11
TATA POWER
506.89 639.53
RELIANCE ENERGY
578.73 540.77
141
GRAPH SHOWING THE TREND OF NOPAT
1000
900 861.09 861.09
800
700 617.11 639.53 639.53
617.11
600 540.77 540.77
AMOUNT
500 2004-05
2005-06
400
300
200 115.07
100 47.18
0
POWER ENERGY
COMPANIES
142
SUMMARY & CONCLUSION
Today the company believes that the very essence of getting managers to do what is best
for the shareholders is to not only offer stock options but to create a deferred incentive
account. The amount in the account increases if the company manages to add incremental
EVA, and decrease if it doesn’t and the incentives themselves are disbursed at the end of a
pre-ordinal time period.
Economic Value Added is a residual income variable. It is defined as Net operating profit
after taxes subtracted with the cost of capital tied in operations. Standard EVA corresponds
mathematically the standard DCF formula because it is a modified version of DCF. Eva’s
equivalence with DCF and NPV holds in valuations although DCF and NPV are based only
on cash flows and EVA is based also on historical accounting items. This peculiar
characteristic of EVA is due to the fact that book value is irrelevant i.e. it can be canceled
out in valuation formula of EVA. In periodical performance measurement EVA can
however in some occasions give misleading information because it suffers from the same
shortcomings as accounting rate of return (ROI). Inflation can distort the values of EVA.
Furthermore EVA suffers from wrong periodization. In most cases the impacts of these
shortcomings are however fairly small. They can also usually be eliminated for major parts
with some corrective adjustments in spite of its faults.
EVA seems to have importance for companies as a performance measurement and

controlling tool. First of all it is fairly simple measure but still measures well the ultimate
aim of any given company, the increase or decrease in shareholders’ wealth. Maximizing
traditional performance measures like ROI is not theoretically in line with maximizing the
wealth of shareholders. Therefore EVA is superior to conventional performance measures.
The premise behind EVA – that businesses must cover their capital costs – is neither new
nor peculiar. Putting it into practice can still be eye opening. EVA shows financial
performance with a new pair of glasses or offers new approach especially for the
companies where equity is viewed as free source of funds and performance is measured by
some earnings figure. At best EVA helps with creating a mind-set throughout the
organization that encourages managers and employees to think and behave like owners.

143
At operational level this new approach leads often to increased shareholder value through
increased capital turnover. In many companies everything has been done in cutting costs
but the capital efficiency has been ignored. EVA has been helpful because it forces to pay
attention to capital employed and especially to excess working capital. Allocating the
capital costs to their originators i.e. individual functions of organization can further
reinforce this impact. One of Eva’s most powerful features is its suitability to management
bonus systems. This has been empirically proofed to be good way to increase shareholder
value .The good feasibility for this purpose is due to the nature of EVA as excess return to
shareholders. When EVA is maximized also shareholder value is maximized. In order to be
successful, EVA based bonus systems should be long-term, based mainly on changes of
EVA and offer considerable bonuses for considerable shareholder value improvements.
With implementation it is important to understand the EVA-concept thoroughly and tailor

the concept to the unique situation of each company or business unit. EVA is at its best as
an overall measure and organizational approach with strong link to payroll of managers and
other employees. That kind utilization cannot succeed without deep understanding and
commitment achieved with proper training. Substantial shareholder value increases and
true success stories arise always from outstanding strategy, quick response, great ideas and
good predicting of future. EVA helps in quantitative assessing of different strategies but
that is all. Wealth does not arise from EVA alone. EVA only measures changes of wealth.
It is also as short-term as all other periodic performance measures. Therefore all companies
should rely also on other performance measures. Especially important this is e.g. for new
growth phase companies. However we have to bear in mind that the success or failure of
any given company is measured ultimately as created shareholder value. Therefore EVA is
important measure also for those companies that use primarily other tools for assessing the
achievement of their strategic goals.

144
CONCLUSION
 EVA= NOPAT- capital employed * cost of capital
 Identification of EVA “drivers”
 Convert employees into owners: The concept should be transmitted to lower
levels as well by training to middle level managers.
 The trend in EVA is more important than absolute EVA.
 Focus on the long term but do not loose the short term
CONCLUSION
 EVA …changes the focus from the traditional government culture. We will
learn to grow revenue only when it is profitable, invest more only when it
produces a good return and reduce expenses only when it doesn’t hurt
service.
 “EVA is not a ‘cure all’. If we had adopted EVA and not done anything else,
our company would not show the kind of strong performance (it has)…
EVA doesn’t replace the basic things that we have to do – customer focus,
the quality, the good strategic plan. Those …you to make EVA work. And
last, I don’t thing EVA can make a bad business into a good business
145
Bibliography
BOOKS:
1) I.M.PANDEY: FINANCIAL MANAGEMENT
Ninth edition ( Vikas Publishing House Pvt. Ltd)
2) KHAN & JAIN: MANAGEMENT ACCOUNTING
( M.Y.Khan and P.K. Jain) Fourth edition (Tata Mac Grawhill Publishing
Company Ltd
ANNUAL REPORTS:
ANNUAL REPORTS OF BHEL, THERMAX, L&T, TATA POWER, RELIANCE

ENERGY
WEBSITE ADDRESS:
www.bhel.com
www.larsentoubro.com
www.thermaxindia.com
www.evanomics.com
www.moneycontrol.com
BUSNESS TODAY ISSUES DATED:
NOVEMBER-19 2006
146
ANNEXURES
 Working Capital Details and Ratios of Thermax, Larsen and

Tubro, Tata Power and Reliance Energy.
147
THERMAX INDIA LTD
(In Crores)
CURRESNT ASSET 2012-13 2012-11
Inventory
118.74 85.92
sundry debtors
226.3 172.86
cash & bank balance
36.11 11.15
other C.A.
21.54 8.48
loans & advances
RATIOS 2012-13
86.73 2012-11
69.96
Contact in Progress
43.54 19.65
Debt
TOTAL Equity Ratio
C.A. 0 532.96 0 368.02
Less- Earning Per Share 10.34 6.73
CURRENT LIABILITIES
Current Ratio 0.89 1
Creditors 151.28 131.84
Acid Test Ratio 0.69 0.76
advances from customers 247.01 123.31
Provision 56.24 41.64
other liabilities 145.86 71.43
TOTAL C.L. 600.39 368.22
WORKING CAPITAL -67.43 -0.2
TURNOVER 1498 941.16
COMPETITIVE WORKING CAPITAL RATIOS
2012-13 2012-11
Net Working Capital Turnover Ratio -22.21 -47058
Inventory to
148
 Turnover 7.87% 9.13%
 Working capital -176.09% -171.84%
 Conversion period (in days) 29 33
Sundry Debtors to
 Turnover 15.11% 18.37%
 Working capital -335.61% -864300%
Cash to
 Turnover 2.41% 1.18%

 Working capital -53.55% -55750%
Loans and Advances to Working Capital -128.62% -349800%
LARSEN AND TUBRO

(In Crores)
Inventory 2210.27 2261.26
sundry debtors 4814.16 4027.57
cash & bank balance 583.2 828.02
Interest Accrued on Investments 17.26 3.95
loans & advances 1911.63 1674.61
9536.52 8795.41
TOTAL C.A.
149
Less-
CURRENT LIABILITIES
3046.28 2890.53
Creditors
1800.29 1403.82
advances from customers
1015.37 795.75
Provision
1049.68 466.47
other liabilities
6911.62 5556.57
TOTAL C.L.
2624.9 3238.84
WORKING CAPITAL
15198.63 13748.26
TURNOVER
RATIOS 2012-13 2012-11
Debt Equity Ratio 0.32 0.57
Earning Per Share 68.58 75.74
Current Ratio 1.38 1.58
2012-13 2012-11
Net Working Capital Turnover Ratio 5.79 4.24
Inventory to
 Turnover 14.54% 16.45%
 Working capital 84.20% 69.82%
150
Sundry Debtors to
 Turnover 31.67% 29.30%
Cash to
 Turnover 3.84% 6.02%

Loans and Advances to Working Capital 72.83% 51.70%
TATA POWER
(In Crores)
Inventory
496.55 323.76
sundry debtors
1242.26 838.87
cash & bank balance
1079.32 1074.36
Other Current Assets
18.11 12.87
loans & advances
453.62 531.13
TOTAL C.A. 3289.86 2780.99
151
Less-
CURRENT LIABILITIES
Creditors 709.93 647.44
advances and Progress Payments 18.15 56.27
Provision 596.47 582.9
TOTAL C.L. 1709.97 1571.86
WORKING CAPITAL 1579.89 1209.13
TURNOVER 6004.66 5303.17
RATIOS 2012-13 2012-11
2012-13 2012-11
Inventory to
152
 Turnover 8.27% 6.11%
Sundry Debtors to
 Turnover 20.69% 15.82%
Cash to
 Turnover 17.97% 20.26%

RELIANCE ENERGY
(In Crores)
Inventory
295.05 353.09
sundry debtors
1092.79 930.96
cash & bank balance
5652.90 6045.37
Other Current Assets
312.9 140.91
loans & advances
3161.69 1170.11
TOTAL C.A. 10515.33 8640.44
153
Less-
CURRENT LIABILITIES
Creditors 662.05 739.09
Deposit and advance from consumers 283.02 61.09
Provision 643.14 409.61
TOTAL C.L. 2213.96 1887.75
WORKING CAPITAL 8301.37 6752.69
TURNOVER 4607.89 4592.55
RATIOS 2012-13 2012-11
2012-13 2012-11
154
Inventory to
 Turnover 6.40% 7.69%
Sundry Debtors to
 Turnover 23.72% 20.27%
Cash to
 Turnover 122.68% 131.63%

155

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Summer Training Project Report on

“WORKING CAPITAL MANAGEMENT

S.D. COLLEGE OF MANAGEMENT STUDIES, MUZAFFARNAGAR

A research study cannot be completed without the guidance,

I wish to acknowledge my indebtedness to,

We are also thankful to Mr.Anoop Bhatia Dy. Manager

SUMMER PROJECT REPORT

CHAPTER 1 - COMPANY PROFILE ……………………… (6 - 23)

CHAPTER 2 – INTRODUCTION TO THE PROJECT..(24 - 38)

1) IMPORTANCE OF THE PROJECT……………………………………………….25

CHAPTER 3 – ANALYSIS OF BHEL’S WORKING

1) STRUCTURE OF BHEL’S WORKING CAPITAL……………………………40

CHAPTER 4 – CONCLUSIONS & SUGGESTIONS..(112-114)

CHAPTER 6 – EVA ANALYSIS OF BHEL & ITS

CHAPTER 7 – SUMMARY AND CONCLUSION OF

 WORKING CAPITAL DETAILS AND RATIOS OF THERMAX INDIA LTD, LARSEN

 Background & Management

BHEL ----- AN OVERVIEW

Major Miles stones in the history of BHEL

Government of India’s liberalization policy and disinvestments policy on its pattern

- The Company commissioned ten industrial power plants resulting in power

 In June, Govt. announces first autonomy package for Navratnas

- The Company is considering a proposal to launch a voluntary retirement scheme

-Appoints A K Puri as the chairman and managing director of Bharat Heavy

-BHEL, TCS jointly working on marketing initiative `Power Pack`

-Appoints Dr V. Gopalakrishnan as Chief of the Bharat Heavy Electricals Ltd at

-Bhel`s Trichy, Bangalore plants win five National Safety Awards

-BHEL inks agreement with IIT Madras for new courses

-Bechtel signs Dabhol agreement with BHEL

- BHEL employees win maximum number of Prime Minister’s Shram

- BHEL achieved an all time high turnover of Rs.18739 crore in

- BHEL has announced 245 % of dividend on its original equity.

- An issue of bonus share in the ratio of 1:1 has been declared by

To ensure a steady growth by enhancing the competitive edge of BHEL in existing

To provide a reasonable & adequate return on capital employed, primarily through

Power Generation and Transmission

 Steam Turbines-Generator sets and Auxiliaries

Industries/Transportation/Oil & Gas /Renewable Energy

 Steam Turbine-Generators Sets

Systems and Services

 Turnkey Utility Power Station/EPC contracts

Steam turbine, Turbo turbine, Hydro

Steam turbine, Turbo generator, Pump, Oil

Energy meters, Water meters, Devices, PV

Its inventory also increased from 1994.23 in 2001-02 to 3744.37 in 2012-13

( in crore) 2012-13 2012-11 2003-04 2002-03 2001

B NON PROMOTER'S HOLDING

(OCB – Overseas Corporate Bodies).

MUTUAL FUNDS AND UTI

MUTUAL FUNDS AND UTI

22% FOREIGN INSTITUTIONAL

Sound financial management practices followed by an industrial corporate firm form

IMPORATANCE OF THE PROJECT WORK

1. Working Capital management requires much of the financial manager’s

TIME DEVOTED TO WORKING CAPITAL MANAGEMENT

INVESTMENT IN CURRENT ASSETS

Importance for big firms