PGSEM SECTION B FINANCIAL ACCOUNTING FINAL ASSIGNMENT

FINANCIAL ACCOUNTING FINAL ASSIGNMENT REPORT

Company: Bharat Forge Limited

Author Info: Karthik Swaminathan (Id No. 2008088)

PGSEM Section B
Email-id: karthik.swaminathan08@iimb.ernet.in

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PGSEM SECTION B FINANCIAL ACCOUNTING FINAL ASSIGNMENT

Bharat Forge Limited – A Kalyani Group Company

Bharat Forge Limited (BFL), the flagship company of the USD 2.4 billion Kalyani
Group, manufactures various forged and machined components for the
automotive and non-automotive sector.

Since commencement of operations in 1966, BFL has achieved several

milestones and is today among the largest and technologically most advanced
manufacturer of Forged & Machined components. As one of India’s emerging
multinationals, the company has manufacturing operations across 12 locations
and 6 countries - 4 in India, 3 in Germany, one each in Sweden, Scotland, USA &
2 in China.

Bharat Forge customers include the top five Passenger Car & top five
Commercial Vehicle Manufacturers in the world. The company derives its income
from both the domestic market and export market. Some of the well known
domestic clients are TATA Motors, Maruti, M&M, Larsen and Toubro, Escorts,
Ashok Leyland, BHEL etc. Some of the well known global clients are General
Motors, BMW, Volvo, Daimler Chrysler, Ford, Toyota, Honda etc.

Backed by a full service supply capability and dual-shore manufacturing model,

Bharat Forge provides end-to-end solutions from product conceptualization to
designing and finally manufacturing, testing and validation.

The automotive products that BFL manufactures comprise of Crankshafts, Front

Axle Beams, pistons, spindles, steering arms, steering knuckles, camshafts etc.
The non-automotive space where BFL caters to, are capital goods (machined
and forged parts) for Oil and Gas, Marine and Power Generation, Energy sector,
Aerospace, Railways and construction etc.

The Indian forging industry can be categorized into large, medium, small and tiny
sectors. A major portion of this industry is made up of small and medium
units/enterprises (SMEs). Only about 5% is made up by the large enterprises in
terms of number. BFL is the leading forging company in India and is at number
two at the global level in providing forged and machined parts for automotive
sector. The domestic competitors for BFL are Sundaram Fasteners Limited, MM
Forgings, Mahindra forgings etc. The global competitors for BFL are Sona
okegawa precision forgings, Unison etc.

Bharat forge has been growing at a tremendous pace in the last few years
through both organic and inorganic means. The vision of the company is to
become the leading forging company in the world. The strategy of the company
is increased diversification into non-automotive space, which it started a few
years ago and in the process also de-risk its business, from the sluggishness of a
particular industry. The company sees big opportunities in the capital goods
sector and has also recently tied up with NTPC Ltd. that envisages setting up a

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joint venture company to manufacture large forgings and castings for high value,
critical components such as rotor shafts, components for turbo generators and
other capital goods, which currently constitute strategic bottlenecks from a
national capacity building point of view causing slow down in execution of several
large projects. With its firm strategy of diversification in key non-automotive
industries, the company is investing close to Rs.500 crores on the capacity
expansion.

The subsequent section analyzes the financial performance of BFL. In analyzing

the financial performance of the company, India operations of Bharat Forge
Limited is only considered.

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1. FINANCIAL ANALYSIS
Given below are the financial statements of India operations of BFL.

1.1 Balance Sheet Analysis

The Balance sheet of BFL for FY2008 and FY2007 is given in Table 1-1.

Table 1-1: Balance Sheet for FY2008 and FY2007

Year Mar 08 Mar 07
SOURCES OF FUNDS :
Share Capital 44.54 54.54
Reserves Total 1,428.74 1,272.26
Total Shareholders Funds 1,473.28 1,326.80
Secured Loans 461.58 373.57
Unsecured Loans 825.91 1,028.04
Total Debt 1,287.49 1,401.61
Total Liabilities 2,760.77 2,728.41
APPLICATION OF FUNDS :
Gross Block 2,029.64 1,735.06
Less : Accumulated Depreciation 711.77 583.13
Net Block 1,317.87 1,151.93
Lease Adjustment 0 0
Capital Work in Progress 427.13 274.8
Investments 593.67 450.71
Current Assets, Loans & Advances
Inventories 338.12 302.79
Sundry Debtors 356.29 253.95
Cash and Bank 164.99 736.28
Loans and Advances 766.6 555.99
Total Current Assets 1,626.00 1,849.01
Less : Current Liabilities and Provisions
Current Liabilities 634.33 575.69
Provisions 451.33 309.8
Total Current Liabilities 1,085.66 885.49
Net Current Assets 540.34 963.52
Miscellaneous Expenses not written off 0 0.23
Deferred Tax Assets 20.57 7.33
Deferred Tax Liability 138.81 120.11
Net Deferred Tax -118.24 -112.78
Total Assets 2,760.77 2,728.41
Contingent Liabilities 521.84 467.49

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The common size balance sheet is given in Table 1-2

Table 1-2: Common Size Balance Sheet

Year Mar 08 Mar 07
SOURCES OF FUNDS :
Share Capital 1.61 2.00
Reserves Total 51.75 46.63
Total Shareholders Funds 53.36 48.63
Secured Loans 16.72 13.69
Unsecured Loans 29.92 37.68
Total Debt 46.64 51.37
Total Liabilities 100.00 100.00
APPLICATION OF FUNDS :
Gross Block 73.52 63.59
Less : Accumulated Depreciation 25.78 21.37
Net Block 47.74 42.22
Lease Adjustment 0.00 0.00
Capital Work in Progress 15.47 10.07
Investments 21.50 16.52
Current Assets, Loans & Advances
Inventories 12.25 11.10
Sundry Debtors 12.91 9.31
Cash and Bank 5.98 26.99
Loans and Advances 27.77 20.38
Total Current Assets 58.90 67.77
Less : Current Liabilities and Provisions
Current Liabilities 22.98 21.10
Provisions 16.35 11.35
Total Current Liabilities 39.32 32.45
Net Current Assets 19.57 35.31
Miscellaneous Expenses not written off 0.00 0.01
Deferred Tax Assets 0.75 0.27
Deferred Tax Liability 5.03 4.40
Net Deferred Tax -4.28 -4.13
Total Assets 100.00 100.00
Contingent Liabilities 18.90 17.13

Analysis
The share capital reduction is mainly because of the reduction in the preferential
shares. The reserves and surplus increased resulting in the increase in value of
shareholders’ fund. While the secured loans increased, the company reduced its
unsecured loans significantly, thus reducing the total debts.

There was an increase in the investments made by the company from Rs 450.71
Cr. to Rs. 593.67Cr. This is due to investments made in acquisitions and loans to
subsidiary companies during the year.1

1
Refer Section B of the Cash Flow Statement in 2007-08 Annual Report of BFL

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There was also an increase in fixed assets component in FY2008. This is in line
with the capital expansion strategy of BFL. The fixed assets increased mainly
because of purchase of plant and machinery (Rs 149.90 Cr.) and vehicles and
Aircraft (Rs 188.29 Cr)2

There is a significant increase in the capital work in progress (Rs 427.13 Cr.
Compared to Rs 274.8 Cr. in FY2007). There is again in line with the BFL
strategy of capital expansion and diversification into non-auto and capital goods
sector. However, it would be interesting to see where the company is sourcing its
funds for the capital expansion. There is no increase in the share capital over the
previous year. The cash flow from investing operations indicates a major portion
of this expenditure as capital expenditure. The remaining portion is sourced from
borrowings from banks3

The current assets have reduced by Rs.223Cr. in absolute terms in FY2008 over
FY2007. The cash has gone down by a significant margin (Rs.164.99 Cr
compared Rs.736.28Cr. in FY2007). The loans and advances increased. The
account receivables also increased but since the BFL have reputed customers,
this may not be an issue. Moreover, the account payables in the current liabilities
also increased, which means that BFL were able to delay the payments to their
suppliers as well.

The net current assets, which is also the working capital decreased significantly
by almost 45% over the previous year, due to decrease in current assets and
significant increase in the current liabilities.

The current ratio4 in FY2008 is 1.38, which is higher than the current ratio of
1.16 in FY2007.5 But it is still above the industry average of 1.19 for 2007.

The Quick ratio6 is 1.10, which conveys the information that the company should
be able to meet its short term needs and hence there is no liquidity problem for
the company. It would be interesting to see days’ cash availability for the
company (derived from P&L account) since the cash has significantly reduced.
The days’ cash7 is 35 days, which is good.

2
Refer Schedule E of the Annual Report for FY2008, available at
http://www.bharatforge.com/investers/bf_whole_ar_file_0708.pdf
3
Refer Section C of the Cash Flow Statement in 2007-08 Annual Report of BFL
4
Refer formulae in Appendix A
5
Refer Table 1-11 for Ration Analysis Chart for BFL.
6
Quick Ratio = (Current assets –inventories)/(Current Liabilities + Short term Debts). Refer
Appendix B for the ratios.
7
Days’ cash = cash/(total expenditures % 365)

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1.2 Income Statement Analysis

The income statement for the period of 2006-07 and 2007-08 are given in Table
1-3.

Table 1-3: Profit and Loss Account

Year Mar 08(12) Mar 07(12)
INCOME
Sales Turnover 2,314.37 1,990.84
Less Excise Duty 172.54 155.8
Net Sales 2,141.83 1,835.04
Other Income 173.49 110.49
Stock Adjustments 20.64 22.47
Total Income 2,335.96 1,968.00
EXPENDITURE
Raw Materials 979.2 832.47
Power & Fuel Cost 178.4 156.76
Employee Cost 144.88 107.67
Other Manufacturing Expenses 232.58 196.7
Selling and Administration Expenses 81.71 64.67
Miscellaneous Expenses 78.41 68.62
Less: Pre-operative Expenses capitalized 0.13 0.11
Total Expenditure 1,695.05 1,426.78
Operating Profit 640.91 541.22
Interest 104.99 82.11
Gross Profit 535.92 459.11
Depreciation 138.94 99.8
Profit Before Tax 396.98 359.31
Tax 98.2 100.23
Deferred Tax 18.39 16.13
Reported Net Profit 273.59 240.95
Extraordinary Items 21.09 -4.28
Adjusted Net Profit 252.5 245.23
Adjst. below Net Profit 0 4.14
P & L Balance brought forward 413.45 285.46
Statutory Appropriations 0 0
Appropriations 130.01 117.1
P & L Balance carried down 557.03 413.45
Dividend 77.93 77.93
Preference Dividend 0.71 0.82
Equity Dividend % 175 175
Earnings Per Share-Unit Curr 11.65 10.18
Book Value-Unit Curr 66.16 59.13

The YoY sales increase in FY 2008 over FY 2007 was 16.25%. The operating
profit increased by 18.4% over the previous year. This is mainly because of the
YoY increase in other income by 57% while the YoY increase of the total
expenditure by approximately 18.4% pulled it down. The reported net profit for
the period ending FY 2008 increased 13.5% over the previous FY 2007. The

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decreased rate of the YoY reported net profit against the YoY sales is due to the
increase in YoY expenditure by approximately 18% which is higher than the YoY
% sales increase.

To analyze the profitability of the company, the common size profit and loss
account is given in Table 1-4.

Table 1-4: Common Size Profit and Loss Account

Year Mar 08(12) Mar 07(12)
INCOME :
Sales Turnover 99.08 101.16
Excise Duty 7.39 7.92
Net Sales 91.69 93.24
Other Income 7.43 5.61
Stock Adjustments 0.88 1.14
Total Income 100.00 100.00
EXPENDITURE :
Raw Materials 41.92 42.30
Power & Fuel Cost 7.64 7.97
Employee Cost 6.20 5.47
Other Manufacturing Expenses 9.96 9.99
Selling and Administration Expenses 3.50 3.29
Miscellaneous Expenses 3.36 3.49
Less: Pre-operative Expenses Capitalized 0.01 0.01
Total Expenditure 72.56 72.50
Operating Profit 27.44 27.50
Interest 4.49 4.17
Gross Profit 22.94 23.33
Depreciation 5.95 5.07
Profit Before Tax 16.99 18.26
Tax 4.20 5.09
Deferred Tax 0.79 0.82
Reported Net Profit (PAT) 11.71 12.24

Analysis of the common size profit and loss account shows no major change in
the composition of income except that the contribution of the other income had
increased to 7.63% from 5.61% to the total income. There was also reduction in
the excise duty.

There was no major change in the composition of the expenditure as well. Except
for the rise in employee cost and SG&A, expenditure of all other components
marginally decreased. The overall expenditure component marginally increased
over the previous year. Hence the operating profit was also not affected and
remained almost the same over the years being compared.

However, due to the increase in depreciation and interest being paid by the
company, the Profit before tax has reduced from 18.26% to 16.99%, a reduction
of 1.27% over FY2007.

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The tax paid and the deferred tax component is lower than the previous year and
the deferred tax liability in the balance sheet is also increased. This partially
offsets the increase in depreciation and interest and hence the reported net profit
is only 0.53% lower than the previous year.

The profit margins are analyzed more in detail during ratio analysis in section 1.5.

1.3 Cash Flow Statement Analysis

The cash flow statement and its common size for the period of 2006-07 and
2007-08 are given in Table 1-5

Table 1-5: Cash Flow Statement (Rs. in Crores)

Cash Flow Summary Mar-08 Mar-07
Cash and Cash Equivalents at Beginning of the
year 736.27 505.41
Net Cash from Operating Activities 345.63 295.77
Net Cash Used in Investing Activities -618.75 -238.62
Net Cash Used in Financing Activities -298.17 173.71
Net Inc/(Dec) in Cash and Cash Equivalent -571.29 230.86
Cash and Cash Equivalents at End of the year 164.98 736.27

Table 1-6: Common size cash flow statement

Cash Flow Summary Mar-08 Mar-07
Cash and Cash Equivalents at Beginning of the
year 213.02 170.88
Net Cash from Operating Activities 100.00 100.00
Net Cash Used in Investing Activities -179.02 -80.68
Net Cash Used in Financing Activities -86.27 58.73
Net Inc/(Dec) in Cash and Cash Equivalent -165.29 78.05
Cash and Cash Equivalents at End of the year 47.73 248.93

The closing cash availability for FY2008 has decreased significantly to Rs 164.98
Cr. compared to the opening balance of Rs. 736.27 Cr. at the beginning of the
financial year. The significant decrease is mainly due to investment in capital
expansion in cash without adding further debt to the company. This might be
because the company is already having high debts (Total debt to equity ratio or
the financial risk of 1.14 at the beginning of FY20088) and is looking forward to
also reduce the financial risk. Since the company had excess cash in the bank, it
would as well put that in business investments that can give better returns
against the bank.

The company also paid back some of the borrowings in addition to some fresh
borrowings, with the overall net being in the negative. This has reduced their
financial risk or total debt to equity ratio to 0.95

8
Refer Table 1-11 and the attached Dupont model worksheet for BFL

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1.4 Trend Analysis

The ten year trend for the balance sheet, profit and loss account and the cash
flow statements are given in the tables 1-7, 1-8 and 1-9 respectively.

Balance Sheet Trend Analysis

The reserves and surplus of the company had decreased in the first few years.
This could be because the industry being capital intensive, most of the income
would have been re-invested in capital expansion. But, in the last five years, the
reserves have increased by nearly 8 times. This is due to the increased
profitability over the period from FY2004 to FY2006

There was also a greater than 3x increase in total debts. This is seen in greater
than 4x increase in fixed assets. The last 4 years have seen tremendous
increase in addition of fixed assets (almost doubled) and increased spending in
capital WIP. This is in line with the diversification strategy of the company into
non-automotive space and its increased focus on capital goods sector as well.

Table 1-7: Balance Sheet Trend Analysis

Year Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar
08 07 06 05 04 03 02 01 00 99
SOURCES OF FUNDS
:
Share Capital 118 145 145 158 180 180 153 127 127 100
Reserves Total 386 343 299 103 50 28 32 27 95 100
Total Shareholders
Funds 361 325 285 108 62 42 43 36 98 100
Secured Loans 208 168 172 173 99 114 99 118 117 100
Unsecured Loans 475 592 352 20 38 41 93 87 86 100
Total Debt 325 354 251 106 72 82 97 104 103 100
Total Liabilities 343 339 268 107 67 62 69 70 101 100
APPLICATION OF
FUNDS :
Gross Block 432 369 269 202 175 164 150 135 144 100
Less : Accumulated
Depreciation 390 319 268 231 203 179 157 135 116 100
Net Block 459 401 270 184 157 154 147 136 162 100
Lease Adjustment 0 0 0 0 0 0 0 0 0 0
Capital Work in
Progress 518 333 450 335 115 17 32 62 48 100
Investments 357 271 267 23 21 0 0 1 56 100
Current Assets, Loans
& Advances
Inventories 445 399 335 245 175 167 113 116 123 100
Sundry Debtors 433 309 229 174 122 99 87 102 81 100
Cash and Bank 322 143 987
2 80 1 549 168 456 182 56 305 100
Loans and Advances 287 208 219 160 102 64 47 40 92 100
Total Current Assets 377 429 356 182 120 93 68 65 98 100

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Less : Current
Liabilities and Provisions
Current Liabilities 516 469 416 351 275 178 123 111 133 100
Provisions 107
3 736 860 612 354 183 101 86 107 100
Total Current Liabilities 658 537 529 418 295 180 117 105 126 100
Net Current Assets 203 362 249 36 11 40 38 41 80 100
Miscellaneous
Expenses not written off 0 12 64 219 415 587 551 581 58 100
Deferred Tax Assets 530 189 178 109 115 100 0 0 0 0
Deferred Tax Liability 170 147 127 104 104 100 0 0 0 0
Net Deferred Tax 152 145 124 104 103 100 0 0 0 0
Total Assets 343 339 268 107 67 62 69 70 101 100
Contingent Liabilities 360 322 265 225 237 263 226 179 113 100

Profit and Loss Account Trend Analysis

The profit and loss account trend analysis shows greater than 5x improvement in
total income while the reported net profits are at 7.33 times the base value.
Taking a closer look, the operating profits have not increased as much as
reported net profits and in fact is more proportional to the increase in total
income. The higher growth of reported net profits as compared to total income is
not due to increased efficiency from operations but mainly due to the increased
leverage of its debt and better tax management.

Table 1-8: Profit and Loss Account Trend Analysis

Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar
Year 08 07 06 05 04 03 02 01 00 99
INCOME
Sales Turnover 513 441 366 279 192 144 102 116 124 100
Excise Duty 372 336 261 197 151 110 105 123 133 100
Net Sales 529 454 378 288 197 148 101 116 123 100
Other Income 484 309 280 165 152 133 67 54 76 100
Stock Adjustments 1134 1235 1620 1526 -153 1714 -105 -361 895 100
Total Income 533 449 379 286 193 154 99 110 123 100
EXPENDITURE
Raw Materials 597 507 450 328 189 143 93 110 121 100
Power & Fuel Cost 520 457 332 254 182 153 109 108 127 100
Employee Cost 342 254 216 157 122 107 98 107 108 100
Other
Manufacturing
Expenses 455 385 313 232 184 178 87 97 132 100
Selling and
Administration
Expenses 981 776 666 583 410 282 134 131 88 100
Miscellaneous
Expenses 313 274 230 243 146 135 103 101 176 100
Total Expenditure 521 439 374 283 181 148 96 107 125 100
Operating Profit 566 478 390 295 229 173 105 117 118 100
Interest 247 193 129 79 76 96 107 135 104 100
Gross Profit 757 648 547 424 320 219 105 106 126 100

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Depreciation 477 343 251 180 157 143 136 136 103 100
Profit Before Tax 952 861 754 594 434 271 82 86 142 100
Tax 2237 2283 2019 1951 1219 638 61 70 228 100
Deferred Tax 176 155 148 6 25 38 100
Reported Net
Profit 733 646 555 433 335 217 57 87 132 100

Cash Flow Trend Analysis

The cash flow trend shows significant increase in the investing activities and
financing activities over the period of last ten years. This is mainly because of the
rapid growth of the organization through acquisitions over the period.9

Table 1-9: Cash Flow Trend Analysis

Mar- Mar- Mar- Mar- Mar- Mar- Mar-
Cash Flow Summary Mar-08 Mar-07 Mar-06 05 04 03 02 01 00 99
Cash and Cash Equivalents at
Beginning of the year 3616 2482 138 42 115 46 14 77 25 100
Net Cash from Operating Activities 210 180 133 84 136 102 87 128 123 100
Net Cash Used in Investing
Activities -1049 -404 -1153 -459 -194 -83 -92 265 -241 -100
Net Cash Used in Financing
Activities -247 144 779 127 -102 -87 -68 -314 -41 -100
Net Inc/(Dec) in Cash and Cash
Equivalent -3749 1515 3132 128 -97 92 42 -83 69 -100
Cash and Cash Equivalents at End
of the year 3222 14380 9871 549 168 456 182 56 305 100

9
Refer http://www.bharatforge.com/company/history.asp

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1.5 Ratio Analysis

This is done using the Dupont model and ratios are as per defined in the Dupont
model excel sheet calculated for Bharat Forge Ltd. Appendix A shows the
formulae used for the calculation of these ratios. The ratio analysis is done in
comparison with the industry average and not with respect to the competitors as
the size of the domestic competitors is not really comparable.

The industry average ratios are displayed in Table 1-10 and Ratio analysis for
BFL is shown in Table 1-11

Table 1-10: Industry Forgings - Large Industry Average Ratios

Year Latest 2006 2005 2004 2003 2002 2001 2000 1999 1998
No.Of Companies 7 6 6 5 5 5 5 5 5 5
Key Ratios
Debt-Equity Ratio 0.97 0.83 1.03 1.23 1.67 2.01 1.46 1.08 1.13 1.53
Long Term Debt-
Equity Ratio 0.8 0.64 0.8 1.06 1.38 1.47 1.04 0.8 0.85 1.2
Current Ratio 1.19 1.17 1.01 1.07 1.19 1.17 1.29 1.56 1.75 1.75
Turnover Ratios
Fixed Assets 1.56 1.63 1.6 1.29 1.03 0.88 0.98 1.17 1.27 1.26
Inventory 6.88 6.86 6.42 5.62 4.93 4.43 4.66 5.16 5 4.95
Debtors 8.73 9.45 8.96 7.84 6.7 5.3 5.6 5.77 4.62 4.05
Interest Cover
Ratio 3.47 6.27 7.27 6.1 3.52 1.42 1.19 2.14 1.64 1.74
PBIDTM (%) 18.18 21.73 22.1 24.52 24.56 18.83 17.39 20.69 18.68 17.4
PBITM (%) 13.81 17.54 17.97 19.6 18.36 11.32 10.75 15.69 13.48 13.34
PBDTM (%) 14.2 18.93 19.63 21.31 19.34 10.87 8.32 13.37 10.46 9.75
CPM (%) 9.63 13.89 13.78 16.39 15.86 9.46 7.82 11.93 9.85 8.92
APATM (%) 5.26 9.7 9.65 11.46 9.66 1.95 1.18 6.94 4.64 4.86
ROCE (%) 16.08 21.37 33.16 34.65 24.19 11.21 9.86 13.47 9.9 9.33
RONW (%) 12.41 22.25 37.18 47.37 34.28 5.43 2.42 12.3 7.22 8.63

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Table 1-11 Ration Analysis Chart for Bharat Forge Ltd.

2007- 2006- 2007- 2006- 2007- 2006-

2008 2007 2008 2007 2008 2007

Deferred tax to Return on Impact of Tax

total funds Networth (ROE*) Planning
4.11% 3.97% 20.28% 19.84% 2.77% 2.24%

Impact of Return on Leverage /

leverage Networth (ROE) Financial risk
9.51% 11.54% 26.95% 27.08% 0.95 1.14

Return on Assets
17.44% 15.54%

Asset Turnover
Ratio (ATO) Profit Margin
0.81 0.69 21.49% 22.43%

Fixed Asset Current Asset Raw Material to

TO TO COGM
1.63 1.59 3.96 1.90 50.50% 51.75%

Employee cost
Current ratio Inventorry TO to COGM
1.38 1.16 4.64 4.35 7.47% 6.69%
Inventory
holding Period
(Days)
Payment
Period Mfg, adm, SGA
(Months) 78.72 83.98 to COGM
7.77 8.30 29.45% 30.25%
Debtors TO
DSCR Interest to
–1 6.01 7.23 COGM
Collection
3.31 1.77 Period (Days) 5.41% 5.10%
60.72 50.51
DSCR
–2
-0.13 0.00
Analysis

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The post tax return on Networth (RoE*) increased marginally to 20.28%

compared to 19.84% in the previous year. This was due to better tax planning
compared to the previous year. The pre-tax Return in Networth actually
decreased marginally to 26.95% compared to 27.08%. But this is higher than the
industry average of 12.5%.10 This is because of two reasons.
1. Better leverage management. The impact of leverage is pretty high on the
RoE, which also increases the financial risk.
2. Operational efficiency which is reflected in the profit margins of close to 22%
for BFL as compared to industry average of 13.8% PBITM%11.

The impact of leverage is also pretty high and so is the financial risk. But the
financial risk has reduced from 1.14 to 0.95, largely due to repayment of some
borrowings and using the cash reserves for investing rather than fresh
borrowings.

The Return on Total Assets increased from 15.54% to 17.44%. While the Asset
Turnover Ratio improved from 0.69 to 0.81, resulting in the increase in RoA, the
PBITM (Profit before Income and Taxes margin) decreased from 22.43% to
21,49%, thus offsetting some of the positive impact due to increase in ATO ratio.
But overall, the company’s RoA of FY2007 15.54% is lower than the industry
average of 16.08%. This could be because of the lower ATO in FY2007, which
BFL identified and improved in FY2008.

Overall, while the company beats most of the parameters compared to the
industry average, especially in cost and leverage management, which can be
seen by comparing the ratios corresponding to these against the industry
averages, there is more scope of improvement on the asset management front.
The company should focus more on the following to improve its Asset Turnover
Ratio, which would in turn improve the Return on Investments.
1. Inventory Turnover Ratio: As of FY2007 closure, this was at 4.35 while the
industry average was 6.88. This improved to 4.64 in FY2008
2. Debtors Turnover Ratio: As of FY2007 closure, this was at 7.23 compared
to the industry average of 8.73. This deteriorated further to 6 at the closure of
FY2008

Otherwise, the company is set for growth through diversification and is investing
heavily in the sectors that have high potential for growth. The last two years have
been soft largely due to economic slowdown and slowdown in the automobile
sector. Though this is not reflected in the balance sheets of FY2007 and FY2008,
the rising input costs of steel and other raw materials will have an impact in the
earnings on FY2009.

10
Compare the industry average ratios with BFL ratios of FY 2007
11
Refer table 1-10 for Industry averages

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APPENDIX A: Formulae used for Ratio Calculations

Return on
Deferred tax to Networth Impact of Tax
total funds (ROE*) Planning
Deferred
Tax/Total [PAT/SH.FUND ROE* - ROE *
Funds ] (1-tax rate)

Return on
Impact of Networth Leverage /
leverage (ROE) Financial risk
ROA - Cost of [PBT/SH.FUND Debt /
Debt x D/E ] Equity or NW

Return on
Assets
[PBIT/TOT
AL ASSETS]

Asset Turnover
Ratio (ATO) Profit Margin
Total
Income/Total PBIT/Total
Assets Income

Raw Material
Fixed Asset TO Current Asset TO to COGM
[Sales+op [Sales/Net CA RM/C
income/NFA] or Gross CA] OGM

Employee
Current ratio Inventorry TO cost to COGM
CA/[CL+Short- COGS/Inv Employee
term Loan] entory Cost/COGM
Inventory holding
Period (Days)
Payment Inventory / Mfg, adm,
Period (Months) [COGS/365] SGA to COGM
Creditors/Month Mfg, adm,
ly Purchases SGA / COGM
Debtors TO
DSCR - Sales/Sundry Interest to
1 Debtors COGM
PBDIT/Interest+ Collection Period Interest /

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Current due (Days) COGM

Sundry
Debtors/
[Sales/365]
DSCR - 2
CF/Interest+C
urrent due

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APPENDIX B: Ratios Calculated Based on the Formulae used in

Dupont Model
2007- 2006-
Ratios 2008 2007

ROE (post tax but prior to extraordinary items) 20.28% 19.84%

Impact of Tax Planning 2.77% 2.24%
ROE (pre tax) 26.95% 27.08%
Impact of Leverage 9.51% 11.54%

Total Debt to Equity Ratio 0.95 1.14

Total Debt to Total Capital ratio 0.49 0.53
Long Term Debt to Equity 0.69 0.75
Long Term Debt to Total Capital 0.35 0.35
Cost of Debt 7.47% 5.42%

ROA 17.44% 15.54%

ROI 12.66% 23.51%
tax rate (statutory rate) 0.35 0.35
Deferred Tax to Total funds 4.11% 3.97%

Total Asset Turnover Ratio 0.81 0.69

Fixed Asset Turnover Ratio 1.63 1.59
Net Current Assets Turnover Ratio 3.96 1.90
Interest, div / investments 14.44% 15.65%
Interest, div / avg. investments 16.41% 11.99%
Gross Current Asset TO ratio 2.49 1.42
Inventory Turnover Ratio 4.64 4.35
Inventory Holding Period 78.72 83.98
Debtors Turnover Ratio 6.01 7.23
Average Collection Period (days) 60.72 50.51
Time take to pay suppliers' due (mths) 7.77 8.30
Curent Ratio 1.38 1.16
Quick Ratio 1.10 1.39
PBIT to Sales 21.49% 22.43%
Creditors to Purchases / Month 7.77 8.30
Material to COGS 50.50% 51.75%
Employee Cost to COGS 7.47% 6.69%
Manufacturing, administrative, selling and distribution expenses to
COGS* 29.45% 30.25%
Interest to COGS 5.41% 5.10%
Depreciation to COGS 7.17% 6.20%
Long-term debt to total captial ratio 0.35 0.35
Long-term debt to equity ratio 0.69 0.75
Debt Service Coverage Ratio -1 3.31 1.77
Debt Service Coverage Ratio -2 -0.13 0.00
No. of days in a year 365 365
No. of Months in a year 12 12

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References
www.capitaline.com
www.bharatforge.com
www.nseindex.com

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