A Report on Financial Analysis Of Bharat Heavy Electricals Ltd.

Under the guidance of Prof. Anirban Dutta Finance Department

BY GROUP 1:
Indranil Chatterjee Rupank Pal Stuti Kapoor Sushma Vegesna

Executive Summary
BHEL is the largest engineering and manufacturing enterprise in India in the energy related/infrastructure. It was established more than four decades ago and has built over the years, a robust domestic market position by becoming the largest supplier of power plant equipment, and by developing huge market presence in select segments of the Industrial sector. Presently, 80% of the Nuclear power generated in the country is through BHEL sets. Under long term assets and liabilities, the debt equity has reduced from 0.8 in 2006 to 0.1 in 2008, and has been constant till last fiscal year. Interest coverage ratio has increased in last five years by 25% from 2009 to 2010.Capitalization ratio has performed in the similar way as debt equity ratio. Overall, the liquidity position is strong. The working capital, which the difference between current assets and current liabilities of a company has been increasing over a period of time. Also for better comparison, ratios like current ratio, quick ratio and cash ratio has been considered. These ratios depict a better solvency position of the company. There has been consistent increase in the net profit margin from 2006 to 2008.This shows that the net profit margin of the company is stable. Also with increase in sales, net profit has increased too over the last five years. But still there was a decline in 2009, mainly due to high administration expenses, which has also affected return on capital employed. The cash flow from operating activities has been good for last four years, but in 2010 it has fallen drastically due to fall in trade payables. Company has invested in fixed assets continually for last five years. The company has been consistently paying good dividend to its shareholders and has not raised equity capital in last five years. Investments increased in 2009 by 7times.This are due to large contributions made in joint venture companies. The share price of BHEL has always outperformed the Sensex and also has much more volatility than the index. From the research done, it can be recommended that the short term investors can make use of volatility in prices, and for long term investors, the future performance of the company is going to be better, so there is a hope that the share price will further increase.

Industry Overview:
Indias manufacturing sector is in full swing. While revival of automation projects typically one of the first indicators for any growth in the economy is already under way, an 11.3% rise in the electrical equipment industry has underscored the overall growth story in the worlds second fastest growing economy. The Rs 52,000-crore industry, which sells cables, switchgears, transformers and other large electrical products, saw a major part of its growth come in the second half of 2009-10, after liquidity improved and companies resumed expansion plans. According to the Indian Electrical and Electronics Manufacturers Association (IEEMA), an apex body representing the Indian electrical equipment industry, the sector grew about 20% in the second quarter, compared with 1.7% in the first half. This demand growth could likely see a two-fold increase in the next 2-3 years, said the associations director-general Sunil More, Demand for power equipment is expected to rise as India is targeting at least 9% GDP growth for the year ahead, said Kuljit Singh, partner and head of transactions advisory at Ernst & Young. The government has also taken policy initiatives to speed up power sector development, such as the Rajiv Gandhi Gramin Vidyutikaran Yojana. Bharat Heavy Electricals (BHEL) and Larsen & Toubro, the two of the largest constituents of BSE Capital Goods Index accounting little over 55% of revenue and 65% of PAT has turned in strong performance, even while the performance from other players have been mixed. While players such as Lakshmi Machine Works, Usha Martin, and Jyoti Structures have turned in all-round strong performance the other players especially those in the electrical/ T&D equipment business had subdued performance.

Company Overview
BHEL, is the largest engineering and manufacturing enterprise in India in the energyrelated/infrastructure sector. It was incorporated in the year 1964. It is one of the leading international companies in the field of power equipment manufacture and is engaged in power generation, transmission, industry LIKE transportation, renewable energy etc and overseas business. It has been more than realized with a well-recognized track record of performance. BHEL

is a ISO 9000, ISO 9001-2000, ISO 14001 and also OHSAS-18001 certified public sector corporate situated in New Delhi. In 1991-92, it had divested a part of its equity shares to public and financial institutions. At present the government of India holds 67.72% in the total equity capital of the company. In India alone BHEL have 14 manufacturing units, 4 power sector regional offices, 8 service centers and 15 business offices for manufactures, over 180 products under 30 major product groups and provides high level of quality & reliability of its products at prompt time. BHEL supplied equipment accounts and contributes approx. 73% of the total Generation in the country.BHEL has over the years established its references in 68 countries of the world spanning across all the six-inhabited continents. The company's major clients are State Electricity Boards, NTPC, World Bank aided projects, the Railways and a host of private companies in domestic, in case of overseas company's products are exported mainly to the middle-east and the far-east countries. Achievements of BHEL Installed equipment for over 90,000 MW of power generation -- for Utilities, Captive and Industrial users. Supplied over 2,25,000 MVA transformer capacity and other equipment operating in Transmission & Distribution network up to 400 kV (AC & DC). Supplied over 25,000 Motors with Drive Control System to Power projects, Petrochemicals, Refineries, Steel, Aluminum, Fertilizer, Cement plants, etc. Supplied Traction electrics and AC/DC locos to power over 12,000 kms Railway network. Supplied over one million Valves to Power Plants and other Industries.

BHEL's operations are organized around three business sectors, namely Power, Industry including Transmission, Transportation and Renewable Energy and Overseas Business. This enables BHEL to have a strong customer orientation, to be sensitive to his needs and respond quickly to the changes in the market.

BHEL has two joint venture companies, namely: 1) BHEL-GE Gas Turbine services Ltd with GE,USA for repair & servicing of GE designed Gas Turbines 2) Power Plant Performance Improvement Ltd with Siemens AG, Germany for plant Performance improvement of old fossil fuel power plant.

The company opened a new line of business in the form of Gas Insulated Substations (GIS) in April 2007. The Corporate R&D department of BHEL has successfully developed an indigenous GIS. As on May 2007 BHEL signed a memorandum of understanding with Toshiba of Japan for knowhow in higher horsepower locomotives, it may help the company to shift from the production locomotives capacity 6,000 hp to 10,000-hp range The company completed Phase I of its latest modernization drive in December 2007, with an investment of Rs 190 crore, to take its manufacturing capacity to 10,000 MW from 6,000 MW a year. Phase II in 2008 would add about 1.25 million sq ft of shop floor and associated office space, spread over about 130 acres in the 3,000-acre of BHEL campus. On-site fabrication work is under way to erect additional shop floors and 75 different types of machines would be install, after this expansion the company's manufacturing capacity would go up to 15,000 MW equivalent of power plant equipment a year and may to be in a position to supply over 75,000 MW equivalent of plant equipment over a five-year period. From April 2008, BHEL's projects can monitored online, the implementation of a new Web-based project monitoring system covered this and it would enable to get a real-time status on project schedules. The greatest strength of BHEL is its highly skilled and committed 42,600 employees. Every employee is given an equal opportunity to develop himself and grow in his career. Continuous training and retraining, career planning, a positive work culture and participative style of management all these have engendered development of a committed and motivated workforce setting new benchmarks in terms of productivity, quality and responsiveness.

FINANCIAL ANALYSIS A. ANALYSIS OF LONG TERM ASSETS & LIABILITIES

Debt-Equity Ratio
0.09 0.08 0.07 0.06 0.05 0.04 0.03 0.02 0.01 0 40238 Debt-Equity Ratio 0.01 39873 0.01 39508 0.01 39142 0.04 38777 0.08 Debt-Equity Ratio

The firms debt ratio has been constant for three years i.e. for 2008, 2009 and 2010.Though it became half in the year 2007 from 0.08 in 2006 to 0.04 in 2007.This decrease is mainly due to the companys secured loans, Rs.500 crores which were paid off in 2007.Overall, the ratio is low which implies that the company is using less leverage and has a stable and strong equity position.

B. ANALYSIS OF INTEREST COVERAGE RATIO.

Interest Coverage Ratio

250 Interest Coverage Ratio 200 150 100 50 0 Mar 10 Interest Coverage Ratio 197.73 Mar 09 158.89 Mar 08 126.08 Mar 07 87.22 Mar 06 44.65

The company has a very good interest coverage ratio. The ratio indicates that the company has enough profits to pay interest on loans borrowed. The company is not burdened by its debts expenses, and has an extremely high margin of safety.

C. ANALYSIS OF CAPTILIZATION RATIO.

Capitalization Ratio
0.08 0.07 Capitalization Ratio 0.06 0.05 0.04 0.03 0.02 0.01 0.00 Mar 10 Capitalization Ratio 0.01 Mar 09 0.01 Mar 08 0.01 Mar 07 0.01 Mar 06 0.07

This ratio focuses on the relationship of debt liabilities as a part of the companys total capital base, which is the capital raised by shareholders and lenders. Overall, the capitalization ratio is low which indicates a healthy proportion of equity in the companys capital structure.

D. Analysis of Working Capital

Current Ratio
1.6 1.55 Current Ratio 1.5 1.45 1.4 1.35 1.3 1.25 Mar 10 CURRENT RATIO 1.37 Mar 09 1.40 Mar 08 1.45 Mar 07 1.47 Mar 06 1.54

Quick Ratio
1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 Mar 10 QUICK RATIO 1.20 Mar 09 1.24 Mar 08 1.34 Mar 07 1.70 Mar 06 1.67

Quick Ratio

Cash Ratio
0.60 0.50 Cash Ratio 0.40 0.30 0.20 0.10 0.00 Mar 10 Cash Ratio 0.35 Mar 09 0.44 Mar 08 0.51 Mar 07 0.50 Mar 06 0.47

The following observations can be made from above:

The current ratio has been declining from last five years. Total current assets have been increasing, but when individual items are seen, its been noticed that loans and advances have been constantly decreasing. Advance Tax paid reduced in last few years. In 2006, advance tax paid was Rs.1475.46 crores, whereas in the year 2010, Rs231.85 was paid, showing a downfall of around 84.28%.

The cash at bank fell in 2010 by Rs.524.59 crores; thereby a fall was witnessed in quick ratio from 1.24 in 2009 to 1.20 in 2010.

The major concern is companys current liabilities which have been increasing from last five years. Two major items need to taken care of. One is sundry creditors which have increased from Rs.2804.09 crores to Rs.7579.80, and the other item is credit balance which has increased 3 times in 2009 from 2006.Therefore, the company must collect all its dues from creditors on time.

The cash ratio is decent, as it is known that it can never be 1:1, because very few companies have enough cash to cover its current liabilities.

Overall, the working capital position is good, but a little more care has to be taken with respect to creditors.

E. ANALYSIS OF PROFITS

Net Profit Margin

16.00 14.00 Net Profit margin (%) 12.00 10.00 8.00 6.00 4.00 2.00 0.00 Mar 10 Net Profit Margin 12.98 Mar 09 11.79 Mar 08 14.67 Mar 07 13.94 Mar 06 12.48

Return on Capital Employed

return On Capital Employed (%) 30.00 25.00 20.00 15.00 10.00 5.00 0.00 Mar 10 Return on Capital Employed 26.86 Mar 09 23.94 Mar 08 26.30 Mar 07 27.19 Mar 06 21.34

The profitability of the company can be ascertained as follows:

There has been consistent increase in the net profit margin from 2006 to 2008.It reached 14.67% in 2008.In March 2009, it fell to 11.79%, and again went up to 12.98%.This shows that the net profit margin of the company is stable as the difference between the net profit margin between two years i.e. 2008 and 2009 is not much. Also with increase in sales, net profit has increased too over the last five years. But still there was a decline in 2009, mainly due to high administration expenses.

The return on capital employed Measures Companys ability to generate returns from its available capital base. The return on capital employed of this company depicts that in last five years, it hasnt reached below the minimum level i.e. below 21.34%(this was the figure in 2006).This tells us that the company has been able to earn over and above its cost of capital fairly well. Fluctuations in returns have been due to change in net profits.

F. ANALYSIS OF CASH FLOWS

Sales Ratio
20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 Mar 10 sales ratio 4.77 Mar 09 12.38 Mar 08 17.85 Mar 07 16.29 Mar 06 12.08

Sales Ratio

This ratio gives investors an idea of the company's ability to turn sales into cash. This ratio has been good for last four years, but in 2010 it has fallen drastically. This is due to fall in cash flow from operating activities. The cash flow decreased from Rs3291.22 crores in 2009 to Rs.1585.06 crores. This might be due to fall in trade payables which were Rs.3864.54 crores only, as compared to Rs.8210.22 crores in 2009.Cash flow from extraordinary items has also become half i.e. Rs.1585.06 crores of what it was in the previous year i.e. Rs.3291.22 crores.

In last five years, cash has been used extensively in investing activities. This shows that the company has been purchasing fixed assets every year. This means that the business is expanding on a large scale.

In last five years, cash has also been used in financing activities. This is mainly due to high amounts of dividend being paid. Dividend paid in 2006 was Rs.473.73 crores, and in 2010 it was Rs.1087.85 crores.

G. ANALYSIS OF INVESTMENTS

Price/Earning per Share

50.00 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 Mar '06 Price/Earning per Share 10.32 Mar '07 11.65 Mar '08 43.66 Mar '09 21.43 Mar '10 27.32 Price/earning per share

This is the best known ratio of investment valuation indicator. It shows how many times a stock is trading (its price) per each rupee of EPS).Price/earning share a happy picture in 2008, when it was the maximum i.e. Rs 43.66.At that time, stock price per share was Rs.2550.05, and earnings per share wasRs.58.41. Now, the stock with a low P/E ratio suggests that investors have modest expectations for its future growth compared to the market as a whole. When price/earning per share increases, there is high expectations by short term investors and speculators to invest in short period and book profits. While it creates a difference for long term investors as they have to pay excessive price over the original price of a shares.

Investments
90 80 70 60 50 40 30 20 10 0 Mar 10 Investments 79.84 Mar 09 52.34 Mar 08 8.29 Mar 07 8.29 Mar 06 8.29

In 2009, the companys investments increased almost 7 times. It was Rs.52.34 crores in 2009.This is on account of equity contribution of Rs.5.05 crores in joint venture companies and Rs.38.95 crores paid as advance for issue of shares in subsidiary companies and joint venture companies.

Investments

ANALYSIS OF SHARE PRICE

From the above graph, it can see that the share price of BHEL has always outperformed the sensex and also has much more volatility than the index. Between 2007-2008, the rise in stock has been more than 300% which is far better than the other stocks in the same industry, also we can see that whenever the company has announced its interim and final dividend, the share price rose by 3-4% ,but has again came back to the same level within 15days. This is due to the speculation done by the market participants. Also the major increase in the stock prices during 3rd quarter of 2007 and 2nd quarter of 2009 was generally due to the large contracts bagged by the company. The major drop in prices in 2008 was due to the global turmoil where sensex also reached its minimum after a long period at around 8000. But the performance of the company helped it to maintain its prices to a level higher than the 100% from the period after 2005 share prices. And after achieving of 280% high, it has been able to maintain consistency for past 7 quarters which is really good for the companys valuation and gives us an idea that the future growth of the company is strong.

FUTURE OUTLOOK OF THE COMPANY:

The EPS of the stock is accepted to be at Rs 118.1 and Rs 138.1 for the earning of FY11F and FY12F respectively. Price to Book Value of the stock is expected to be at 5.79 (x) for FY11F and 4.58 (x) for FY12F. It has witnessed a robust growth in new orders over the past 5 years. Its initiative in nuclear power and super critical segment as key positives for future growth. As the Government of India (GoI) plans to enhance total power generation capacity (~78 GW in XIth five year plans) and renew the power transmission and distribution infrastructure of the country, we expect the Companys order book would get a further boost. BHEL, with its dominant market position and capacity expansion plans of 5 GW by March 2012, is well positioned to capitalize on these opportunities in the power sector. From Income statement it can be concluded that the revenue is increasing at the rate of 20 % in FY11F and 12 % in FY12F. There is a significant increase projected in cash flow from operations in FY11F and FY12F. The free cash flow is negative in present year i.e. FY10A and there is an radical increase projected in FY11F and FY12F. Sales growth rate of the company is projected to increase by 25.9% in FY11F and by 16.5% FY12F which is more than that compared to the close competitors like ABB Ltd. and Larsen & Toubro. EBIT margin of FY10A is 17.6% which is projected to increase up to 19.0% in FY11F which is far better than that of ABB ltd. and Larsen & Toubro.

Conclusion
As ratios calculated above for the long term assets and liabilities, the debt equity ratio is fairly well as the company is using its own funds; therefore it faces low liquidity risk. But has a high working capital requirement which is increasing over the period of time. Increase in share price data over last two years with constant earnings of the company has increased the market capitalization of the company which is good for investors. But the increase in Price/earnings per share ratio tells us that the company is good for short term investment and can create a problem for those who want to invest for long term. This is due the reason that companys share price are over-valued, if compared with the book value of the company. On the other hand, looking at the future projects like its R&D initiatives, BEHL has been able to expand the load on existing power equipment to generate more power without much additional cost. So investors can hope of having high returns in future and increase in book value of the company. Therefore, there are chances that the future price of share will increase, and will maintain consistency in the long term.