Review and AnalysisPrepared byXLRI GMP Class of 2012 – Section A – Group 2Abhishek Kumar Singh (G11002)Ananth Prabhu (G11008)Bhaskar Chatterjee (G11014)Hrishikesh Chennakesavula (G11020)Mrinamya Ranjan Kr Mishra (G11026)Prasanna Chandran Ramachandran (G11032)
Company Profile BHEL is the largest engineering and manufacturing enterprise in India in the energy related/infrastructure sector today. BHEL has a strong presence in domestic and international markets as a major supplier of power plant equipment besides establishing substantial inroads in select segment of products in Industrial sector and Railways. Currently, 74% of the total power generated in the country is through BHEL sets.
Significant AchievementsFrom the Director’s report and the Chairman’s Speech BHEL has increased its turnover by three times and net profit by four times in the last five years. The top line in 2009-10 grew by 22% with turnover reaching 34,154 Crore. Profit before Tax was 6,591 Crore, a 36% YOY growth and Net Profit rose to 4,311 Crore, a 37% YOY growth. Earning per share (EPS) increased to 88.06 against previous years 764.11. A final dividend of 123% has been recommended by Board, in addition to the interim dividend of 110% for the year, making a total of 233% for the year. Economic Value Addition (EVA) reached 2670 Crore, a 33% increase over that of 2008 Crore in the year before.
Auditors ReportAuditors have issued clean chit audit report to the companyfor 2009-10.“In our opinion and to the best of our information and according to theexplanations given to us, the said accounts read together with theaccounting Policies and Explanatory Notes in Schedule-19, give theinformation required by the Companies Act, 1956, in the manner sorequired and give a true and fair view in conformity with the accountingprinciples generally accepted in India: (i) In the case of the Balance Sheet, of the state of affairs of the Company as at March 31, 2010; and (ii) In case of Profit & Loss Account of the profit for the year ended on that date; and (iii) In the case of Cash Flow Statements of the cash flows for the year ended on that date. “
Key Accounting Standards ( 1 of 2) The financial statements have been prepared on the historical cost convention basis and on accrual method of accounting. Depreciation on fixed assets is charged up to the total cost of the assets on straight line method as per the rates prescribed in Schedule XIV of the Companies Act, 1956. The company has changed the accounting practice of provision for doubtful debts during the year. As against earlier practice of creating provision on a case to case basis, the company has revised it that wherever trial operation has been conducted and the debtors are outstanding for more than three years from the date of trial operation, provisions (including contractual obligations) shall be equal to the debtors as prevalent on that date.
Key Accounting Standards ( 2 of 2) Long–term investments are carried at cost. Current investments are carried at cost or quoted/fair value whichever is lower. Unquoted current investments are carried at cost. Valuation of Inventory Inventory is valued at actual/estimated cost or net realizable value, whichever is lower. Finished goods in Plant and work in progress involving Hydro and Thermal sets including gas based power plants, boilers, boiler auxiliaries, compressors and industrial turbo sets are valued at actual/estimated factory cost or at 97.5% of the realizable value, whichever is lower. In respect of valuation of finished goods in plant and work-in-progress, cost means factory cost; actual/estimated factory cost includes excise duty payable on manufactured goods.
Strengths of BHEL (1 of 2)Based on Profitability Ratios The ROI of 24.88 % can be as considered one of biggest strengths for a manufacturing set up like BHEL. Increased by 4 % as compared to last year. Increase in the percentage can be attributed to the increase in net sales from 26212.33 Cr in year 08-09 to 32861.44 Cr in year 09-10 GP Ratio is 26%, which is above industry average. Only a marginal percentage decrease from 28 % of sales to 26 % of sales. Difference can be attributed to the expense made in the purchase of material worth 20672.32 Cr in financial year 09-10 as compared to 17620.05 Cr in FY 08-09. Profitability Ratios Ratio Formula 2009-10 2008-09 Profit After Tax / (FIXED ASSETS + WORKING ROI CAPITAL) 24.88% 20.90% GP ratio GROSS PROFIT/SALES 25.70% 28.41%
Strengths of BHEL (2 of 2) Based on Coverage Ratios Dividend Coverage Ratio is 3.77 which is the same as the last fiscal year. For allocation of dividend to the shareholders, this ratio is the same and hence it shows goodwill towards shareholder. DSCR is 47.32 in FY 09-10 where as it was 107.17 in FY 08-09. Company has generated some funds from loan market. Lot of potential of generating more long term loans which is a positive cue for any banker. Generating long term loan will help the company to decrease its current liability which will eventually help the company attain a better quick ratio i.e. better borrowing capacity. Coverage Ratios Ratio Formula 2009-10 2008-09 Profit After Dividend Coverage Tax/PROPOSED Ratio DIVIDEND 3.7793 3.7711 CGFO/DEBT SERVICE DSCR OBLIGATION 47.3152 107.1674
Weaknesses of BHEL (1 of 2)Based on Solvency Ratios The current ratio is 1.32 for FY 09-10 and 1.30 for FY 08-09. Shows companies sedate approach towards generating long term funds. Lot of dependency on current liabilities. Company should pump in more cash through long term sources. Debt –Equity ratio is .008 for FY 09-10 and .01 FY 08-09. Company is currently not using Loan Funding. Represents lost opportunity in loan interest tax savings. Ideal industry standard is 2:1 to 3:1. Solvency Ratios Ratio Formula 2009-10 2008-09 CURRENT ASSETS / Current Ratio CURRENT LIABILITIES 1.3234 1.3024 Debt Equity Ratio DEBTS / EQUITY 0.0080 0.0115
Weaknesses of BHEL (2 of 2) Based on Performance Ratios Debtor velocity is 221 days in FY 09-10 where as it was 208 days in FY 08-09. Company has longer cash conversion cycle as compared to the other competitors like Larsen & Toubro in the same sector which is 104 days and Bharat Earth Movers Limited (BEML) which is maintaining it at 145 days. BHEL has enough potential to improve this ratio. Creditor Velocity is 143 days in FY 09-10 where as it was 137 days in FY08-09. Shows promptness towards supplier payment but the same is not shown for collections(DV). Stock Velocity is 150 in FY 09-10 where it was 140 days in FY08-09. Working capital is blocked in terms of inventories 20688.75 Cr. (FY 09-10) and 15975.50 (FY 08-09). Performance Ratios Ratio Formula 2009-10 2008-09 Debtors Velocity DEBTORS / SALES 221.0999 208.0055 Creditors Velocity CREDITORS / PURCHASES 143.5428 137.6526 Stock Velocity AVG STOCK / COST OF SALES X MF 150.7198 140.5870
Remedial Measures to Improve Financial Performance Improve Cash Conversion CycleThe cash conversion cycle is 150+221-143 = 228 days. We recommend decreasing the CCC. BHEL can improve this by decreasing Inventory Holdings and Debtors Holdings.
Remedial Measures to Improve Financial Performance Generate funds from Long Term loans The current ratio is 1.32 for FY 09-10 and 1.30 for FY 08-09. The Debt- Equity ratio is 0.008. Both these ratio Shows BHEL’s conservative approach towards utilizing long term funds. They should employ more long term financing to finance fixed assets and permanent current assets and should only use short term financing to finance temporary or variable current assets. There is a lot of dependency on Current Liabilities. The company should pump in cash through long term sources.
Altman Z Score Model A predictive model that combines five different financial ratios to determine the likelihood of bankruptcy. The lower the score, it is accepted that the odds of bankruptcy are higher. Companies with Z-Scores above 3 are considered to be healthy and, therefore, unlikely to enter bankruptcy. Scores in between 1.8 and 3 lie in a grey area. Altman Z Score Model 1.2*X1 + 1.4*X2 + 3.3*X3 + Altman Z Score Model 0.6*X4 + 1.0*X5 3.8429 4.0264 X1 Working Capital / Total Assets 0.3075 0.3270 Cumulative Retained Earnings X2 / Total Assets 0.3182 0.3006 Earnings Before Interest and X3 Tax / Total Assets 0.1366 0.1178 Market Value of Equity / Book X4 Value of Total Liabilities 3.1220 3.5795 X5 Sales / Total Assets 0.7044 0.6768 BHEL has a score of more than 3 and is a healthy company.
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