BHEL

Financial Statement
Analysis

Ashish Verma 0911225

Ashin Mathew 0911224
Sagar Gaikwad 0911235
Suman Mondal 0811061
Vivek 0911285

Industry Overview
The reform process in the Power sector, though initiated quite sometime back, is yet to gather
momentum. The delay could lead to low growth in downstream industries like Power Plant
manufacturers. Investments in infrastructure projects have not picked up as expected. This
coupled with excess capacity in many basic industries, such as the capital goods sector, have
led to slowdown in the growth at less than half the growth rate experienced in the previous
year.
The ongoing changes in the global market for Power Generation Equipment have had a direct
impact on domestic companies. Significant industry consolidation across the continents was
primarily driven by de-regulation and opening up of many formerly protected markets. The
industry was also affected by over capacity, heavy development cost of maintaining
competitive position in advanced technologies, WTO requirements and lowering of tariff
barriers. The continuing integration of the Indian economy with the global economy has
made the environment highly competitive.
BHEL was focused on reducing its dependency on the power sector because of the
dominance posed by the SEBs. Hence it forayed into the field of Industry operations as well.
It also took up a lot of risk containment measures such as entry into export markets, new
market segments. The company has always been very conservative in the sales credit front as
well. Recently it has announced plans to set up a 100% subsidiary in the field of Information
Technology as well.
Company History and Strategy
BHEL is more than 40 years old company. K Ravi Kumar took over the charge of company
as CMD recently in the year 2007-08i. The main strength of BHEL lies in design, engineering
and manufacturing of high quality products in power generation, transmission, transportation
and renewable energy. BHEL sets account for nearly 65% of the total installed power
generating capacity contributing 73% of the total power generation in the countryii.
Recently BHEL entered into a MoU with TNEB to set up 2x800 MW Supercritical Thermal
Power project and with NTPC to form a JV for jointly executing EPC projects and power
equipment manufacturing. BHEL has access to technology for higher size gas turbines and
can supply gas turbines of up to 279 MW unit size. To give a thrust to refurbishing and
modernization for plant performance improvement of old fossil fuel power plants, two joint
venture companies have been floated with Siemens and GE respectively. BHEL
manufactures and supplies major capital equipment and systems like captive power plants,
centrifugal compressors, drive turbines, industrial boilers and auxiliaries, waste heat recovery
boilers, gas turbines, pumps, heat exchangers, electric machines, valves, heavy castings and
forgings, electrostatic precipitators, ID/FD fans, seamless pipes etc. BHEL has the capability
to supply complete onshore drilling rigs, super deep drilling rigs, desert rigs, mobile rigs,
work over rigs and sub sea well heads. The products manufactured by BHEL include power
transformers, instrument transformers, dry type transformers, shunt reactors, capacitors,
vacuum and SF6 switchgear, gas insulated switchgear, ceramic insulators, etc. Most of the
trains in the Indian Railways, whether electric or diesel powered, are equipped with BHEL’s
traction propulsion systems and controlsiii.
By the latest available annual report 2007-08 we can infer that however BHEL is able to
serve only 20000 crores of orders it is having worth 85000 crores orders lying with it. Orders
received each year are higher than the serving capacity of BHEL and hence outstanding
orders are increasing year by yeariv. Recently BHEL acquired the entire share capital of
Bharat Heavy Plates & Vessels Ltd, a plant equipment products manufacturer. BHEL is
having the plans to merge Palakkad unit of Instrumentation Ltd, a control equipments
manufacturer and Bharat Pumps & Compressors Ltd, a pump and compressors manufacturerv.
An alleged dispute over intellectual property rights has stalled a joint initiative between
BHEL and NTPC Ltd to build less-polluting power generation plantsvi. BHEL disinvestment
is under consideration with Minister of Heavy Industries and Public Enterprisesvii.

SWOT Analysis of BHEL

Strengths
• Technology is the major element in the corporate strategy of BHEL as most of its
products are highly technology intensive in nature. BHEL has been upgrading its
technology from time to time with tie ups with world leaders

• BHEL is amongst the highest investors in R & D in India

 • Quality standards of BHEL have been recognized in India and abroad with all the
major manufacturing divisions getting ISO 9000 certification

• Prompt and efficient attendance to customer issues is another USP of BHEL

Weaknesses
• Though BHEL is competitive in the international majors in terms of cost, delivery and
equipment in the domestic market, the company’s inability to match the financial
packages provided by the multinationals has been one of its major weaknesses

Opportunities
• Move towards electricity market restructuring and reforms gaining momentum

• Electricity sectors of developing Asian nations are expected to be the fastest growing
sectors in the world

Threats
• Global power industry is facing uncertainty because of rising fuel prices, limited non
renewable energy sources and a wobbling global economy

• Unsatisfactory financial performance of many acquisitions in the international market

I: Revenue Trends
Revenue from operational activities (sales and services) forms the major part of the total
revenue of BHEL. Revenue from non operational activities includes export incentives,
dividend income and interest income and they are tabulated under “other income”.
 For BHEL, sales show a steadily increasing trend from 2005 to 2009 as shown in the
table below.
Income (Rs MM) 2009 2008 2007 2006 2005
Net Sales 26,590.14 19486.27 17320.74 13442.58 9516.49
Other Income 1119.87 1157.52 575.20 328.98 453.37
Total Revenues 27710.01 20643.79 17895.94 13771.56 9969.86
% Growth 34.22% 15.35% 29.94% 38.13%

II: Profitability Analysis

The Ratios DuPont analysis is given in the following table for BHEL.
Ratios 2009 2008 2007 2006 2005
Net Profit Margins 11.95% 14.81% 14.22% 12.63% 10.02%
Asset Turnover 0.73 0.67 0.73 0.72 1.14
ROA (Net Profit/ATA) 8.75% 10.02% 10.49% 9.17% -
ROE 26.81% 29.51% 30.62% 25.47% -
Earnings per share 64.11 58.41 98.66 68 38.95

From the above table it can be seen that there has been an increase in profit margin from
2005 till 2008. The drop in profit margin in 2009 can be attributed to the global recessionary
trend. Asset turnover ratio has decreased in recent years when compared to 2005. This
indicates the decrease in efficiency of asset management. The return on assets (ROA) has
decreased in the year 2009 even though asset turnover ratio has increased. This can be
attributed to the decrease in the net profit margin in the year 2009.ROE is greater than ROA
in all the years from 2005, indicating that BHEL earned more per rupee of shareholders funda
than per rupee of assets. From the commonsized balance sheet of 2009 it can be seen that
56.32% of company assets is financed by current liabilities which shows the extent of
leveraging.

III: Liquidity Analysis

Ratios 2009 2008 2007 2006 2005
Current Ratio 1.28 1.37 1.34 1.43 1.43
Quick Ratio 1.01 1.09 1.11 1.14 1.15
Debtor Turnover 1.89 1.79 2.05 2.04 -
Inventory Turnover 3.33 3.23 3.54 3.36 -
 Operating Cycle 302 316 280 286 -

The current ratio has remained above 1 in all the years from 2005 which shows the
company’s ability to pay its debt in the short term. This ratio shows a decreasing trend over
the years and company should make sure that this trend doesn’t continue further. There is no
huge difference between the quick ratio and the current ratio over the years which show that
the majority of the current assets of BHEL are easily liquefiable. The industry average of
debtor turnover ratio for the current year is 2.70. BHEL’s debtor turnover ratio is below the
industry average but not to a huge extent which shows the moderate quality of debtors and
collection efforts. Compared to last year the debtor collection period has decreased from 203
days to 192 days. However this is high compared to the current industry average of 135 days.
The current industry average of inventory turnover ratio is 5.48. As inferred from the above
table, BHEL’s inventory turnover ratio, although consistent through the years, is below
industry standard which indicates the possibility of cash being idle in inventories for a longer
period. BHEL’s inventory holding period is 109 days which is way above the industry
average of 66 days. The decreasing trend of debtor turnover ratio and inventory turnover ratio
over the years has resulted in the increasing trend of operating cycle which can be seen from
the above table.

III: Solvency Analysis

Ratios 2009 2008 2007 2006 2005
Debt to Equity ratio 0.011 0.008 0.01 0.076 0.089
Liabilities to Equity ratio 2.21 1.87 2.01 1.78 1.73

The debt equity ratio of BHEL has decreased considerably in the last 3 years and it has
remained below the industry average of 0.16. The high liabilities to equity ratio compared to
the debt to equity ratio shows that the current liabilities form a major part of total debt of
BHEL. Even though BHEL makes use of leveraging, the debt to equity ratio is low because it
keeps rolling over short term obligations. Some of the items in current liabilities take a long
term character and are not different from interest free debt.

IV: Capital Market Analysis

Ratios 2009 2008 2007 2006 2005
Interest Coverage Ratio 23.33 34.88 11.53 16.22 9.77
Book Value per share 26.43 22.00 35.90 29.83 24.62
Price to Book Ratio 56.57 92.57 31.68 36.97 15.44
BHEL in the year 2009 has interest coverage ratio of 23.33 which is higher than the industry
average of 19.94. This high ratio indicates the stock market’s confidence in the company’s
future earnings growth. The very high price to book ratio shows BHEL shares are prices way
above their book value in the markets and thus indicates that the market expects the stock to
earn at a rate higher than the required rate.

V: Cash Flow Analysis

Refer to the exhibit for Cash Flow Statement, Cash and cash equivalents for BHEL are
continuously increasing. From the last five year’s cash flow statement it can be inferred that
it is following the similar trends where operating profit is positive while Cash from investing
and financing activities are negative. Here is some analysis on different sections.
• Cash from Operating Activities:

Cash from operating activities are representing an increasing trend. The major
sources of this cash are high sales and better realization capabilities of BHEL
which are representing better shape of the organization.
• Cash from Investing Activities:

Cash realized from investing activities are negative over last five years. Cash
flow statement is referring to purchase of fixed assets is the major investment
BHEL is going for. BHEL as a plan to its expansion strategy is investing in
fixed assets and merging companies with in it. Other major contributor to this
section is interest received. BHEL receives huge interest as a part of its
investment which is another source of income for it.
• Cash from Financing Activities:

Cash from financing activities are also showing negative values over last five
years. BHEL seems to be in good health as it has no liability to pay debts. In
the last five years it paid long term debt only in one year. The major
contributor here is dividends paid. BHEL pays good amount of dividends to its
investors.

• Cash Realization Ratio:

 o BHEL improved its cash realization capability considerably from 2005 to
2009. While it was realizing only 86% of its net profit in 2005 it realized
103% in the year 2009. This realization capability reached peak in 2008
(120%) and this year it declined considerably. The realization more than 100%
shows that BHEL is reducing its accounts receivables which further reduce the
chances of bad debts for the company.
• Modified Cash Realization Ratio:

o If it is changed from net profit to Profit before working capital, it represents

the better cash realization ratio analysis. In case of BHEL however it is
showing similar trends as cash realization analysis, BHEL is only realizing 75
% of its sales operations. These are investing activities and financing activities
which made it look for more than 100% realization. This occurred because of
realization of debts from previous years. Use of more inventories further
added to the effect.
From the cash flow statement of BHEL it can be inferred that the heath of organization is
good. It is having good realization capabilities and high sales. It is in improvement stage of
its realizing capabilities. It is investing in its future expansion plans and yields better
dividends to its investors. It is putting more emphasize on its debtors and hence able to
extract some money.

VI: CONCLUSION
The biggest strength of BHEL is that it has no big competitors in the market. This gives it an
unique natural monopoly position. BHEL has outstanding orders which are 2.5 times its
current serving capabilities. Thus there is a huge potential and opportunity for BHEL. BHEL
provides 70% of the total equipments in power sector market. BHEL has been very slow in
terms of expansion. BHEL has many pending orders. The received orders are greater than the
capabilities.
As an investor some of the ratios that will have to be considered before investment are as
follows:-
• P/E ratio: A high price earnings ratio indicates the stock markets confidence in the
company’s future earnings growth. So a high P/E will be an incentive to the investor
to invest in the company.
• Debt-Equity Ratio: A high debt-equity ratio indicates solvency issues with the
company and hence will attract less number of investors. So a prudent investor will
consider this ratio before making his investment in the company.
 • Dividend yield and Price to Book ratio: This ratio indicates the market valuation of
the company and thus provides useful info to the investor regarding the future market
price of the company stock.
• ROA: This ratio is an excellent indicator of the overall performance of the company
and hence the investor can use this to evaluate the profitability of the company and
thus invest wisely

The main take away from this exercise is that financial ratios cannot be used in isolation for
the evaluation of the company. The company background and industry environment have to
be considered along with the ratios. The industry average should be used as the benchmark
for the evaluation of the main ratios
i
http://www.bhel.com/images/pdf/annual_report_2007-08.pdf Pg No : 4
ii
http://www.bhel.com/images/pdf/annual_report_2007-08.pdf Pg No : 10
iii
http://www.bhel.com/images/pdf/annual_report_2007-08.pdf Pg No: 11-13
iv
http://www.bhel.com/images/pdf/annual_report_2007-08.pdf Pg No :16
v
http://www.alacrastore.com/mergers-acquisitions/Bharat_Heavy_Electricals_Ltd_BHEL-
1045900
vi
http://www.livemint.com/2009/02/03225111/Intellectual-property-rights-i.html
vii
http://www.thehindu.com/holnus/001200906191810.htm