SAPM Valuation AssignmentCompany Bharat Heavy Electricals Limited

Submitted BySamarth Gupta 9020241026Vishal Singla 9020241048

SAPM Valuation AssignmentBharat Heavy Electricals Limited

The Discounted Free Cash Flow Model for a Complete Business

Bharat Heavy Electricals Limited

Particulars Actual ForecastedMar '08 Mar '09 Mar '10 2011 2012 2013 2014 2015

High Growth Period Moderate Growth Period Stable Growth PeriodTotal revenue 21,776 28,504 34,154 42,544 52,994 61,473 71,309 79,866

Cost of Goods Sold 14,741 20,998 27,459 34,205 42,607 49,424 57,332 64,212 Gross profit 7,035 7,506 6,694 8,339 10,387 12,049 13,977 15,654

Selling, general and administrative expenses 1,665 1,836 838.63 922 1,015 1,116 1,228 1,351 Earnings before interest, taxes, depr. & amort. (EBITDA) 5,370 5,670 5,856 7,416 9,372 10,933 12,749 14,303

Depreciation and amortization 297 334 458 535 652 794 967 1,177 Earnings before Interest and taxes (EBIT) 5,073 5,336 5,398 6,881 8,720 10,139 11,782 13,126 Available tax-loss carryforwards 0.000 0.000 0.000 0 0 0 0 0 Extra-ordinary items -12.69 96.64 47.85 55 78 97 50 78

Net taxable earnings 5,060 5,432 5,445 6,936 8,798 10,236 11,832 13,204

Taxes 1,565 1,799 1,851 2,358 2,991 3,480 4,023 4,489 Net Operating Profit After-Tax (NOPAT) 3,495 3,633 3,594 4,523 5,729 6,659 7,759 8,637

Add back depreciation and amortization 297 334 458 535 652 794 967 1,177 Subtract the capital expenditure -702.97 -1,355.57 -1,722.25 (1,211) (1,123) (323) (145) (453)Change in working capital needs -877.87 -680.88 1,503.05 1,212 832 1,300 456 1,202 Terminal valueFree Cash Flow 2,211.80 1,930.99 3,833.30 5,059 6,090 8,430 9,037 10,563 234663

WACCPresent Value of Free Cash Flows

2011 2012 2013 2014 2015 Terminal value17.04% 4,322 4,446 5,258 4,816 4,809 91,286

Total Present Value of Company Operations(in Rs cr) 118,770 Number of shares outstanding 489,520,000.00

SHARE VALUE BASED ON FUNDAMENTALS INR 2,426.26

Assumptions1 Selling , general and administrative expenses grow by 10 % every year2 WACC is calculated to be 17.04%3 Cost of debt is 8.8%4 Cost of equity is 17.20%5 Average growth in fixed assets is 21.77%6 Average % depreciation as a fraction of fixed assets is 6.68%

7

8

910 Terminal value of free cash flow is calcuated assuming constant growth rate once the growth stabilises to 12% after 5 years.

11 Terminal values and other free cash flows are discounted at present value including the value of free cash flow for period ending March 2010.

Cost Of Funds

Cost Of EquityWeight Of EquityCost Of DebtWeight Of DebtWeighted Average Cost of CapitalAverage WACC

Average Growth Rate(Calculated using ROE and retained earnings)Growth Rate (IIFL Report and other analysts report)Average growth rate

High Growth Rate (2 Years)Moderate Growth RateStable Growth Rate

Depreciation as a percentage of fixed assetsFixed Assets Depreciation as %age of fixed assetsAverage % of depreciation over fixed assets historically

Based on analysts report and annual reports' management discussions, it is inferrred that new orders are not as per the expansion plans,and hence the high growth phase will gradually slow down in the coming years.Increasing capex coupled with not so significant new orders will result in net downside of the growth plans.

The depreciation is calculated as a percentage of fixed assets based on avg fraction of fixed assets over the years as well as average growth in fixed assets(gross block)

Three growth phases have been assumed after taking the reports and management discussions in prespective - High Growth Rate: 24.56,Moderate Growth Rate: 16% ,Stable Growth Rate: 12%

Growth percentage of Gross block of fixed assets

Fixed AssetsGrowth %Average growth in fixed assetsAverage Growth %

AssumptionsSelling , general and administrative expenses grow by 10 % every yearWACC is calculated to be 17.04%Cost of debt is 8.8%Cost of equity is 17.20%Average growth in fixed assets is 21.77%Average % depreciation as a fraction of fixed assets is 6.68%

Terminal value of free cash flow is calcuated assuming constant growth rate once the growth stabilises to 12% after 5 years.

Terminal values and other free cash flows are discounted at present value including the value of free cash flow for period ending March 2010.

Cost Of Funds2008 2009 2010 Beta Of BHEL 0.93

17.20 17.202 17.202 Risk Free 6.60.991243 0.988587 0.9920381 Market Return 18

8.80% 8.80% 8.80% Risk Premium 11.40.008757 0.011413 0.007961917.05214 17.00668 17.06574

17.04%Rating By CRISIL AAADefault Spread 0.80%Base Rate 8%

27.13%22%

24.56%

24.56%16%12%

Mar-08 Mar-09 Mar-104,443.03 5,224.43 6,580.14

6.69% 6.40% 6.96%6.68%

Based on analysts report and annual reports' management discussions, it is inferrred that new orders are not as per the expansion plans,and hence the high growth phase will gradually slow down in the coming years.Increasing capex coupled with not so significant new orders will

The depreciation is calculated as a percentage of fixed assets based on avg fraction of fixed assets over the years as well as average

Three growth phases have been assumed after taking the reports and management discussions in prespective - High Growth Rate:

Mar-08 Mar-09 Mar-104,443.03 5,224.43 6,580.14

1.175871 1.25949431.217683

21.77%

Bharat Heavy Electricals LimitedBalance Sheet

2008 2009

Sources Of Funds

Total Share Capital 489.52 489.52

Equity Share Capital 489.52 489.52

Share Application Money 0 0

Preference Share Capital 0 0

Reserves 10,284.69 12,449.29

Revaluation Reserves 0 0

Networth 10,774.21 12,938.81

Secured Loans 0 0

Unsecured Loans 95.18 149.37

Total Debt 95.18 149.37

Total Liabilities 10,869.39 13,088.18

2008 2009

Application Of Funds

Gross Block 4,443.03 5,224.43

Less: Accum. Depreciation 3,462.21 3,754.47

Net Block 980.82 1,469.96

Capital Work in Progress 658.47 1,212.70

Investments 8.29 52.34

Inventories 5,736.40 7,837.02

Sundry Debtors 11,974.87 15,975.50

Cash and Bank Balance 1,511.02 1,950.51

Total Current Assets 19,222.29 25,763.03

Loans and Advances 7,366.17 4,616.67

Fixed Deposits 6,875.00 8,364.16

Total CA, Loans & Advances 33,463.46 38,743.86

Deffered Credit 0 0

Current Liabilities 16,632.97 23,415.10

Provisions 7,608.68 4,975.58

Total CL & Provisions 24,241.65 28,390.68

Net Current Assets 9,221.81 10,353.18

Miscellaneous Expenses 0 0

Total Assets 10,869.39 13,088.18

Contingent Liabilities 1,673.19 2,546.25

Book Value (Rs) 220.1 264.32

Net Working Capital 2,589.32 2,347.93

Bharat Heavy Electricals LimitedBalance Sheet

2010

489.52

489.52

0

0

15,427.84

0

15,917.36

0

127.75

127.75

16,045.11

2010

ForecastedMar '11 Mar '12 Mar '13 Mar '14 Mar '15

6,580.14 8012.522 9756.709 11880.58 14466.77 17615.944,164.74

2,415.40

1,529.55

79.84

9,235.46

20,688.75

9,790.08

39,714.29

4,747.75

0

44,462.04

0

28,023.74

4,417.98

32,441.72

12,020.32

0

16,045.11

2,620.36

325.16

11,690.55

Bharat Heavy Electricals LimitedCash Flow Statement

2008 2009

12 mths 12 mths

Net Profit Before Tax 4430.39 4848.85

Net Cash From Operating Activities 3477.9 3291.2

Net Cash (used in)/from Investing Activities -12.54 -512.82

Net Cash (used in)/from Financing Activities -888.25 -849.73

-2577.11 1928.65

Opening Cash & Cash Equivalents 8386.02 8386.02

Closing Cash & Cash Equivalents 5808.91 10314.67

Net (decrease)/increase In Cash and Cash Equivalents

Bharat Heavy Electricals LimitedCash Flow Statement

2010

12 mths

6590.65

1585.06

-966.64

-1143.01

-524.59

10314.67

9790.08

Bharat Heavy Electricals LimitedProfit & Loss account

2008 2009

Income

Sales Turnover 21,775.60 28,504.05

Excise Duty 2,234.52 1,889.69

Net Sales 19,541.08 26,614.36

Other Income 1,023.12 1,017.86

Stock Adjustments 827.33 1,151.54

Total Income 21,391.53 28,783.76

Expenditure

Raw Materials 10,400.69 15,587.43

Power & Fuel Cost 273.07 341.82

Employee Cost 2,602.30 2,982.63

Other Manufacturing Expenses 1,464.58 2,086.06

Selling and Admin Expenses 1,664.57 2,414.84

Miscellaneous Expenses 216.6 165.12

Preoperative Exp Capitalised 0 0

Total Expenses 16,621.81 23,577.90

2008 2009

Operating Profit 3,746.60 4,188.00

PBDIT 4,769.72 5,205.86

Interest 35.42 30.71

PBDT 4,734.30 5,175.15

Depreciation 297.21 334.27

Other Written Off 0 0

Profit Before Tax 4,437.09 4,840.88

Extra-ordinary items -12.69 96.64

PBT (Post Extra-ord Items) 4,424.40 4,937.52

Tax 1,565.06 1,799.31

Reported Net Profit 2,859.34 3,138.21

Total Value Addition 6,221.12 7,990.47

Preference Dividend 0 0

Equity Dividend 746.52 832.18

Corporate Dividend Tax 126.87 141.43

Per share data (annualised)

Shares in issue (lakhs) 4,895.20 4,895.20

Earning Per Share (Rs) 58.41 64.11

Equity Dividend (%) 152.5 170

Book Value (Rs) 220.1 264.32

Bharat Heavy Electricals LimitedProfit & Loss account

2010

34,153.76

1,292.32

32,861.44

1,648.29

786.65

35,296.38

17,752.74

337.99

6,449.17

2,919.58

838.63

762.01

0

28,221.49

2010

5,426.60

7,074.89

33.5

7,041.39

458.01

0

6,583.38

47.85

6,631.23

2,319.21

4,310.64

10,468.75

0

1,140.58

191.51

Per share data (annualised)

4,895.20

88.06

233

325.16

2008Income Statement

Sales 21,391.53Costs 16,621.81EBT 4,769.72Taxes(34%) 1621.7048Net Income 3,148.02Dividend on equity shares 746.52Basic earnings per share (Rs.) 58.41Retained Earning 2,401.50

Balance SheetShareholders’ funds 10,774.21Loan funds 95.18Deferred tax liability (net) 0Total 10869.39Fixed assets 980.82Investments 8.29Net current assets 9,880.28Total 10869.39

Internal Growth RateROA(net income/total assets) 0.289622067107722Retention Ratioretained earning/net income 0.762860103089718Internal Growth Rate 28.36%

Sustainable Growth RateROE 0.292180605352968Retention Ratioretained earning/net income 0.762860103089718Numerator 0.222892926720381Denominator 0.777107073279619SGR 28.68%

Debt/Equity RatioPresent 0.008834058367156With SGR 0.008834058367157

Performa Income Statement 28.36% 28.68%Sales(Projected) 27458.169 27527.133Costs 21335.756 21389.343Taxable Income 6122.4127 6137.79Taxes(34%) 2081.6203 2086.8486Net Income 4040.7924 4050.9414Dividend on equity shares 958 961Retained Earning 3083 3090Retained Earning(%age) 76.29% 76.29%

Performa Balance Sheet 28.36% 28.68%Shareholders’ funds 13857 13865Loan funds 95.18 95.18Deferred tax liability (net) 0 0Total 13952 13960Fixed assets 1258.9806 1262.1427Investments 10.641044 10.667771Net current assets 12682.328 12714.181Total 13951.949 13986.991Increase in assets Required 3082.5593 3117.6015Extra Funds Needed 0 27

2009Income Statement

Sales 28,783.76Costs 23,577.90EBT 5,205.86Taxes(34%) 1769.9924Net Income 3,435.87Dividend on equity shares 832.18Basic earnings per share (Rs.) 64.11Retained Earning 2,603.69

Balance SheetShareholders’ funds 12,938.81Loan funds 149.37Deferred tax liability (net) 0Total 13088.18Fixed assets 1,469.96Investments 52.34Net current assets 11,565.88Total 13088.18

Internal Growth RateROA(net income/total assets) 0.262516835801463Retention Ratioretained earning/net income 0.757796255012853Internal Growth Rate 24.83%

Sustainable Growth RateROE 0.265547418966659Retention Ratioretained earning/net income 0.757796255012853Numerator 0.201230839621263Denominator 0.798769160378737SGR 25.19%

Debt/Equity RatioPresent 0.01154433831241With SGR 0.01154433831241

Performa Income Statement 24.83% 25.19%Sales(Projected) 35931.833 36035.142Costs 29433.165 29517.79Taxable Income 6498.6678 6517.3523Taxes(34%) 2209.547 2215.8998Net Income 4289.1207 4301.4525Dividend on equity shares 1039 1042Retained Earning 3250 3260Retained Earning(%age) 75.78% 75.78%

Performa Balance Sheet 24.83% 25.19%Shareholders’ funds 16189 16198Loan funds 149.37 149.37Deferred tax liability (net) 0 0Total 16338 16348Fixed assets 1835.0055 1840.2814Investments 65.33796 65.525815Net current assets 14438.116 14479.628Total 16338.46 16385.435Increase in assets Required 3250.2796 3297.2548Extra Funds Needed 0 38

2010Income Statement

Sales 35,296.38Costs 28,221.49EBT 7,074.89Taxes(34%) 2405.4626Net Income 4,669.43Dividend on equity shares 1,140.58Basic earnings per share (Rs.) 88.06Retained Earning 3,528.85

Balance SheetShareholders’ funds 15,917.36Loan funds 127.75Deferred tax liability (net) 0Total 16045.11Fixed assets 2,415.40Investments 79.84Net current assets 13,549.87Total 16045.11

Internal Growth RateROA(net income/total assets) 0.291018721591812Retention Ratioretained earning/net income 0.755734503977939Internal Growth Rate 28.19%

Sustainable Growth RateROE 0.293354387913573Retention Ratioretained earning/net income 0.755734503977939Numerator 0.221698032839616Denominator 0.778301967160384SGR 28.48%

Debt/Equity RatioPresent 0.008025828403705With SGR 0.008025828403705

Performa Income Statement 28.19% 28.48%Sales(Projected) 45247.876 45350.496Costs 36178.285 36260.335Taxable Income 9069.5915 9090.1608Taxes(34%) 3083.6611 3090.6547Net Income 5985.9304 5999.5061Dividend on equity shares 1462 1465Retained Earning 4524 4534Retained Earning(%age) 75.57% 75.57%

Performa Balance Sheet 28.19% 28.48%Shareholders’ funds 20441 20451Loan funds 127.75 127.75Deferred tax liability (net) 0 0Total 20569 20579Fixed assets 3096.4003 3103.4227Investments 102.35017 102.58229Net current assets 17370.134 17409.528Total 20568.884 20615.533Increase in assets Required 4523.7741 4570.4231Extra Funds Needed 0 36

2007 2008 Change 2009Inventories 4,217.67 5,736.40 1,518.73 7,837.02

Sundry Debtors 9,695.82 11,974.87 2,279.05 15,975.50

Current Liabilities 11,957.32 16,632.97 4,675.65 23,415.10

Net change in working capital needs -877.87

Change 2010 Change2,100.62 9,235.46 1,398.444,000.63 20,688.75 4,713.256,782.13 28,023.74 4,608.64-680.88 1,503.05

Financial Year 2008 2009 2010

Investment Valuation Ratios

Face Value 10 10 10

Dividend Per Share 15.25 17 11

Operating Profit Per Share (Rs) 76.54 85.55 110.86

Net Operating Profit Per Share (Rs) 399.19 543.68 671.3

Free Reserves Per Share (Rs) 209.99 254.23 --

Bonus in Equity Capital 50 50 50

Profitability Ratios

Operating Profit Margin(%) 19.17 15.73 16.51

16.73 13.96 14.39

Gross Profit Margin(%) 17.65 14.47 15.11

Cash Profit Margin(%) 15.59 12.12 13.68

Adjusted Cash Margin(%) 15.59 12.12 13.68

Net Profit Margin(%) 13.87 11.36 12.49

Adjusted Net Profit Margin(%) 13.87 11.36 12.49

Return On Capital Employed(%) 41.56 37 41.23

Return On Net Worth(%) 26.53 24.25 27.08

Adjusted Return on Net Worth(%) 27.07 23.28 26.78

220.1 264.32 325.16

220.1 264.32 325.16

Return on Long Term Funds(%) 41.56 37 41.23

Liquidity And Solvency Ratios

Current Ratio 1.38 1.36 1.37

Quick Ratio 1.09 1.02 1.04

Debt Equity Ratio 0.01 0.01 0.01

Long Term Debt Equity Ratio 0.01 0.01 0.01

Debt Coverage Ratios

Interest Cover 127.55 157.71 197.52

Total Debt to Owners Fund 0.01 0.01 0.01

Financial Charges Coverage Ratio 135.94 168.59 211.19

90.12 114.07 143.35

Management Efficiency Ratios

Inventory Turnover Ratio 3.88 3.7 3.7

Debtors Turnover Ratio 1.8 1.9 1.79

Investments Turnover Ratio 3.88 3.7 3.7

Fixed Assets Turnover Ratio 4.48 5.2 4.99

Total Assets Turnover Ratio 1.81 2.05 2.05

Asset Turnover Ratio 4.48 5.2 4.99

Average Raw Material Holding 88.75 80.96 --

Profit Before Interest And Tax Margin(%)

Return on Assets Excluding Revaluations

Return on Assets Including Revaluations

Financial Charges Coverage Ratio Post Tax

Average Finished Goods Held 12.03 9.74 --

Number of Days In Working Capital 169.89 140.04 131.68

Profit & Loss Account Ratios

Material Cost Composition 53.22 58.56 54.02

27.73 27.81 35.15

Selling Distribution Cost Composition 1.22 1.09 --

4.8 6.7 25.14

Cash Flow Indicator Ratios

Dividend Payout Ratio Net Profit 30.54 31.02 30.9

Dividend Payout Ratio Cash Profit 27.66 28.03 27.93

Earning Retention Ratio 70.07 67.69 68.77

Cash Earning Retention Ratio 72.83 70.92 71.8

AdjustedCash Flow Times 0.03 0.04 0.03

Earnings Per Share 58.41 64.11 88.06

Book Value 220.1 264.32 325.16

Imported Composition of Raw Materials Consumed

Expenses as Composition of Total Sales