FINANCIAL REPORT ANALYSIS OF BHARAT HEAVY ELECTRICALS

LIMITED

SUBMITTED BY:-

SEC. A

GROUP NO. 2

ACHINTHYO DAS (2012016)AMEY MAIRAL (2012035)

PGDM 2012-14

Bharat Heavy Electricals Limited is an integrated power plant equipment manufacturer and one of the largest engineering and manufacturing companies in India in terms of turnover. It is engaged in the design, engineering, manufacture, construction, testing, commissioning and servicing of a wide range of products and services for the core sectors of the economy, viz. Power, Transmission, Industry, Transportation, Renewable Energy, Oil & Gas and Defence. It has 15 manufacturing divisions, two repair units, four regional offices, eight service centres, eight overseas offices and 15 regional centres and currently operates at more than 150 project sites across India and abroad.

It is the 12th largest power equipment manufacturer in the world. In the year 2011, it was ranked ninth most innovative company in the world by US business magazine Forbes. 

Q. What are the main Revenue Generating Activities (Main Business) of the company?

A. BHEL is engaged in the design, engineering, manufacture, construction, testing, commissioning and servicing of a wide range of products and services for the core sectors of the economy

Power, Transmission, Industry, Transportation, Renewable Energy, Oil & Gas Defence. 

Q. What are the major Growth Drivers for the products of the Company?

A. BHEL has registered 29% growth in revenue to Rs 13944.65 crore and at net-profit level it was even better with a growth rate of 42% to Rs 1909.58 crore. The company that has concluded the wage settlement during the fourth quarter ended March 2010 has incurred an additional cost of Rs 338.16 crore over and above the provision for arrears pending wage settlement due to short fall. Similarly the company has also provided Rs 453.10 crore towards pending approval of pension scheme as per new wage settlement. Strong bottom-line growth despite incremental expense towards wage settlement etc was largely on account of strong growth in revenues, savings in input costs and lower tax incidence.

Q. What are the areas which are being covered by the Company in its Accounting Policies? A. Basis of preparation of Financial StatementsThe financial statements have been prepared asof a going concern on historical cost convention and on accrual method of accounting in accordance with the generally accepted accounting principles and the provisions of theCompanies Act, 1956

Fixed AssetsFixed assets are carried at the cost of acquisition or construction or book value less accumulated depreciation.

Intangible AssetsA) Intangible assets are capitalised at cost ifB) Expenditure during the research phase of Research & Development Projectsc) Fixed assets acquired for purposes of research and development are capitalised.Borrowing CostsBorrowing costs that are attributable to the manufacture, acquisition or construction of qualifying assets, are included as part of the cost of such assets.

DepreciationDepreciation on fixed assets is charged up to the total cost of the assets on straight-line methodInvestmentsLong–term investments are carried at cost.Current investments are carried at cost or quoted/fair value whichever is lower

Accounting for Foreign CurrencyTransactionsTransactions in foreign currencies are recorded at the exchange rates prevailing on the date of the transaction. Foreign currency monetary assets and liabilities are translated at year end exchange ratesRevenue RecognitionSales are recorded based on significant risks and rewards of ownership being transferred in favour of the customer. Sales include goods dispatched to customers by partial shipment.Employee BenefitsProvident Fund and Employees’ Family PensionScheme contributions are accounted for on accrual basis. Liability for Earned Leave, Half Pay Leave, Gratuity, Travel claims on retirement and Post Retirement Medical Benefits are accounted for in accordance with actuarial valuation.Government GrantsGovernment Grants are accounted when there is reasonable certainty of their realisation. Grants related to fixed depreciable assets are adjusted against the gross cost of the relevant assets while those related to non-depreciable assets are credited to capital reserve. Grants related to revenue, unless received as compensation for expenses/losses, are recognised as revenue over the period to which these are related on the principle of matching costs to revenue.

COMMENTS ON CASH FLOW

Operating activities: Company has showed tremendous growth its profit before tax have increased 103% for the period 2007-2011. There has been no fluctuations in the profit i.e. company has steady growth in the period Company has distributed the good amount to their shareholders from their profit, which shows the investor friendly and reliability of the company towards their investors. Company has fluctuating Acid test ratio, which means they are not handling their current inventories properly.

Investing Activities: In the given period, Company has purchased the fixed asset which shows that they are working in order to increase their production level so as to fulfil the market demand. Time to time increase in the dividend and interest shows that company has invested the public funds or money rather in a good place so that they are able to return the money with a handsome profit.

Financing Activities: By observation, we conclude that, that there is decrease in the working capital borrowings which deduce that the company has paid back all the borrowing which they have borrowed for raising the financial activities. Company has also paid the interest time to time to their borrowers. Their dividend is also increasing which helps in inference that company is announcing and distributing their profits in the form of dividend to their investors.

MANUFACTURING AND OTHER EXPENSES: Under this head there are several items but major items which has really caused the expenses of the company to move up are:

These five input These six inputs the major key drivers for the expenses of the company but we can’t ignore others factors as well.

INVENTORY ADJUSTMENTS: This covers all the inventories which the company requires for its operations. Under this expense head it includes the cost of purchased items as well as the excise duty paid on the items which are imported for the operation or for the finished goods as well.

INTEREST & OTHER FINANCIAL CHARGES: Interest on loans, other interest for which the company has raised the capital like purchase of mutual funds, bonds, debentures, etc. and other financial expenses like for the repayment of loans, etc.

Calculation & Analysis of Ratios -

Expenses 2010-11(Rs. in crore)

2009-10(Rs. In crore)

2008-09(Rs. in crore)

2007-08(Rs. in crore)

Consumption of Material & Engineering Expenses

11820.87 17620.05 20672.32 23109.07

Payment to Employee

2607.69 2983.68 6449.17 5396.71

Other Expense of Manufacture

1644.23 1835.77 2155.02 2535.88

Admin, S & D Provisions

778.25 1280.97 934.15 2715.12

Interest & other borrowing costs

35.42 30.71 33.50 54.73

Depreciation & Amortization

297.21 334.27 458.01 544.12

Ratios 2010-11 2009-10 2008-09 2007-08Return on Assets 10.71% 9.39% 8.09% 9.55%

Return on Invested Capital 29.80% 27.29% 24.18% 26.53%

Return on Net Worth 29.93% 27.67% 24.33% 26.53%

Total Asset Turnover Ratio 0.81 times

0.73 times 0.71 times 0.49 times

Invested Capital Turnover Ratio 2.141 times

2.134 times

2.142 times

1.968 times

Average Collection Period 240.23 days

224.03 days

209.23 days

204.23 days

Net Worth Turnover Ratio 2.19 times

2.18 times 2.19 times 1.99 times

Inventory Turnover Ratio 4.11 3.77 3.7 3.88

Working Capital Turnover Ratio 2.16 times

2.39 times 2.17 times 1.89 times

Day’s Inventory 80.81 96.82 98.65 94.07

Current Ratio 1.319 1.328 1.302 1.396

Acid Test Ratio 1.06 1.055 1.029 0.785

Debt Equity Ratio 0.01 0.01 0.01 0.01

Debt to Total Invested Capital 0.0080 0.0079 0.011 0.0087

Interest Coverage Ratio 167.21 200 158.91 89.3

Earning Per Share 122.8 88.34 65.13 58.47

Dividend Payout Ratio 0.253 0.2648 0.2651 0.2619

Goss Profit Ratio 20.91 19.41 17.46 20.91

Net Profit Ratio 13.9 12.79 11.37 13.23

Operating Profit Ratio 20.3 18.04 15.71 19.17

Company’s operating profit margin has gone up from 14.84% to 19.77% over the previous years. The net profit margin has also gone up in the three years. This implies that the company is doing well. Increased earnings are good, but an increase does not mean profit margins are improving. If costs have increased at greater rate than sales, it leads to lower profit margin. From 2007-08 the return on net worth has not changed substantially. This is not favorable for investors as they favor higher return on equity. In 2011 RONW has however gone up showing that the company is now doing well.

Capital Market Ratios Earnings per share have increased consistently over the years indicating good share price. In 2008 the company issued bonus shares. Dividend payout ratio has remained constant over the years which imply that the company is focused on retaining its earnings rather than paying out more dividends. However dividends per share have shown an increasing trend which indicates shareholders share of profit is increasing over the years. Thus BHEL has succeeded in sustaining shareholders confidence. As bonus shares were issued in 2008, dividends per share of 2008 cannot be compared with those of 2010.

CURRENT RATIO :- It has decreased from 1.4 to 1.32 in 4 years which reflect that has improved its Operating cycle slightly & can turn its product/services into cash.

ACID TEST RATIO :- It has increased from 0.8 to 1.04 that reflects that company has increased its short term assets to cover its immediate liability without selling inventory.

DEBT EQUITY RATIO :- It remains constant at 0.01 which reflects that the company is not aggressive in financing its growth with debt.

INTEREST COVERAGE RATIO :- It has increased from 86.9 to 163.8 that reflects that the company has an extremely high margin of safety

EARNINGS PER SHARE :- It has remained constant.

DIVIDEND PAYOUT RATIO :- It has decreased slightly from 0.261 to 0.253 that’s a bit concern for the company.

GROSS PROFIT RATIO:- It remains same at 20.9 with up & downs in the mid years.

NET PROFIT RATIO :- It has increased from 13.4 to 13.9 with up-down in mid years. The increase in the value shows that the net profit is sufficient; the firm shall be able to achieve a satisfactory return on its investment.

Thus, BHEL has continued to generate good profits in spite of uncertain market conditions and financial turmoil. Profitability ratios indicate the firm has high operating efficiency backed by a strong management.

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