Bharat Forge Limited : A Project of Corporate Finance by Asokendu Samanta

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Abstract – Bharat Forge Limited (BFL), one of the world's largest forging companies is based in Pune, India and has nine manufacturing plants in India, Germany, Sweden, United States, Scotland, United Kingdom and mainland China. The flagship company of the USD 2.4 billion Kalyani Group was founded by Indian billionaire Baba Kalyani in 1961 and is listed both in BSE and NSE. BFL manufactures various forged and machined components for the automotive and non-automotive sector (Fig. 1). In this present report, analyses of BFL, mainly from corporate finance point of view are made. Various aspects (cash flow analysis, ratio analysis, capital budgeting, valuation of stock, working capital management, analysis with its peers) are done chapter wise collecting data mainly from company’s website and annual report. Sample calculations (ratio, NPV, IRR, Intrinsic value of stock) are shown in details and remarks are made wherever required. At the end, conclusions are drawn in chapter seven analyzing all aspects.

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Bharat Forge Limited : A Project of Corporate Finance by Asokendu Samanta

  1. 1. Bharat Forge Limited (Project of Corporate Finance of Prof. Ram Kumar Kakani) by Asokendu Samanta (SMSID 104118, SID RB09035)Post Graduate Certificate in Business Management (PGCBM 15) Powai, Mumbai 1 May 2009, [11:00 a.m.]
  2. 2. A Project On Bharat Forge Limited 1 Bharat Forge Limited (Project of Corporate Finance of Prof. Ram Kumar Kakani) Asokendu Samanta SMSID 104118, SID RB09035, PGCBM 15, XLRI, Center- Powai, Mumbai, Email: asokendu@hotmail.com, May 1, 2009 [11:00 a.m.]Abstract – Bharat Forge Limited (BFL), one of the worlds largest forging companies is based in Pune,India and has nine manufacturing plants in India, Germany, Sweden, United States, Scotland, UnitedKingdom and mainland China. The flagship company of the USD 2.4 billion Kalyani Group was foundedby Indian billionaire Baba Kalyani in 1961 and is listed both in BSE and NSE. BFL manufactures variousforged and machined components for the automotive and non-automotive sector (Fig. 1). In this presentreport, analyses of BFL, mainly from corporate finance point of view are made. Various aspects (cashflow analysis, ratio analysis, capital budgeting, valuation of stock, working capital management, analysiswith its peers) are done chapter wise collecting data mainly from company’s website and annual report.Sample calculations (ratio, NPV, IRR, Intrinsic value of stock) are shown in details and remarks are madewherever required. At the end, conclusions are drawn in chapter seven analyzing all aspects.Key Words: Bharat Forge Limited, Capital Budgeting, Cash Flow Analysis, Intrinsic Value, IRR, NPV Fig. 1 Bharat Forge has the main business in automotive sector, though is expanding in various horizons [Source: Company’s annual report 2007-08] Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  3. 3. A Project On Bharat Forge Limited 2ContentsAbstract 1Contents 2-3Chapter 1 Profile of the Company 4-7 1.1 Introduction 4 1.2 Manufacturing Units and Products 5 1.3 Customer of Bharat Forge 5 1.4 Award, Recognition and Honors 5 1.5 Major Milestone and Financial Facts 6 1.6 Competitors of Bharat Forge Limited 7Chapter 2 Financial Statement and Cash Flow Analysis 8-12 2.1 Balance Sheet, Profit And Loss, and Cash Flow 8Chapter 3 Financial Analysis and Planning 13-22 3.1 Introduction 13 3.2 Common Size Balance Sheet and Income Statement 14 3.3 Ration Analysis 16 3.4 Comparison with Peer 20Chapter 4 Valuation Of Stock 23-26 4.1 Introduction 23 4.2 Constant Growth Dividend Model 24 4.3 Two Phase Growth Dividend Model 25Chapter 5 Capital Investment Decision 27-34 5.1 Introduction 27 Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  4. 4. A Project On Bharat Forge Limited 3 5.2 Average Tax Calculation 29 5.3 Capacity Expansion Plan 29 5.3.1 Straight Line Depreciation Method 29 5.3.2 Written Down Value Depreciation Method 32Chapter 6 Working Capital Management 35-37 6.1 Introduction 35 6.2 Short Term and Long Term Loan 37Chapter 7 Conclusions 38 7.1 Summary 38References 39Abbreviation 39 Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  5. 5. A Project On Bharat Forge Limited 4 Chapter ONE PROFILE OF THE COMPANY1.1 INTRODUCTION B harat Forge Ltd. (Table 1.1), the flagship company of the US $ 2.4 billion Kalyani Group (Ref. 1), is a leading global ‘Full Service Supplier’ of forged and machined - engine & chassis components. It is the largest exporter of auto components from India and leading chassis component manufacturer in the world. Global leadership is BFL’s dream and underthe visionary leadership of its Chairman, Mr. B. N. Kalyani, the company is steadfastly marching towardsits goal. Table 1.1 Quick facts of Bharat Forge Company Bharat Forge Limited (BFL) Website www.bharatforge.com Head Quarter Mumbai, Maharashtra, India Established in 1961 Type Private (BSE, NSE) Chairman Mr. B. N. Kalyani Product Forged and machined - engine & chassis components Total Employee 4000 Total Asset / Net Profit Rs. 2879.01 Crore / Rs. 273.59 Crore Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  6. 6. A Project On Bharat Forge Limited 51.2 MANUFACTURING UNITS AND PRODUCTSWith manufacturing facilities spread across 12 locations and 6 countries (Fig. 1.1), four in India, three inGermany, one each in Sweden, Scotland, USA and two in China, the company manufactures a wide rangeof safety and critical components for passenger cars, SUV’s, light, medium & heavy commercial vehicles,tractors and diesel engines. The company also manufactures specialized components for the aerospace,power, energy, oil & gas, rail & marine, mining & construction equipment, and other industries. It iscapable of producing complex large volume parts in both steel and aluminium. Fig. 1.1 Global presence of Bharat Forge (Ref. 1)1.3 CUSTOMER OF BHARAT FORGEIts customer base includes virtually every global automotive OEM and Tier I supplier. Daimler Chrysler,Toyota, BMW, General Motors, Volkswagen, Audi, Renault, Ford, Volvo, Caterpillar - Perkins, Iveco,Arvin Meritor, Detroit Diesel, Cummins, Dana Corporation, Honda, Scania and several others sourcetheir complex forging requirements including machined crankshafts, front axle beams and steeringknuckles from Bharat Forge.1.4 AWARD, RECOGNITION AND HONORSBFL is a recipient of several national and international honors, recognition and awards (Ref. 1). ForbesMagazine has listed it for consecutive three years in its global “Best under a Billion” list. AutomotiveComponent Manufacturers Association of India (ACMA) has honored it over past four years for its exportexcellence. Outlook recognized BFL as the Best Value Creator for 2004 among large companies. BFL hasalso been awarded the Indo German Chamber of Commerce (IGCC) Award for ‘Outstanding Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  7. 7. A Project On Bharat Forge Limited 6Contribution towards Promotion of the Indo-German Economic Relations for the Year 2005’. BharatForge received GKD-NIQR award for “Outstanding Organization” in 2005.1.5 MAJOR MILESTONE AND FINANCIAL FACTSMile stones and a few financial facts of Bharat Forge Limited are given in Table 1.2 (Ref. 1) and Table1.3 (Ref. 2) respectively. Table 1.2 Major mile stones of Bharat Forge Year Mile Stone 1961 Incorporation 1962 Technical agreement with SIFCO, USA for hammer forging technology 1966 Start of hammer shop commercial production 1972 Execution of maiden export order to Greece 1984 Technical agreement with Tokyo Drop Forge, Japan for technology up-gradation 1985 Entry in the USSR market 1986 Technical agreement with Jidosha Buhin Kogyo, Japan for machining of front axle beams 1990-91 Breakthrough in the markets of Japan, USA and UK for the critical suspension and engine components like front axle beams and machined crankshafts 1991 Implementation of a large US $50 million forging facility up-gradation program in Weingarten (Germany) 1993 ISO 9002 accreditation 1996 Technical agreement with Metalart Corporation, Japan for small forgings 1999 QS 9000 accreditation 2004 Acquired one of the largest German Forging Companies, CDP Aluminiumtechnik now known as Bharat Forge Aluminiumtechnik. 2005 Acquired Federal Forge in USA and Imatra Kilsta, AB, Sweden along with its wholly owned subsidiary Scottish Stampings in Scotland. Signed a JV with FAW Corporation, - the largest automotive group in China. Table 1.3 A few financial facts of Bharat Forge (Rs. in crore) Mar’ 08 Mar’ 07 Mar’ 06 Mar’ 05 Mar’ 04 Total Asset 2879.01 2841.19 2253.25 941.60 617.35 Total Income 2315.25 1938.55 1631.04 1226.47 851.14 Net Profit 273.59 240.95 206.97 161.63 124.91 Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  8. 8. A Project On Bharat Forge Limited 71.6 COMPETITORS OF BHARAT FORGE LIMITEDBharat Forge has a few competitors. The comparisons between them (Ref. 3) are shown in Table 1.4. Table 1.4: Comparisons (March 2008) between Bharat Forge and its competitors Share Price* Market Cap Sale Turnover Net Profit Total Assets (Rs.) (Rs. Cr.) (Rs. Cr.) (Rs. Cr.) (Rs. Cr.) Bharat Forge 125.60 2,796.51 2,196.50 273.59 2,879.01 Mahindra Forge 45.50 311.98 214.13 -14.17 974.09 Ahmednagar Forge 42.25 147.54 661.16 63.44 551.84 Jayaswal Neco 12.50 141.11 1,473.62 85.59 783.77 Hinduja Foundry 65.90 123.07 451.42 16.92 420.03* At the close of 9 April, 2009 Market Cap (Rs. Cr.) 3,000.00 Sales Turnover (Rs. Cr.) 2,500.00 2,000.00 1,500.00 1,000.00 500.00 0.00 Bharat Forge Mahindra Forge Ahmednagar Forge Fig. 1.2 Comparison (based on March 2008) of three companies [Chart prepared by author collecting data from Ref. 3] Analysis and Remarks: It can be observed from Table 1.4 that Bharat Forge is well ahead from its nearest competitor Mahindra Forge in every aspect (market cap, sales, net profit and total asset). It can also be observed that in spite of global economy meltdown, Bharat Forge made a good profit (Rs. 273.59 cr) in March 2008, when Mahindra Forge suffered losses. The bar charts (Fig 1.2) of Market cap and Sales turnover between Bharat, Mahindra and Ahmednagar Forge also establish the supremacy of Bharat Forge. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  9. 9. A Project On Bharat Forge Limited 8 Chapter TWO FINANCIAL STATEMENT AND CASH FLOW ANALYSIS2.1 BALANCE SHEET, PROFIT AND LOSS, AND CASH FLOW B harat Forge Ltd. has a lot of associated companies. As such it has its own balance sheet and a consolidated balance sheet. Similarly it has its own profit and loss account and cash flow and a consolidated version. In the present project, emphasis is given on its own balance sheet, profit and loss account and cash flow rather than consolidated versions. Certain importantfinancial statements of Bharat Forge are shown below. These are Balance sheet (Table 2.1), Profit andloss account (Table 2.2) and Cash flow statements (Table 2.3) for the last five years. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  10. 10. A Project On Bharat Forge Limited 9 Table 2.1 Balance sheet of Bharat Forge [Arranged by author collecting data from annual reports, Ref. 2] Balance Sheet Rs (Crore) Mar 08 Mar 07 Mar 06 Mar 05 Mar 04 Sources of Funds Shareholders Fund Equity share capital 44.54 44.54 44.46 39.56 37.68 Preference share capital 0.00 10.00 10.00 20.00 30.00 Reserves & surplus 1428.74 1272.26 1109.67 383.00 183.56 Loan Funds Secured loans 461.58 373.57 381.60 383.21 219.05 Unsecured loans 825.91 1028.04 610.86 34.67 66.52 Deferred Tax Adjustment Deferred tax liabilities 138.53 119.77 103.02 85.39 85.02 Deferred tax assets -20.29 -6.99 -6.37 -4.22 -4.47 Total 2879.01 2841.19 2253.25 941.60 617.35 Application of Funds Fixed Assets Gross block 2029.63 1735.06 1265.12 948.78 821.97 Less : accumulated depreciation 711.77 583.13 489.87 421.33 370.79 Net block 1317.86 1151.93 775.25 527.46 451.18 Capital work-in-progress 427.14 274.80 370.70 275.90 87.71 Investments 593.67 450.71 444.02 38.35 34.3765 Current Assets Inventories 338.12 302.79 254.27 186.08 133.13 Sundry debtors 356.29 253.95 188.55 143.06 100.14 Cash and bank balance 164.99 736.28 505.41 28.13 8.60 Other current assets 88.11 83.67 91.31 66.44 44.32 Loans and advances 678.50 472.33 495.71 361.07 236.63 Current Liabilities Liabilities 634.33 575.69 511.49 431.82 338.08 Provisions 451.33 309.80 361.73 257.37 148.78 Net Current Assets 540.34 963.52 662.03 95.60 35.96 Miscellaneous expenses not written 0.00 0.23 1.25 4.30 8.13 Total 2879.01 2841.19 2253.25 941.60 617.35 Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  11. 11. A Project On Bharat Forge Limited 10 Table 2.2 Profit and loss account of Bharat Forge [Arranged by author collecting data from annual reports, Ref. 2] Profit and Loss Account Rs (Crore) Mar 08 Mar 07 Mar 06 Mar 05 Mar 04 Income Sales (Gross) 2293.21 1966.15 1632.10 1243.23 853.15 Less: Excise Duty 172.61 156.02 120.65 91.41 70.05 Net Sales 2120.60 1810.13 1511.45 1151.82 783.10 Operating Income 75.90 54.30 66.48 67.24 48.95 Other Income 88.40 80.88 53.11 7.40 19.09 Exceptional Income/(Expenditure) 30.35 -6.75 0.00 0.00 0.00 Total Income 2315.25 1938.55 1631.04 1226.47 851.14 Expenditure Manufacturing Cost 1674.34 1396.83 1188.33 891.60 591.85 Profit before depreciation, interest and tax (PBDIT) 640.91 541.72 442.72 334.86 259.29 Depreciation 138.94 99.80 73.04 52.56 45.77 Profit before interest and tax (PBIT) 501.97 441.92 369.68 282.31 213.52 Interest 104.99 82.11 54.79 34.23 32.36 Profit before tax (PBT) 396.98 359.81 314.89 248.08 181.17 Tax 123.39 118.86 107.93 86.45 56.26 Profit after tax (PAT) 273.59 240.95 206.97 161.63 124.91 Table 2.3 Cash flow of Bharat Forge [Arranged by author collecting data from annual reports, Ref. 2]Cash Flow Statement Rs (Crore) 2007-08 2006-07 2005-06 2004-05 2003-04A. Cash Flow From Operating ActivitiesProfit Before Tax (PBT) 396.98 359.81 314.89 248.08 181.16Adjustment for Interest / Depreciation / Othersi) Depreciation and amortization 138.94 99.80 73.04 52.56 45.77ii) Interest paid 104.99 82.11 54.79 34.23 32.36iii) Other adjustments 5.24 9.41 3.77 5.23 6.88Total 249.17 191.32 131.60 92.01 85.01Adjustment for Dividend/ Other incomei) Interest received (27.98) (53.93) (29.12) (0.40) (0.48)ii) Dividend (26.06) (16.21) (9.75) 0.00 0.00iii) Profit on sale of investments (30.55) (0.38) (0.14) 0.00 0.00iv) Other adjustments (1.08) (0.22) (3.83) (2.00) (3.02)Total (85.66) (70.74) (42.83) (2.41) (3.51) Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  12. 12. A Project On Bharat Forge Limited 11Operating Profit Before Working Capital Changes 560.48 480.39 403.66 337.68 262.67Changes in Working Capital(Increase) / Decrease in Current Assetsi) Inventories (35.33) (48.52) (68.18) (52.95) (6.72)ii) Sundry debtors (106.29) (65.49) (45.41) (43.13) (19.53)iii) Other current assets, loans and advances (71.09) (30.23) (59.01) (66.67) (50.27)Increase / (Decrease) Current liabilitiesLiabilities 96.37 65.82 85.73 50.26 91.18Total (116.34) (78.43) (86.88) (112.48) 14.67Cash Generated From Operation 444.15 401.96 316.79 225.20 277.33Direct Tax Paid (98.52) (106.19) (98.55) (87.27) (54.38)Net Cash From Operating Activities (A) 345.63 295.77 218.24 137.93 222.95B. Cash Flow From Investment Activitiesi) investment in subsidiary companies (52.05) (52.91) (152.16) (3.97) (34.38)ii) (Increase) / Decrease in investment in MF (90.92) 46.22 (253.51) 0.00 (88.87)iii) Capital expenditure (540.78) (286.91) (304.94) (260.34) (0.50)iv) Interest Capitalised (0.82) (4.73) (5.42) (2.15) 8.49v) Sale proceeds of assets 22.72 0.39 1.62 (2.02) 0.48vi) Loan on wholly owned subsidiaries (41.49) (10.75) (4.46) (0.62) 0.00vii) Non operating income- interest, dividend 84.59 70.06 38.38 0.40 0.00Net Cash Used in Investment Activities (B) (618.75) (238.62) (680.50) (268.70) (114.77)C. Cash Flow From Financial ActivitiesIncrease / (Decrease) in share capital / borrowing (64.20) 319.22 455.66 127.98 (62.41)Adjustments to net worth (38.03) 9.60 597.11 101.94 0.00Interest paid (104.15) (77.89) (50.48) (34.70) (31.82)Dividend (91.79) (77.22) (62.74) (44.92) (28.70)Net Cash Used in Financing Activities (C) (298.17) 173.71 939.55 150.29 (122.93)Net Change in Cash and cash Equivalents (A+B+C) (571.29) 230.86 477.29 19.52 (14.74)Cash, Equivalent at Begin of Year (Opening Balance) 736.28 505.41 28.13 8.60 23.34Cash, Equivalent at Close of Year (Closing Balance) 164.99 736.28 505.41 28.13 8.60 Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  13. 13. A Project On Bharat Forge Limited 12 Analysis and Remarks Analyzing the above mentioned statements, the following points can be observed. 1. It is observed from Profit and Loss account that net profits have been increasing constantly from 2003-04 to 2007-08 with a growth of nearly 15%, which is a healthy sign of the company. 2. Cash flow from operating activity is increased steadily from 2005-06 to 2007-08. In terms of growth it is 35.53% from 2005-06 to 2006-07 and 16.85% from 2006-07 to 2007-08. This is mainly because sales have increased at a rate of 16-20 %. 3. Cash flows from investment activity are fluctuating. In 2004-05 it was (268.70 cr), in 2005-06 it was (680.50 cr), in 2006-07 it was (238.62 cr) and in 2007-08 it was (618.75 cr). It is observed that Bharat Forge has invested a good amount (540.78 cr) in capital expenditure recently in 2007-08, leading to a huge cash outflow. This is mainly because of its expansion plan in Pune for close die forging and crankshaft machining (details are given in capital budgeting chapter, chapter 5) 4. Cash flow from financial activity is negative in recent year 2007-08. This is mainly because decrease in share capital and outflow due to dividend and interest paid. In 2005-2006, there was a huge inflow of cash from financial activity due to adjustment of net worth. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  14. 14. A Project On Bharat Forge Limited 13 Chapter THREE FINANCIAL ANALYSIS AND PLANNING3.1 INTRODUCTION B In this chapter, financial analysis and planning of Bharat Forge are discussed. Common size balance sheet (Table 3.1) and income statement (Table 3.2) are prepared for ready comparison. Various ratios are calculated. These are mainly short term solvency ratio, long term solvency ratio, turnover ratio and profitability ratios. Sample calculations of each ratiofor financial year 2007-08 are shown. These ratios are compared with its nearest peer Mahindra Forge.Analysis and remarks are made whenever is applicable. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  15. 15. A Project On Bharat Forge Limited 143.2 COMMON SIZE BALANCE SHEET AND INCOME STATEMENT Table 3.1 Common size Balance Sheet of Bharat Forge Common Size Balance Sheet Mar 08 Mar 07 Mar 06 Mar 05 Mar 04 Sources of Funds Shareholders Fund Equity share capital 1.55 1.57 1.97 4.20 6.10 Preference share capital 0.00 0.35 0.44 2.12 4.86 Reserves & surplus 49.63 44.78 49.25 40.68 29.73 Loan Funds Secured loans 16.03 13.15 16.94 40.70 35.48 Unsecured loans 28.69 36.18 27.11 3.68 10.77 Deferred Tax Adjustment Deferred tax liabilities 4.81 4.22 4.57 9.07 13.77 Deferred tax assets -0.70 -0.25 -0.28 -0.45 -0.72 Total 100 % 100 % 100 % 100 % 100 % Application of Funds Fixed Assets Gross block 70.50 61.07 56.15 100.76 133.14 Less : accumulated depreciation 24.72 20.52 21.74 44.75 60.06 Net block 45.77 40.54 34.41 56.02 73.08 Capital work-in-progress 14.84 9.67 16.45 29.30 14.21 Investments 20.62 15.86 19.71 4.07 5.57 Current Assets Inventories 11.74 10.66 11.28 19.76 21.57 Sundry debtors 12.38 8.94 8.37 15.19 16.22 Cash and bank balance 5.73 25.91 22.43 2.99 1.39 Other current assets 3.06 2.94 4.05 7.06 7.18 Loans and advances 23.57 16.62 22.00 38.35 38.33 Current Liabilities Liabilities 22.03 20.26 22.70 45.86 54.76 Provisions 15.68 10.90 16.05 27.33 24.10 Net Current Assets 18.77 33.91 29.38 10.15 5.82 Miscellaneous expenses not written 0.00 0.01 0.06 0.46 1.32 Total 100 % 100 % 100 % 100 % 100 % Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  16. 16. A Project On Bharat Forge Limited 15 Table 3.2 Common size Income Statement of Bharat Forge Common Size Income Statement Mar 08 Mar 07 Mar 06 Mar 05 Mar 04 Income Sales (Gross) 100 % 100 % 100 % 100 % 100 % Less: Excise Duty 7.53 7.94 7.39 7.35 8.21 Net Sales 92.47 92.06 92.61 92.65 91.79 Operating Income 3.31 2.76 4.07 5.41 5.74 Other Income 3.86 4.11 3.25 0.60 2.24 Exceptional Income/(Expenditure) 1.32 -0.34 0.00 0.00 0.00 Total Income 100.96 98.60 99.94 98.65 99.76 Expenditure Manufacturing Cost 73.01 71.04 72.81 71.72 69.37 Profit before depreciation, interest and tax (PBDIT) 27.95 27.55 27.13 26.93 30.39 Depreciation 6.06 5.08 4.48 4.23 5.36 Profit before interest and tax (PBIT) 21.89 22.48 22.65 22.71 25.03 Interest 4.58 4.18 3.36 2.75 3.79 Profit before tax (PBT) 17.31 18.30 19.29 19.95 21.23 Tax 5.38 6.05 6.61 6.95 6.59 Profit after tax (PAT) 11.93 12.26 12.68 13.00 14.64 Analysis and Remarks Analyzing the above mentioned common size statements, the following points are observed. 1. Reserves and surpluses have increased to nearly 50% of the total asset in March 2008, which was nearly 30% in March 2004. 2. Working capital (Current asset – Current liabilities), is decreased in FY 2007-08 compared to FY 2006-07. 3. Manufacturing cost is nearly 70% of gross sales. This is nearly constant for last five financial years. 4. Net profit is 12% of gross sale, indicates that Bharat Forge is not a net profit margin based organization. In fact it utilizes its assets (volume based gain). Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  17. 17. A Project On Bharat Forge Limited 163.3 RATIO ANALYSIS Table 3.3 Short term solvency ratio Bharat Forge Mar Mar Mar Mar Mar 08 07 06 05 04 Short Term Solvency Ratio Current Ratio 1.33 1.84 1.57 1.01 0.91 Quick Ratio 1.05 1.54 1.31 0.77 0.68 Cash Ratio 0.13 0.73 0.52 0.04 0.02 Calculation for Short Term Solvency Ratio of Bharat Forge (FY 2007-08) Current assets 1626 .00 Current ratio = = = 1 .33 Current liabilitie s 1224 .19 Current assets − Inventory 1626 .00 − 338 .12 Quick ratio = = = 1.05 Current liabilitie s 1224 .19 Cash 164 .99 Cash ratio = = = 0 .13 Current liabilitie s 1224 .19 Remarks 1. Current ratio 1.33 indicates that Bharat Forge has its current liabilities covered 1.33 times. To a creditor or a supplier this is satisfactory as the ratio is greater than 1. 2. It is seen that current ratio was less than 1 in Mar’04, which means net working capital was negative. This was not a good sign for a healthy firm. However in the subsequent years current ratios are greater than 1. 3. Quick ratio is the acid test of the company. It is seen that in recent years Bharat Forge has quick ratios greater than 1. This is a very healthy sign of the company as company has sufficient cash in hand. 4. As company like Bharat Forge deals with lots of inventory, as a result a difference (20-30%) between current and quick ratio is observed always. 5. A very short term creditor might be interested in cash ratio. It is observed that in FY 2007-08, cash has decreased significantly from the previous FY 2006-07. This is not encouraging fact to a short term supplier of Bharat Forge. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  18. 18. A Project On Bharat Forge Limited 17 Table 3.4 Long term solvency ratio Bharat Forge Mar Mar Mar Mar Mar 08 07 06 05 04 Long Term Solvency Ratio Total Debt Ratio 0.49 0.53 0.48 0.53 0.59 Debt Equity Ratio 0.87 1.06 0.85 0.94 1.14 Equity Multiplier* 1.95* 2.14 1.94 2.13 2.46 Times Interest Earned Ratio 4.78 5.38 6.75 8.25 6.60 Cash Coverage Ratio 6.10 6.60 8.08 9.78 8.01* Equity Multiplier = 1+ Debt equity ratio, however in present case minor difference is observed due to account of deferred tax Calculation for Long Term Solvency Ratio of Bharat Forge (FY 2007-08) Total assets − Total equity 2760.76 − 1473.28 Total debt ratio = = = 0.49 Total assets 2760.76 Total debt 1287.49 Debt equity ratio = = = 0.87 Total equity 1473.28 Total asset 2879.01 Equity multiplier = = = 1.95 Total equity 1473.28 PBIT 501.97 Times interest earned ratio = = = 4.78 Interest 104.99 PBIT + Depreciation 501.97 + 138.94 Cash coverage ratio = = = 6.10 Interest 104.99 Remarks 1. It is interesting to notice that Bharat Forge maintains a constant total debt ratio for the last five years which is nearly 0.5. 2. Equity multiplier = 1 + debt equity ratio. But in this case a minor difference is observed due to deferred tax accounting. 3. Time interest ratio 4.78 in FY 2007-08 indicates that company has 4.78 times interest obligation covered. 4. Cash coverage ratio 6.10 indicates BFL has a good capability to generate cash from operations. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  19. 19. A Project On Bharat Forge Limited 18 Table 3.5 Turnover ratio Bharat Forge Mar Mar Mar Mar Mar 08 07 06 05 04 Turnover Ratio Inventory Turnover Ratio 4.95 4.61 4.67 4.79 4.45 Day’s Sales in Inventory 73.71 79.12 78.10 76.18 82.11 Receivable Turnover 6.44 7.74 8.66 8.69 8.52 Day’s Sales in Receivables 56.71 47.14 42.17 42.00 42.84 Total Asset Turnover 0.80 0.69 0.72 1.32 1.38 Capital Intensity 1.26 1.45 1.38 0.76 0.72 Calculation for Turnover Ratio of Bharat Forge (FY 2007-08) Cost of good sold 1674 .34 Inventory turnover = = = 4 .95 Inventory 338 .12 365 days 365 Day’s sales in inventory = = = 73 .71 Inventory turnover 4.95 Sales 2293 .21 Receivable turnover = = = 6 .44 Account receiable 356 .29 365 days 365 Day’s sales in receivable = = = 56 .71 Re ceivable turnover 6.44 Sales 2293 .21 Total asset turnover = = = 0 .80 Total assets 2879 .01 Total assets 2879 .01 Capital intensity = = = 1 .26 Sales 2293 .21 Remarks 1. Inventory turnover ratio 4.95 times indicates, Bharat Forge sold off the entire inventory 4.95 times over the year. In other words inventory sits 73.7 days (Day’s sales in inventory) on average before it is sold. A marginal change is observed in recent years over last year. 2. From days sales in receivables (56.71 days) indicates that on average Bharat Forge takes 56.71 days to collect its credit sales. In recent year (FY 2007-08) this ratio is more. This indicates Bharat Forge took longer time to collect its credit than previous years. 3. Total asset turnover 0.80 indicates for every rupee in assets, Bharat Forge generated Rs. 0.80 in FY 2007-08. It has increased from the past two years but decreased from FY04 and FY05. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  20. 20. A Project On Bharat Forge Limited 19 Table 3.6 Profitability ratio Bharat Forge Mar Mar Mar Mar Mar 08 07 06 05 04 Profitability Ratio Profit Margin 11.93 12.26 12.68 13.00 14.64 Return on Asset (ROA) 9.50 8.48 9.19 17.17 20.23 Return on Equity (ROE) 18.57 18.16 17.78 36.52 49.72 Calculation for Profitability Ratio of Bharat Forge (FY 2007-08) Net income 273.59 Profit margin = = × 100 = 11.93 Sales 2293.21 Net income 273.59 Return on asset (ROA) = = ×100 = 9.50 Total asset 2879.01 Net income 273.59 Return on equity (ROE) = = ×100 = 18.57 Total equity 1473.28 Du Pont Identity Net income Sales Assets Return on equity (ROE) = × × Sales Assets Total equity = Profit margin × Total asset turnover × Equity multiplier = 11.93 × 0.80 × 1.95 = 18.60 Remarks 1. For every rupee in sales, Bharat Forge generates a little less than 12 paisa in profit. This ratio has decreased in recent year from the previous four years which may be a concern for the company. 2. Return on asset (ROA) is a measure of profit per rupee of assets. Though it has increased in FY 2007- 08, it was observed very high in FY 2003-04. 3. Return on equity (ROE) is a true bottom line measure of performance as the goal of a company is to benefit share holders. For the last three years it has been increasing marginally, which may attract more share holders to invest their money in Bharat Forge. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  21. 21. A Project On Bharat Forge Limited 203.4 COMPARISON WITH PEER Table 3.7 Comparison in short term solvency ratio Bharat Forge Short Term Mahindra Forge Solvency Mar Mar Mar Mar Mar Mar 08 07 06 08 07 06 1.33 1.84 1.57 Current Ratio 1.26 1.73 2.26 1.05 1.54 1.31 Quick Ratio 0.65 1.05 1.72 0.13 0.73 0.52 Cash Ratio 0.01 0.03 0.02 Remarks 1. It is observed that current ratios both for Bharat Forge and Mahindra Forge are nearly same in FY 2007-08 and FY 2006-07. However, quick ratio of Bharat Forge is better than Mahindra Forge. It indicates that Bharat Forge has more liquidity in current asset than Mahindra Forge. 2. Cash ratio is very low for Mhindra. This will discourage short term supplier to supply material to Mahindra Forge. Table 3.8 Comparison in long term solvency ratio Bharat Forge Long Term Mahindra Forge Solvency Mar Mar Mar Mar Mar Mar 08 07 06 08 07 06 0.49 0.53 0.48 Total Debt Ratio 0.22 0.46 0.29 0.87 1.06 0.85 Debt Equity Ratio 0.27 0.84 1.05 1.95 2.14 1.94 Equity Multiplier 1.27 1.84 2.05 Times Interest Earned 4.78 5.38 6.75 0.91 2.00 -0.33 Ratio 6.10 6.60 8.08 Cash Coverage Ratio 1.81 3.18 0.28 Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  22. 22. A Project On Bharat Forge Limited 21 Remarks 1. Debt equity ratio of Mahindra Forge is not encouraging in recent year which is 0.27. It means that they are loosing their control. 2. It is observed that Times interest earned ratio was negative for Mahindra Forge in FY 2005-06. It indicated that they did not have their interest obligation coverage during FY04-05. However the ratio is increased in successive two financial years. On the other hand Bharat Forge has a good coverage for interest obligation. Table 3.9 Comparison in turnover ratio Bharat Forge Turnover Mahindra Forge Ratio Mar Mar Mar Mar Mar Mar 08 07 06 08 07 06 Inventory Turnover 4.95 4.61 4.67 7.96 8.08 5.45 Ratio Day’s Sales in 73.71 79.12 78.10 45.85 45.17 66.97 Inventory 6.44 7.74 8.66 Receivable Turnover 9.42 8.76 13.08 Day’s Sales in 56.71 47.14 42.17 38.74 41.66 27.90 Receivables 0.80 0.69 0.72 Total Asset Turnover 0.25 1.13 0.93 1.26 1.45 1.38 Capital Intensity 4.00 0.88 1.07 Remarks 1. For the case of Inventory turnover ratio, Mahindra Forge has advantage. Their inventory sits only 46 (FY 08) days on average before it is sold. Whereas for Bharat Forge it is nearly 74 days. 2. For receivable turnover ratio also Mahindra has an edge. They receive their credit sales in 39 days (FY 08) on an average, whereas Bharat takes 57 days on average to collect their credit sales. 3. Total asset turnover is very low (0.25) in FY08 of Mahindra. Though it was good in the past. On the other hand Bharat’s ratio is nearly constant, indicating their sales are proportional to their assets. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  23. 23. A Project On Bharat Forge Limited 22 Table 3.10 Comparison in profitability ratio Bharat Forge Profitability Mahindra Forge Ratio Mar Mar Mar Mar Mar Mar 08 07 06 08 07 06 11.93 12.26 12.68 Profit Margin -5.50 -4.95 -5.16 Return on Asset 9.50 8.48 9.19 -1.39 -5.57 -4.80 (ROA) Return on Equity 18.57 18.16 17.78 -1.77 -10.29 -6.74 (ROE) Remarks 1. Profitability ratios are not at all encouraging for Mahindra Forge. The consecutive negative numbers indicate that they are now a loss making company. On the other hand at the time of global melt down also, Bharat Forge’s continuous profit corroborates the fact that they are now the market the leader. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  24. 24. A Project On Bharat Forge Limited 23 Chapter FOUR VALUATION OF STOCK4.1 INTRODUCTION V aluation of stock is done in this chapter. Dividends given by the company for the last ten years are shown in Table 4.1. Two methods, constant dividend growth and two phase growth are considered for this purpose. Assumptions are clearly mentioned for each case and calculations for each case are shown. At the end the intrinsic value of the stock iscompared with the current market price of the share and verdict is given whether it will be profitable tobuy or sale the share of Bharat Forge. Table 4.1 shows the dividend paid by Bharat Forge in the last tenyears. In Table 4.2, market value is calculated. Table 4.1 Dividend given in the last ten years (May-June) Year 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 Dividend 175 175 150 125 100 60 35 30 50 30 40 40 (%) Dividend per share 3.50 3.50 3.00 2.50 2.00 1.2 0.7 0.6 1.0 0.6 0.8 0.8 (Rs)**Face value of share = 2 Rs as given in company’s Profit and Loss Account Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  25. 25. A Project On Bharat Forge Limited 24 Table 4.2 Maket value measure Bharat Forge Mar Mar Mar Mar Mar 08 07 06 05 04 Market Value Measure Number of shares (Crore) 22.33 22.35 21.79 20.38 19.52 Earning per share (EPS) 12.25 10.78 9.50 7.93 6.40 Dividend per share 3.50 3.50 3.00 2.50 2.00 Retention ratio 0.71 0.68 0.68 0.68 0.69 Long term growth rate (g) 13.26 12.26 12.16 25.01 34.18 Calculation for Market Value of Bharat Forge (FY 2007-08) Net income 273.59 Earning per share (EPS) = = = 12.25 Shares outs tan ding 22.33 Pr ice per share 125.60 Price earning ratio = = = 10.25 Earning per share 12.25 Market price of share 125.60 Market to book ratio = = = 1.90 Book value per share 1473.28 / 22.33 Dividend paid 3.5 × 22.33 Retention ratio = 1 − = 1− = 0.7143 Net profit 273.9 Long term growth rate (g) = ROE × Re tention ratio = 18.57 × 0.7143 = 13.26 %4.2 CONSTANT GROWTH DIVIDEND MODELAssumptionsi) Expected rate of return (R) = 14.5%ii) Constant dividend growth model Valuation of share of Bharat Forge (Constant Growth Method) D × (1+ g ) 3.5 × ( 1 + 0.1318 ) Value of a share = = = Rs. 300.10 (R −g ) ( 0.145 − 0.1318 )Verdict: As the intrinsic value (Rs.300.10) of the share is more than current market price(Rs.125.60) of the share, one may buy the share. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  26. 26. A Project On Bharat Forge Limited 254.3 TWO PHASE GROWTH DIVIDEND MODELAssumptionsi) Initial growth (g1) = 13.18 % (as calculated before) (It will continue up to 5 years)ii) Second phase growth (g2) = 10% (from 6th year onwards)iii) Expected rate of return (R) = 14.5% Table 4.3 Calculation of expected dividend and its present value Future Growth Expected Present Year Rate (g1) Dividend* Value 1 0.1318 3.96 3.46 2 0.1318 4.48 3.42 3 0.1318 5.07 3.38 4 0.1318 5.74 3.34 5 0.1318 6.50 3.30*Expected Dividend = Present Dividend × ( 1 + g1 )n where, n = particular year Expected DividendPresent Value = , where, n = particular year ( 1 + R )n Valuation of share of Bharat Forge (Two Phase Growth Method) From 6th year onwards it will be acting as a growing perpetuity. So the price at the end of year 5 is given by Div 6 Div 5 × ( 1 + 0.10) 6.5 ×1.1 P5 = = = = 158.89 ( R − g2 ) ( 0.145 − 0.10) 0.045 The present value of P5 today, P5 158.89 = = 80.74 (1 + R ) 5 ( 1 + 0.145) The present value of all dividends today = (3.46+3.42+3.38+3.34+3.30+80.74) = Rs. 97.64Verdict: As the intrinsic value (Rs.97.64) of the share is less than current market price (Rs.125.60)of the share, one may sale the share to earn profit.It is interesting to observe that two different models (Constant Growth and Two Phase Growth) give twodifferent intrinsic values of the share, one is higher than market price and one is lesser than market price.This is mainly due to the assumption of growth rate (g2). Variation of Bharat Forge stocks is shown inFig. 4.1. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  27. 27. A Project On Bharat Forge Limited 26 Fig 4.1 Variation of stock price of Bharat Forge during last five years [Source: http://www.moneycontrol.com] Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  28. 28. A Project On Bharat Forge Limited 27 Chapter FIVE CAPITAL INVESTMENT DECISION5.1 INTRODUCTION I nvestment decisions is an important aspect for the growth of the company. Fig. 5.1 shows that Bharat Forge has initiated an expansion plan in Pune, India for close die forging and crankshaft machining. An out flow of Rs. 540 Cr. (noticed in cash flow statement) due to capital expenditure in FY 2007-08 corroborate the facts of expansion project. In this chapter capitalbudgeting decisions are discussed with various techniques namely payback period, net present value,Internal rate of return and profitability index. Average tax of Bharat Forge is calculated for the last fiveyears which is needed in calculating capital budgeting. Having made certain assumptions, NPV, IRR, PIare calculated both for straight-line depreciation and Written Down Value depreciation method.Calculations are shown for each case. And at the end decision are given whether it is profitable inaccepting this project. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  29. 29. A Project On Bharat Forge Limited 28 Fig. 5.1 Capacity expansion plan of Bharat Forge [Source: Company’s annual report 2007-08, page no. 68] Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  30. 30. A Project On Bharat Forge Limited 295.2 CALCULATION OF AVERAGE TAX OF BHARAT FORGE Table 5.1 Average tax rate of Bharat Forge Average Tax (Rs Crore) Mar 08 Mar 07 Mar 06 Mar 05 Mar 04 PBT 396.98 359.81 314.89 248.08 181.16 PAT 273.59 240.95 206.97 161.63 124.91 Taxes Paid 123.39 118.86 107.93 86.45 56.26 Average Tax (%) 31.08 33.03 34.28 34.85 31.06 Table 5.2 Individual tax components of Bharat Forge Individual Tax (Rs Crore) Components Mar 08 Mar 07 Mar 06 Mar 05 Mar 04 Current Tax 98.20 100.73 89.14 85.84 53.66 Deferred Tax 18.39 16.13 15.49 0.61 2.60 Fringe Benefit Tax 6.80 2.00 3.30 - - Total Tax 123.39 118.86 107.93 86.45 56.265.3 CAPACITY EXPANSION PLANBharat Forge has initiated an expansion project of close die forging and crank shaft machining at Pune.This expansion plan is discussed by two methods (Straight line depreciation and Written down valuedepreciation method).5.3.1 Straight Line Depreciation MethodFollowing data are collected / assumed for the expansion plani) Capital expenditure = Rs. 540 Cr (From Cash flow account of Bharat Forge 2007-08)ii) Let us assume that revenue will increase by Rs 410 Cr on each yeariii) Assume that rise of operating cost = 70 Cr (nearly 4% of the total operating cost of Bharat Forge)iv) Book value of the machine at the end of 4 year = Rs. 110 Crore (It will be scrapped at that cost)v) Depreciation (Straight line method)vi) Average tax rate 34 % (as calculated in Table 5.1)vii) Expected rate of return R = 15% Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  31. 31. A Project On Bharat Forge Limited 30 Table 5.3 Capital Budgeting (Rs. Cr) of Bharat Forge (SL Method) Capital Budgeting Of Bharat Forge Year 0 Year 1 Year 2 Year 3 Year 4 Expansion Plan Investment Cost -540.0 110.0 Tax 0.0* Change in Net Working Capital -30.0 30.0# Shipping and Installation Cost -50.0 Cash Flow from Investment Activity -620.0 140.0 Income Revenue 410.0 410.0 410.0 410.0 Expenses 70.0 70.0 70.0 70.0 Operating Profit 340.0 340.0 340.0 340.0 Depreciation (Straight-line)$ 120.0 120.0 120.0 120.0 Earning Before Tax 220.0 220.0 220.0 220.0 Tax (@34%) 74.8 74.8 74.8 74.8 Net Income 145.2 145.2 145.2 145.2 Cash Flow From Operating Activity -620.0 265.2 265.2 265.2 405.2 (Add Depreciation)Note: * As the Selling price = Book value, no tax is paid # At the end of 4th year, working capital will be + ve (inflow of fund) $ Depreciation (Straight-line) = (620-110)/4= Rs 120.0 Cr per yearCalculation of Pay Back Period(620.0-265.2-265.2) = 89.6 Cr.(89.6*12)/265.2 = 4.05 MonthsSo, Pay back period = 2 years and 4 monthsCalculation of NPV (Net Present Value) 265.2 265.2 265.2 405.2NPV = − 620.0 + + + + ( 1 + 0.15 ) ( 1 + 0.15 ) 2 ( 1 + 0.15 ) 3 ( 1 + 0.15 )4 = − 620.0 + ( 230.60 + 200.53 + 174.37 + 231.67 ) = − 620.0 + 837.17 = 217.17 Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  32. 32. A Project On Bharat Forge Limited 31Calculation of IRR (Internal Rate of Return)For calculation of IRR, NPV will be zero.Let us assume that, rate is x 265.2 265.2 265.2 405.2So, − 620.0 + + + + = 0 (1 + x ) (1 + x ) 2 (1 + x ) 3 ( 1 + x )4By Trial and error,Let us take x = 10%, NPV = 316.270 (too high)To decrease this value we have to increase the value of x.Let us take x = 30 %, NPV = 3.505 (little high)By interpolation (if y is the interpolated value)0.1 − 0.3 316.27 − 3.505 = 0.1 − y 316.27 − 0So, y = 0.30224So, IRR = 30.22%Calculation of PI (Profitability Index) Summation of Cash Flow From Year1 837.17PI = = = 1.35 Cash Outflow At Year 0 620.00 Table 5.4 Capital Budgeting Decision (Depreciation-Straight Line Method) Pay Back NPV IRR PI Period Criteria 2 years NPV > 0 IRR > PI > 1.0 (Assume) Discount Rate (15%) Present Case 2 yr 4 months + 217.17 30.22% 1.35 Remarks Should Not Can Be Can Be Can Be Be Accepted Accepted Accepted Accepted Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  33. 33. A Project On Bharat Forge Limited 32 800 If IRR > Discount Rate, NPV = +ve If IRR < Discount Rate, NPV = -ve Net Present Value (Rs, Cr) 600 400 200 +ve NPV IRR = 30.32% 0 -ve NPV -200 0 10 20 30 40 50 Discount Rate (%) Fig 5.2 NPV and IRR of the present analysis (SL)5.3.2 Written Down Value Depreciation MethodFollowing data are collected / assumed for the expansion plani) Capital expenditure = Rs. 540 Cr (From Cash flow account of Bharat Forge 2007-08)ii) Let us assume that revenue will increase by Rs 410 Cr on each yeariii) Assume that rise of operating cost = 70 Cr (nearly 4% of the total operating cost of Bharat Forge)iv) Machine will be scrapped at the end of 4 year at Rs. 110 Crorev) Depreciation (Written Down Value @ 30%)vi) Average tax rate 34 % (as calculated in Table 5.1)vii) Expected rate of return R = 15% Table 5.5 Depreciation based on written down value (WDV) Depreciation Year 0 Year 1 Year 2 Year 3 Year 4 Written Down Value Value before Depreciation 590.0 413.0 289.1 202.4 Depreciation (@30%) 177.0 123.9 86.7 60.7 Value after Depreciation 413.0 289.1 202.4 141.7 Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  34. 34. A Project On Bharat Forge Limited 33 Table 5.6 Capital Budgeting (Rs. Cr) of Bharat Forge (WDV Method) Capital Budgeting Of Bharat Forge Year 0 Year 1 Year 2 Year 3 Year 4 Expansion Plan Investment Cost -540.0 110.0 Tax 10.8* Change in Net Working Capital -30.0 30.0 Shipping and Installation Cost -50.0 Cash Flow from Investment Activity -620.0 150.8 Income Revenue 410.0 410.0 410.0 410.0 Expenses 70.0 70.0 70.0 70.0 Operating Profit 340.0 340.0 340.0 340.0 Depreciation (WDV) 177.0 123.9 86.7 60.7 Earning Before Tax 163.0 216.1 253.3 279.3 Tax (@34%) 55.4 73.5 86.1 95.0 Net Income 107.6 142.6 167.2 184.3 Cash Flow From Operating Activity -620.0 284.6 266.5 253.9 395.8 (Add Depreciation)Note: * As the Selling price (Rs 110 Cr) < Book value (Rs. 141.7 Cr), Company will get tax benefit (Tax benefit= 0.34 *(141.7-110) = Rs. 10.78 Cr)As per the calculation shown before the Pay back period, NPV, IRR and PI are tabulated in Table 5.7. Table 5.7 Capital Budgeting Decision (Depreciation-Written Down Value Method) Pay Back NPV IRR PI Period Criteria 2 years NPV > 0 IRR > PI > 1.0 (Assume) Discount Rate (15%) Present Case 2 yr 3.3 + 222.23 31.00% 1.36 months Remarks Should Not Can Be Can Be Can Be Be Accepted Accepted Accepted Accepted Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  35. 35. A Project On Bharat Forge Limited 34 800 If IRR > Discount Rate, NPV = +ve If IRR < Discount Rate, NPV = -ve 600 Net Present Value (Rs, Cr) 400 200 +ve NPV IRR = 31% 0 -ve NPV -200 0 10 20 30 40 50 Discount Rate (%) Fig 5.3 NPV and IRR of the present analysis (WDV) Analysis and Remarks 1. An expansion project at Pune is analyzed by Straight Line (SL) and Written Down Value (WDV) depreciation methods. It is observed that in both the cases decisions are same. 2. Average tax rate of Bharat Forge is calculated in Table 5.1 which is required for capital budgeting calculation. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  36. 36. A Project On Bharat Forge Limited 35 Chapter SIX WORKING CAPITAL MANAGEMENT6.1 INTRODUCTION W orking capital management defines cash cycle and operating cycle (Fig. 6.1). It also defines inventory period, receivable and payable period. It will give an idea whether company is taking short term loan to manage its seasonal variation. In this present chapter operating and cash cycles of Bharat Forge are calculated and attempts have been made tofind out how Bharat Forge is trying to manage its short term requirement.It can be seen from Table 3.5, of Chapter 3 that for Bharat Forge, inventory periods are 73.71, 79.12,78.10, 76.18 and 82.11 days for the 2007-08, 2006-07, 2005-06, 2004-05, 2003-04 financial yearsrespectively. So, average inventory period of BFL for the last five years is 77.84 days.From the same table, receivable periods are 56.71, 47.14, 42.17, 42.00, 42.84 days for the 2007-08,2006-07, 2005-06, 2004-05, 2003-04 financial years respectively. So, average receivable period of BFLfor the last five years is 46.17 days. It is observed that receivable periods for 2005-06, 2004-05 and 2003-04 were nearly constant which were on an average 42 days. However, in the recent year (2007-08), it isincreased 20.3% from the last year (2006-07) and 34.48% from 2005-06 financial years.Similarly payable turnover periods are 138.28, 150.43, 157.11, 176.78 and 208.50 days for the 2007-08,2006-07, 2005-06, 2004-05, 2003-04 financial years respectively. So, average receivable period of BFLfor the last five years is 166.22 days. It is observed that payable period was very high in 2003-04, whichwas 2008.5 days. In recent past BFL is paying its supplier in less time. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  37. 37. A Project On Bharat Forge Limited 36Fig. 6.1 Cash flow time line and the short term operating activities of a typical manufacturing firm [Source: Ross et al. 2009] Bharat Forge Limited: Operating and Cash Cycles Average Inventory Period = 77.84 days Average Receivable Period = 46.17 days Average Payable Period = 166.22 days Average Operating Cycle = Av. Inventory Period + Av. Receivable Period = 77.84 + 46.17 = 124.01 days Average Cash Cycle = Av. Operating Cycle – Av. Payable Period = 124.01 – 166.22 = - 42.21 days Remarks: It is interesting to notice that Cash cycle of Bharat Forge is negative. It means that Bharat Forge usages supplier’s money for daily operation.It is observed from Table 6.1 that though sales have increased by 16.63% from FY07 to FY08, NetWorking Capital has decreased significantly by 43.92 %. Inventory days are decreased marginally by6.84%. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  38. 38. A Project On Bharat Forge Limited 37 Table 6.1 Comparisons of working capital FY 2006-07 FY 2007-08 Changes (%) Sales (Rs, Cr) 1966.15 2293.21 + 16.63 % Working Capital 963.52 540.34 - 43.92 % Inventory Days 79.12 73.71 - 6.84 % Creditors Days 150.43 138.28 - 8.08 % Debtor’s Days 47.14 56.71 + 20.30 %6.2 SHORT TERM AND LONG TERM LOANIt is observed from the annual report of Bharat Forge, that Bharat Forge has taken short term loans (Table6.2) from banks under a buyers line of Credit for import of goods, etc. Import of goods is acting as aseasonal variation (Fig. 6.2) in this case. Fig. 6.2 Short term financing to manage seasonal variation [Source: Ross et al. 2009] Table 6.2 Loan taken by Bharat Forge Loans (Cr) FY 2007-08 FY 2006-07 FY 2005-06 Secured Loan 461.58 373.57 381.60 Unsecured Loan 825.91 1028.04 610.86 Short Term Loan 88.82 224.39 133.89 Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  39. 39. A Project On Bharat Forge Limited 38 Chapter SEVEN CONCLUSIONS7.1 SUMMARY A nalysis on Bharat Forge Limited is carried out in this report mainly from financial aspects. It is understood that Bharat Forge is a market leader in forging work not only in India but also in global market. It has received many accolades. It is observed that when its peers are making losses, Bharat Forge continues making profits. The following conclusions aredrawn based on the analysis on Bharat Forge.i) Bharat Forge Limited is one of the largest forging companies in the world having customers like Daimler Chrysler, Toyota, BMW, General Motors, Volkswagen, Audi, Renault, Ford, Volvo, Caterpillar, Honda and several others.ii) Its assets and net profit in FY 2007-08 are 2879.01 Cr. and 273.59 Cr. respectively, whereas its nearest competitor, Mahindra Forge has 974.09 Cr. and -14.17 Cr. (loss) respectively.iii) Net profits of Bharat Forge have been increasing constantly from 2003-04 to 2007-08 with a growth of nearly 15%, which is a healthy sign of the company.iv) As company like Bharat Forge deals with lots of inventory (volume based company), a difference (20-30%) between current and quick ratio is observed always.v) It is observed that two different models (Constant Growth and Two Phase Growth) give two different intrinsic value of the share, one is higher than market price and one is lesser than market price. This is mainly due to the assumption of growth rate (g2).vi) Bharat Forge has initiated an expansion project of close die forging and crank shaft machining at Pune. Straight line depreciation and Written down depreciation method gives similar opinion whether the projects can be accepted.vii) It is observed in working capital management that Bharat Forge’s cash cycle is negative. It indicates that Bharat Forge efficiently uses its supplier’s money in its operation. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai
  40. 40. A Project On Bharat Forge Limited 39References1. Official website of Bharat Forge Limited (http://www.bharatforge.com)2. Annual reports (2007-08, 2006-07, 2005-06, 2004-05 and 2003-04) of Bharat Forge Limited3. Web site (http://money.rediff.com)4. Web site (http://www.moneycontrol.com)5. Corporate Finance, Stephen A. Ross, Randolph W. Westerfield, Jeffrey Jaffe and Ram Kumar Kakani, 8th Edition, 2009, Tata Mcgraw Hill Publication, New Delhi.6. Fundamentals of Financial Management, Gregory A. Kuhlemeyer, 11th Edition, 2001, Printice –Hall.7. Class Note on Corporate Finance, by Prof. Ram Kumar Kakani, PGCBM 15 Course, XLRI, Jamshedpur, 2009.AbbreviationBFL Bharat Forge LimitedBSE Bombay Stock ExchangeEPS Earning Per ShareFY Financial YearIRR Internal Rate of ReturnIV Intrinsic value (of Share)NPV Net Present ValueNSE National Stock ExchangePAT Profit After TaxPBT Profit Before TaxPBIT Profit Before Interest and TaxPI Profitability IndexROE Return On EquitySL Straight Line (Method of Depreciation)WDV Written Down Value (Method of Depreciation) Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai

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