Managerial Accounting and Control-1 Financial Analysis of BHEL

Group members:

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

PGP-1 IIM Indore Section D Group 7

BHEL

Established more than 40 years ago, BHEL is the largest engineering and manufacturing enterprise of India in the energy & infrastructure related sectors. BHEL is amongst worlds rarest few who have the capability to manufacture entire range of power plant equipment. Since its inception, BHEL is maintaining a consistent track record of growth, performance and profitability. The company has grown in stature over the years with continued inflow of orders, manufacturing prowess, continued thrust on technology leading to a strong presence in domestic and international markets as a major supplier of power plant equipments besides establishing substantial inroads in select segment of products in Industrial sector and Railways. The company has realized the capability to deliver 15,000 MW p.a. power equipment capacities and the further expansion program is underway to reach 20,000 MW p.a. by 2012. BHEL caters to core sectors of the Indian Economy viz., Power Generation and Transmission, Industry, Transportation, Renewable Energy, Defense, etc. The wide network of BHELs 15 manufacturing divisions, 2 repair units, 4 power sector regions, 8 service centers, 15 regional offices, 2 subsidiaries and a large number of Project Sites spread all over India and abroad enables the company to provide most suitable products, systems and services- efficiently and at competitive prices. The company has entered into a number of strategic joint ventures in supercritical coal fired power plants to leverage equipment sales besides living up to the commitment for green energy initiatives. In Power generation segment, BHEL is the largest manufacturer in India supplying wide range of products & systems for thermal, nuclear, gas and hydro-based utility and captive power plants. BHEL has proven turnkey capabilities for executing power projects from concept-to-commissioning. BHEL supplied utility power generating sets have crossed the landmark of 1, 00,000 MW and continue to maintain the record of nearly two-third of the overall installed capacity and around three-fourth of the power generated in India. BHEL supplies steam turbines, generators, boilers and matching auxiliaries up to 800 MW ratings, including sets of 660/700/800 MW based on supercritical technology. BHEL has facilities to go up to 1000 MW unit size. To make efficient use of high ash content coal available in India, BHEL also supplies circulating fluidized bed combustion (CFBC) boilers for thermal plants. BHEL is the only Indian company capable of manufacturing large-size gas-based power plant equipment, comprising of advancedclass gas turbines up to 289 MW (ISO) rating for open and combined-cycle operations. BHEL engineers and manufactures custom-built hydro power equipments.

As per the 47th Annual Report on the Business and Operations of the Company For the Year ended March 31, 2011 the Financial Performance of the BHEL is as follows: Financial Year (In Rs. Crore except per share data) Turnover(Gross) Profit before depreciation and tax Less: Depreciation Less: Interest & Finance charges Profit before tax Less: Provision for Taxes(including deferred tax) Profit after Tax Add:/(less) Statutory appropriation Distributable Profit Add: Balance brought forward from the previous year Balance available for appropriation Dividend (including interim dividend) Corporate Dividend tax (incl. on interim dividend) Amount transferred to General Reserve Balance in P&L account to be carried forward Earnings per Share (Rs.) NAV per share (Rs.) Economic Value Added (Rs. Crore) 122.80 411.71 3793 88.06 352.16 2670 812 575 4000 3000 6586 1525 249 4907 1141 191 2010-11 43337 9605 544 55 9006 2995 6011 6011 575 2009-10 34154 7083 458 34 6591 2280 4311 1 4312 595

FINANCIAL HIGHLIGHTS During the year, the company witnessed growth in Turnover by 26.89% to Rs.43337 Crore from Rs.34154Crore in the previous year. The Turnover (net of excise duty) increased by 26.49% from Rs. 32861 Crore in 2009-10 to Rs. 41566 Crore in 2010-11. Profit before Tax for the year 2010-11 is placed at Rs. 9006 Crore as against Rs. 6591 Crore during 2009-10, a growth of 36.64% as compared

to previous year which is because of technological cost benefits and accounting policy changes. Company has taken a number of initiatives. Localization of technologies, continuous working on supply chain and lower material costs helped in good profit. Profit after Tax is placed at Rs. 6011 Crore as against Rs. 4311 Crore during2009-10, a growth of 39.43% over previous year. Change in the company's accounting policy on provision for warranty obligation for construction contracts also pushed revenues and profits higher. BHEL forayed into the Yemenese and Kenyan markets, mainly for supply of motors apart from entering Hong Kong and Turkey solar power markets and as a result BHEL has earmarked a capital expenditure amount of Rs 1,700 crore for the current financial year Increase in turnover coupled with savings in material cost over previous year has contributed to the better financial performance during the year.Net worth of the company has gone up from Rs. 15917Crore to Rs. 20154 Crore registering an increase of26.62%. Net asset value (NAV) per share has increased from Rs. 325.16 in 2009-10 to Rs. 11.71 in 2010-11.

DIVIDEND The Board has recommended a Final Dividend of179% (Rs. 17.90 per share), Rs. 876.24 Crore, for the year 2010-11. An interim dividend of 132.50% (Rs. 13.25per share), Rs. 648.61 Crore, on share capital of Rs. 489.52Crore, has already been paid for the year 2010-11.Thus the total dividend payment for the year 2010-11 is Rs. 1524.85 Crore (exclusive of dividend tax) as against Rs.1140.58 Crore paid in the previous year. Provision of Rs. 142.15 Crore has been made for Corporate Dividend Tax on the Final dividend proposed. BHEL's shareholders have been paid an interim dividend of 132.5 per cent while the earnings per share in the previous fiscal climbed to Rs 123 per share. The firm is looking at business opportunities in the gas turbine segment in Japan increasing the shareholder faith to grow in the company and creating an economic value for the BHEL.

Review of Financial Performance of 10 years Reserves & Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Average Surplus 4221 4708 5278 6027 7301 8788 10775 12939 15917 20154 % Change 11.54 12.11 14.2 21.14 20.37 22.62 20.09 23.02 26.62 19.08 Sales & Operatin g Income 7287 7482 8662 10336 14525 18739 21401 28033 34154 43337 % Chang e 2.68 15.78 19.33 40.53 29.02 14.21 30.99 21.84 26.89 22.37 PBDIT 930 1042 1272 1882 2869 4052 4762 5214 7082 9605 % Change 12.05 22.08 47.96 52.45 41.24 17.53 9.5 35.83 35.63 30.48 PBT 664 802 1014 1582 2564 3736 4430 4849 6591 9006 % Change 20.79 26.44 56.02 62.08 45.71 18.58 9.46 35.93 36.65 34.63

1) Reserves and Surplus It can be observed from the above table that the reserve surplus has been increasing over the years but at different rates. The rate of growth on the reserves is the highest (26.6 %) in 2011. Since the base changes percentage increase, it might not reflect the actual increase of the revenue and surplus. Although the constant high rate of increase signifies that the company is doing fairly well.

2) Sales and Operating Income

The growth rate of sales and operating income has been at an average of 22.37 % with minor fluctuations, which is a good sign of operating efficiency. There has been a decline in the growth of about 15% in 2008 possibly due to the effect of recession.

3) PBDIT

Profit for the company has been continuously increasing from 2002 -2007 reaching a peak growth of 50%, but declined drastically to 9.5% in 2009 on the account of recession. Company has gained the momentum back and the PBDIT has grown at an average of 35 % for the last two years. 4) PBT

It shows similar trend as of PBDIT that means it shows increasing pattern from year 2002-2007. The PBT for the year 2005- 2007 shows some steep increase, which indicates high growth in sales and operating income. During the year 2008 & 2009 the growth rate declined drastically during recession

5) Loans

Unsecured Loan represents credit for assets taken on Finance Lease. It increased from 128 Crore in 2009-10 to 163 Crore in 2010-11.

6) Investments

Long term trade investments have increased by Rs 359 Crore mainly on account of Equity participation in Joint Venture Companies and Subsidiary Company.

Gross Fixed Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Average Assets 9298 9587 11658 14491 17506 22280 29554 39581 46960 57097 % Change 3.11 21.61 24.31 20.81 27.28 32.65 33.93 18.65 21.59 22.66

Capital Employe d 4527 4772 5212 5950 7001 7640 8873 10091 12968 16391 % Change 5.42 9.23 14.16 17.67 9.13 16.14 13.73 28.52 26.4 15.6

Market Value Added 3074 3248 3680 4254 5683 7182 8323 9894 13171 18476 % Change 5.67 13.31 15.6 33.6 26.38 15.89 18.88 33.13 40.28 22.53 PAT 469 444 657 953 1679 2415 2859 3138 4311 6011 % Change -5.34 47.98 45.06 76.19 43.84 18.39 9.76 37.39 39.44 34.75

7) Fixed Assets

Company has been increasing its gross assets at an average rate of 22 % for the last ten years as result of expansion strategy. Gross Block and Capital Work in progress increased by 1470 Crore creased and 212 Crore respectively during the year due to Capital expenditure incurred on ongoing capacity augmentation programme at various manufacturing units and the erection and rogramme commissioning facilities at the project sites.

8) Market Value Added Market Value Added (MVA) is the difference between the current market value of a firm and the capital contributed by the investors If MVA is positive, the firm has added value. If it is investors. negative, the firm has destroyed value. The amount of value added needs to be greater than the firm's investors could have achieved investing in the market portfolio, adjusted for the leverage of the firm relative to the market. The formula for MVA is:

Where: MVA is market value added V is the market value of the firm, including the value of the firm's equity and debt K is the capital invested in the fir firm

MVA
20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0

From the 10 years data it is evident that there has always been a growth in MVA at an average rs rate of 22.53 %. 9) Net Profit (PAT)

Net profit of the Company for the year 2011 stood at 6011 Crores as compared to 469Crores in the 2002, growing at an average rate over 34% the last 10 years. 10) Deferred Tax Assets (Net)

Deferred Tax Assets (Net) have increased by Rs.637 Crore mainly due to increase in provisions.

11) Inventories

Inventory increased by Rs 1728 Crore over previous year in tune with the increase in volume of s operations but in terms of days of turnover, it has decreased from 99 days in 2009 ions 2009-10 to 93 days in 2010-11.

12) Sundry Debtors (Net)

In terms of days of turnover debtors increased from 221 days in 2009-10 to 230 days in 2010-11 which is mainly on account of increase in deferred debts.

13) Cash and Bank Balances

The cash and cash equivalents at the year end are placed at Rs 9630 Crore as against Rs 9790 Crore in 2009-10.

14) Loans and advances & other Current Assets

Loans & advances have increased by Rs 444 Crore in line with increased level of operations. Other current assets represent interest accrued on bank deposits and investments.

15) Current Liabilities and Provisions

The increase in current liabilities is mainly due to increase in advances from customers by Rs 1200 Crore and sundry creditors & other liabilities by Rs 2123 Crore. The increase in provision is mainly on account of increase in provision for Contractual Obligation in line with revised policy on warranty provisions.

16) Turnover

Turnover net of Excise Duty increased by 26.49% during the year, Power segment and Industry segment contributed 79% and 21% respectively for the total revenue of the company.

17) Other Income

Other income increased by Rs.53 Crore during the year. The increase in operational income is in tune with increase in the volume of operations and the reduction in interest income is due to reduced interest rates and decrease in short term investments.

18) Consumption of Material, Erection & Engineering Expenses

The increase in Consumption of Material, Erection & Engineering Expense by s 2537 Crore or 12.27% is mainly on account of increase in Turnover / volume of operation, which has increased by 26.89%. As percentage of net turnover it decreased from 62.91% in 2009-10 to 55.84% in 2010-11 (59.83% without considering the impact of additional turnover on a/c of policy change).

19) Employees Remuneration & Benefits

Employees remuneration & benefits increased from Rs.5244 Crore in 2009-10 to Rs.5397 Crore in 2010-11. Employees Remuneration & benefits include provision for pension scheme.

20) Other Expenses of Manufacturing, Administration, Selling & Distribution

The increase in other Expenses of manufacturing, Administration, Selling & Distribution is Rs.471 Crore or 22.81% as compared to 2009-10 in line with the increased level of operations of the company.

21) Provisions (Net)

The Increase in Provisions (Net) is mainly on account of increase in provision for Contractual Obligations in line with revised policy on warranty provisions.

22) Interest and other borrowing costs

The interest cost represents the interest component of the lease rentals on assets taken on Finance lease and interest on short term borrowings during the year.

23) Depreciation

The increase in depreciation by Rs.86 Crore is on account of increase in gross block on commissioning of assets.

24) Provision for taxation

The increase in provision for taxation is in line with the growth in profit for the year. 25) Economic Value Added In corporate finance, Economic Value Added or EVA, a registered trademark of Stern Stewart & , Co., is an estimate of a firm's economic profit being the value created in excess of the required return of the company's investors (being shareholders and debt holders). Quite simply, EVA is the profit earned by the firm less the cost of financing the firm's capital. The idea is that value is . created when the return on the firm's economic capital employed is greater than the cost of that capital. EVA is net operating profit after taxes (or NOPAT) less a capital charge, the latter being the rating ) product of the cost of capital and the economic capital. The basic formula is:

where:

, is the Return on Invested Capital (ROIC); is the weighted average cost of capital (WACC); is the economic capital employed; NOPAT is the net operating profit after tax, with adjustments and translations, generally for the amortization of goodwill, the capitalization of brand advertising and others non-cash non items. NOPAT is profits derived from a companys operations after cash taxes but before financing costs and non-cash bookkeeping entries. It is the total pool of profits available to provide a cash cash return to those who provide capital to the firm. de Capital is the amount of cash invested in the business, net of depreciation. It can be calculated as the sum of interest-bearing debt and equity or as the sum of net assets less non interest-bearing bearing non-interest current liabilities (NIBCLs). EVA is the relevant yardstick for measuring economic profits. EVA is the companys net operating profit after tax, after deducting the cost of capital. Companies, which earn returns higher than the cost of capital, create wealth for the shareholders and on the other hand companies earning returns lower than the cost of capital, destroy shareholders wealth.

2010-11

2009-10

2008-09

2007-08 08

2006-07

Cost of equity (%age) WACC (%age) Average capital employed

14 14.1 14680

13.3 13.3 11540

13.4 13.4 7751

14.4 14.4 6467

14.6 14.4 5544

NOPAT Less: Cost of capital Economic value added Growth in EVA

5867 2074 3793 42.1

4206 1536 2670 33

3047 1039 2008 11

2739 929 1810 9.3

2454 797 1657 N.A

Market Value of equity Add: Debt Less: Cash and cash equivalents Enterprise value

100971 163 9630 91504

117027 128 9790 107365

73944 149 10315 63778

100907 95 8386 92616

55349 89 5809 49629

EVA
4000 3500 3000 2500 2000 1500 1000 500 0 2006-07 2007-08 2008-09 2009-10 2010-11

Cash and Profitability Mar 11 Cash Flow Summary Cash and Cash Equivalents B.O.Y. Net Cash from Operating Activities Net Cash Used in Investing Activities Net Cash Used in Financing Activities Net change in Cash and Equivalent Cash and Cash Equivalents E.O.Y. Reported Net Profit 9790.08 2658.62 -1342.82 -1475.73 -159.93 9630.15 6,011.20 10314.67 1585.06 -966.64 -1143.01 -524.59 8386.02 3291.22 -512.82 -849.75 1928.65 5808.91 3477.9 -12.54 -888.25 2577.11 8386.02 4133.97 2821.37 -212.66 -933.77 1674.94 5808.91 2,414.70 Mar 10 Mar 09 Mar 08 Mar 07

9790.08 10314.67 4,310.64

3,138.21 2,859.34

This is the absolute data on the cash flow and reported net profit. As we can see the cash and cash equivalents have shown a change in the positive direction over the years but it has shown a decline in the last 2 years. Ironically, the net profits have not declined; in fact, they have been rising. This shows that it is not necessary that cash flows must be increasing with increase in net profits. A contrary situation is perfectly possible. There may be various reasons for such kind of a situation. There is an observable increase in the net cash used in investing activities: After March 2008, purchase of fixed assets has shown an increase from 703 crore to 1730 crore. Before 2008 it was more or less constant at this level, now it is constant at the new level. 2011 has also seen a loss of 360 crore in the investment in subsidiaries. There is an obvious use of cash here which does not alter the profits. More dividends have been paid: The payment of dividend has seen an increase, under the heading net cash used in financing activities of about 200 crore in 2010 and about 350 crore in 2011. There is obviously an outflow in cash here which does not influence profits.

These were the main reasons why the company showed a decline in cash despite of increase in net profits over the years, especially recently.

CASH INCREASE PROFITS INCREASE ++ These companies are in a good financial condition. DECREASE +The company is not earning profit from the cash invested in the business. It probably needs to diversify in other business. DECREASE -+ The companys C to C cycle is not able to produce cash despite earning profits. -These companies are in a bad financial condition. Company needs a restructuring of its business.

Cash flow for BHEL falls in the 2nd quadrant as its profits are constantly rising but the cash inflow has shown a considerable decline in recent times. Though the declines are decreasing, it can be hoped that the company will again begin to show positive cash inflows. Most of the cash outflow has been due to the dividends paid and the cash used in investing activities that will yield results in the long run. Thus, cash decline is not a cause of big worry for the company as of now.

Key Financial Ratios:

11Mar Key Ratios Debt-Equity Ratio Long Term Debt-Equity Ratio Current Ratio 0.01 1.37 0.01

10Mar 9-Mar 8-Mar 7-Mar 6-Mar 5-Mar 4-Mar 3-Mar 2-Mar

0.01

0.01

0.01

0.04

0.08

0.1

0.11

0.13

0.2

0.01 1.37

0.01 1.4

0.01 1.45

0.04 1.47

0.08 1.54

0.1 1.57

0.11 1.66

0.13 1.7

0.1 1.56

Turnover Ratios Fixed Assets Inventory Debtors Interest Cover Ratio PBIDTM (%) PBITM (%) PBDTM (%) CPM (%) APATM (%) ROCE (%) RONW(%) 6.01 4.33 1.83 165.54 21.84 20.6 21.72 14.91 13.67 49.83 33.33 5.86 4.03 1.89 197.73 20.47 19.14 20.37 13.78 12.46 45.47 29.88 5.89 4.17 2.04 158.89 18.3 17.13 18.19 12.19 11.01 40.73 26.47 5.07 4.35 2.01 126.08 21.92 20.55 21.76 14.53 13.16 45.23 29.23 4.78 4.78 2.27 87.22 21.31 19.87 21.08 14.13 12.7 45.16 30.02 3.96 4.43 2.24 44.65 19.46 17.79 19.06 13.06 11.39 36.37 25.2 2.98 4.21 2 20.43 17.82 15.75 17.05 11.1 9.03 26.86 16.84 2.6 4.32 2.04 21.67 16.92 14.69 16.24 11.11 8.88 23.55 15.58 2.35 3.84 1.77 18.39 15.55 13.14 14.84 9.34 6.92 19.89 11.45 2.41 3.7 1.7 9.88 15.12 12.85 13.82 10.22 7.95 20.14 14.28

1) Debt-Equity Ratio:

Debt-Equity ratio is a measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.

Debt-Equity ratio=

A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt, which may lead to volatile earnings as a result of the additional interest expense. A high debt to equity ratio helps a company generate more earnings than it would have without this outside financing. If the earnings increase by a greater amount than the debt cost, then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing. The debt/equity ratio also depends on the industry in which the company operates.

Debt-Equity ratio from Mar 10 to Mar 02:

Debt/Equity
0.25 0.2 0.15 0.1 0.05 0

As we can see from the graph, the debt-equity ratio gradually decreases across the years and has become constant at a low value of 0.01. This is a positive indication to the shareholders and attracts new

shareholders as the value of debt for the company has decreased from a higher value of 0.2 to a quite lower value of 0.01. The debt-equity ratio is decreasing with year due to increase in the Governments grants as these are Government owned entities and moreover, their profits have been increasing with these years. So, debts have been decreasing in comparison to equities. 2) Long-term Debt-Equity Ratio:

Long term debt-equity ratio is quite similar to the debt-equity ratio. But, in place of total liabilities, only long term debts are considered. It refers to money the company owes that it does not expect to pay off in the next year. Long term debt consists of things such as mortgages on corporate buildings, land, business loans etc. A great sign of prosperity is when the balance sheet shows the amount of long term debt has been decreasing for one or more years. When debt shrinks and cash increases, the balance sheet is said to be improving. When its the other way around, it is said to be deteriorating. Companies with too much long term debt will find themselves overwhelmed with interest payments, a risk of having too little working capital and ultimately, bankruptcy.

Long term Debt/Equity

0.14 0.12 0.1 0.08 0.06 0.04 0.02 0

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

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

This ratio is used to give an idea of the companys ability to pay back its short term liabilities(debt and payables) with its short term assets(cash, inventory and receivables). The higher the ratio, the more capable the company is payable of its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign.

The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash. Companies that have trouble getting paid on their receivables or have long inventory turnover can run into liquidity problems because they are unable to alleviate their obligations. Because business operations differ in each industry, it is always more useful to compare companies within the same industry.

This ratio is similar to the acid-test ratio except that the acid-test ratio does not include inventory and prepaid as assets that can be liquidated. The components of current ratio (current assets and current liabilities) can be used to derive working capital (difference between current assets and current liabilities). Working capital is frequently used to derive the working capital ratio, which is working capital as a ratio of sales.

Current ratio
1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0

Current Ratio is decreasing due to increase in current assets and decrease in current liabilities of the company. This is due to increase in the Governments grants over the decade. 4) Fixed Asset Turnover Ratio: A financial ratio of net sales to fixed assets. The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) net of depreciation. A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues.

The fixed-asset turnover ratio is calculated as:

Fixed Asset turnover ratio=

This ratio is often used as a measure in manufacturing industries, where major purchases are made for PP&E to help increase output. When companies make these large purchases, prudent investors watch this ratio in following years to see how effective the investment in the fixed assets was.

Fixed Asset Turnover Ratio

7 6 5 4 3 2 1 0

Fixed asset turnover ratio has been constantly increasing over the decade as there has not been a constant increase in the infrastructure of the company as compared to the sales of the company. This attracts the shareholders in investing in the company. But, the company does not need much investment being a PSU.

5) Inventory Turnover Ratio: Inventory turnover ratio is a ratio showing how many times a company's inventory is sold and replaced over a period. Inventory Turnover ratio= Inventory turnover ratio= To calculate Inventory Turnover Days, the days in the period is divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand. Although the first calculation is more frequently used, COGS (cost of goods sold) may be substituted because sales are recorded at market value, while inventories are usually recorded at cost. Also, average inventory may be used instead of the ending inventory level to minimize seasonal factors. This ratio should be compared against industry averages. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying. High inventory levels are unhealthy because they represent an investment with a rate of return of 0. It also opens the company up to trouble should prices begin to fall. . Alternatively, it can be calculated as,

Inventory Turnover ratio

6 5 4 3 2 1 0

Inventory turnover ratio increases till the year 2007 and then decreases. It increases due to increase in costs of the goods sold and increased demands. After 2007, inventory turnover ratio decreases. This is due to decreases in cost of goods sold as compared to inventory because the industry was hit by recession at that period. Hence, costs of goods sold have reduced due to a decrease in demand. This dip in the cost of goods sold continues till the year 2010. It increases from the year 2011 corresponding to increase in the goods Margins 1) Profit before Interest Depreciation Taxes Margin and a corresponding increase in demand or reduced inventory.

PBIDTM (%)
25 20 15 10 5 0 PBIDTM (%)

A measurement of a company's operating profitability. It is equal to profit before interest, tax, depreciation (PBITD) divided by total revenue. Because PBITD excludes depreciation and interest, PBITD margin can provide an investor with a cleaner view of a company's core profitability. The PBIDT margin was increasing from the year 2002 to the year 2008.There was a dip in the PBIDTM in the year 2008-2009.Since then PBIDTM has been increasing from the year 2009 to the year 2011. A similar trend is followed by PBDTM. Generally, a higher value is appreciated for these ratios as that would indicate that the company is able to keep its earnings at a good level via efficient processes that have kept certain expenses low. The increase in PBIDTM and PBDTM can be attributed to increase in turnover coupled with savings in material cost over previous year and this has contributed to the better financial performance during the year. 2) Profit Before Depreciation and Taxes Margin

PBDTM (%)
25 20 15 10 5 0

PBDTM (%)

The PBDT margin was increasing from the year 2002 to the year 2008.There was a dip in the PBDTM in the year 2008-2009.Since then PBDTM has been increasing from the year 2009 to the year 2011. 3) Profit Before Interest and Tax Margin

PBITM (%)
25 20 15 10 5 0 PBITM (%)

The PBIT margin was increasing from the year 2002 to the year 2008.There was a dip in the PBDTM in the year 2008-2009.Since then PBDTM has been increasing from the year 2009 to the year 2011. There has been a change in accounting policy. The method of calculating the % completion has been modified to remove the mismatch in recognition of revenue and creation of provision for contractual obligation at 2.5% of the contract revenue on completion of trial operation and also to ensure that only 2.5% of the contract revenue is recognized on completion of trial operation with corresponding provision for contractual obligation. This was necessitated as the company observed the provisioning for contractual obligation made ranged between 1% to 5% from project to project and this anomaly was corrected. Since the % completion is done on estimated cost the variation between estimate and actual has been written back actually. And this has resulted in increase in STO for the quarter to the tune of Rs 444 crore. The impact at PBT and PAT level was Rs 88 crore and Rs 60 crore respectively. This is a one off item and as this anomaly was corrected there will be no future impact/occurrence. Industrial sector is expanding. The demand for the products has gone up. The company sees the unit size are increasing, the players who were earlier ordering for 60 MW are ordering 150 MW sets and who earlier went for 150 MW sets moves up to 250 MW sets. The demand for compressor and motors are also picking up. The high voltage transmission product ordering is happening. Transportation is another growth area where the company has picked up impressive orders from railways and private sector recently. This increase in demand has attributed to the increased sales turnover. 4) Cash Profit Margin

CPM (%)
16 14 12 10 8 6 4 2 0 CPM (%)

Cash profit margin ratio is used to measure operating performance. A higher cash profit margin is desirable. Here we can observe that CPM is increasing from the year 2009-2011.This can be attributed to increased PAT over the period due improved industry condition and increased sales turnover for BHEL. Formula: (Profit after Tax+ Depreciation)/Gross Sales So these are the very important concept for fundamental analysis.

5) Return on Capital Employed (ROCE)

ROCE (%)
60 50 40 30 20 10 0 ROCE (%)

ROCE reflects a companys ability to earn a return on all of the capital that the company employs .ROCE is calculated by determining what percentage of a companys utilized capital it made in pre-tax profits,before borrowing costs. The companys ROCE increases from year 2002 to 2008 and there is a decrease in the year 2008.ROCE again increases from year 2009-2011.There is an increased ROCE which shows that BHEL has utilized its capital employed in a more efficient way.The prime objective of making investments in any business is to obtain satisfactory return on capital invested. Hence, the return on capital employed is used as a measure of success of a business in realizing this objective. It is the best measure of profitability in order to assess the overall performance of the business. It indicates how well the management has used the investment made by owners and creditors into the business.

ROCE should always be higher than the rate at which the company borrows; otherwise any increase in borrowing will reduce shareholders' earnings. ROCE tells us how much profit we earn from the investments the shareholders have made in their company. A negative ROCE would mean that the firm had made a loss. ROCEs are typically between 5% and 15%. This will depend on the sector in which the firm operates. 6) Return on Net worth (RONW)

RONW (%)
35 30 25 20 15 10 5 0

RONW (%)

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

ROE is expressed as a percentage and calculated as: Return on Equity = Net Income/Shareholder's Equity

Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends to preferred stock.) Shareholder's equity does not include preferred shares. Also known as "return on net worth" (RONW). The ROE is useful for comparing the profitability of a company to that of other firms in the same industry. There are several variations on the formula that investors may use:

1. Investors wishing to see the return on common equity may modify the formula above by subtracting preferred dividends from net income and subtracting preferred equity from shareholders' equity, giving the following: return on common equity (ROCE) = net income - preferred dividends / common equity.

2. Return on equity may also be calculated by dividing net income by average shareholders' equity. Average shareholders' equity is calculated by adding the shareholders' equity at the beginning of a period to the shareholders' equity at period's end and dividing the result by two.

3. Investors may also calculate the change in ROE for a period by first using the shareholders' equity figure from the beginning of a period as a denominator to determine the beginning ROE. Then, the endof-period shareholders' equity can be used as the denominator to determine the ending ROE. Calculating both beginning and ending ROEs allows an investor to determine the change in profitability over the period. This gives a continuously increasing trend from year 2003 to year 2007 and then we observe that there is a decreasing trend from year 2008-2009.We can again observe an increasing trend from 2009-2011.This ratio gives you an idea of the returns generated by investing in the company. While ROCE is an effective measure to get a general overview of the profitability of the company's business operations, RONW lets you gauge the returns you can earn on your investment. This ratio indicates the return on stockholder's total equity. RONW/ROE is the single most important financial ratio applying to stockholders and the best measure of performance by a firm's management.

A high return on equity indicates that the company is spending wisely and is likely profitable; a low return on equity indicates the opposite. As a result, high returns on equity lead to higher stock prices. A negative RONW would mean that the firm had negative earning. After Tax Profit Margin

A financial performance ratio, calculated by dividing net income after taxes by net sales. A company's after-tax profit margin is important because it tells investors the percentage of money a company actually earns per rupee of sales. This ratio is interpreted in the same way as profit margin - the after-tax profit margin is simply more stringent because it takes taxes into account.

Often, a company's earnings don't tell the entire story. The amount of profit can increase, but that doesn't mean the company's profit margin is improving. For example, a company's sales could increase, but if costs also rise, that leads to a lower profit margin than what the company had when it had lower profits. This is an indication that the company needs to better control its costs.

APATM (%)
16 14 12 10 8 6 4 2 0 APATM (%)

Here we observe that the APATM has decreased in the year 2008-2009 and has increased over 20092011.The decrease can be attributed to economic slowdown and decrease in the revenues earned and also a decrease in demand for heavy electrical products. Du Pont Analysis: BHEL showed the following trends in the important parameters governing the Du Pont Chart analysis: 1. Profit margin: Profit margin is given by the formula

In this analysis this term has been calculated by dividing it further into two terms:

The following graphs show the variation for the two relevant terms for the last 10 fiscals. ow

PBIDT/Sales(%)
25 20 15 10 5 0

The ratio PBDIT/Sales gives the operating efficiency of the firm. The difference between PAT and PBDIT arises due to the fixed rates of depreciation and taxes that have to be taken into account. As the into following graph shows, this ratio basically has stayed more or less constant over the last 10 years. There is a clearly apparent upward trend in the ratio over the last 10 years, apart from the dip in 2009, which can be attributed to the economic downturn that the world witnessed in 2008.

The ratio is a measure of operating efficiency of the company, and an increasing trend shows that that as far as operations are concerned, it is moving in the right direction.

PAT/PBIDT(%)
70 60 50 40 30 20 10 0

PAT/Sales (%)
14 12 10 8 6 4 2 0

2. Asset turnover ratio: The asset turnover ratio is given by the formula:

Asset turnover ratio of the engineering services industry is typically low, since the products that it manufactures usually earn it a large profit margin. BHEL possesses Asset turnover in the range of

1.5-2, and the trend is on the increase. However, this ratio is not of great importance to this 2, industry which is not a sales sales-dominant industry.

Sales/Net Assets
2.5 2 1.5 1 0.5 0

PBDIT/Net Assets
0.5 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0

3. Financial Leverage ratio:

The formula for financial leverage ratio is given by:

This ratio is also not of so great an importance to the Engineering sevices industry, and as such this ratio is consistently low for BHEL. This ratio is generally high for finalcial services industries. However, a high financial leverage ratio is considered risky for other industries, and tries. BHELs present value is tagged at 1.01.

Net Assets/Net Worth

1 0.8 0.6 0.4 0.2 0

4. Return on Equity: ROE (Return on Equity) is arguably the most important ratio to the shareholders and investors for determining a companys financial position. It is the most important indicator of shareholder etermining value creation. Return on equity reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet. Shareholder equity is a creation of Shareholder accounting that represents the assets created by the retained earnings of the business and the paid paidin capital of the owners. A business that has a high return on equity is more likely to be one that is capable of generating cash internally. For the most part, the higher a company's return on equity compared to its industry, the better.

ROE(%)
35 30 25 20 15 10 5 0

As the graph clearly shows, the ROE trend is favorable for BHEL in the last decade. It has steadily grown from 13% in 2002 to 33% in 2011. The growth in ROE has been majorly contributed to the impressive CAGR that BHEL has mentioned during the decade. As the Du Pont Analysis suggests, the major factor the is the growing profit margin of the company, which is basically an indicator of increasing operational efficiency of the company.