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Bharat Heavy Electricals Ltd

Business Analysis and Valuation using Financial

Statements

Date of Submission: 4th Sep 2010

Section: C2DE

Submitted By:

2009198 Sanjesh Dubey

2009200 Saurabh Singh Bagel

2009201 Siddharth M

2009202 Sivaram Sripada

2009203 Sneha Agarwal

2009205 Rahul Sridhar Raghavan

2009207 Rajkumar

2009209 Rani Treasa Joseph

2009211 Revati Naik

2009215 Rishabh Agarwal

Intrinsic Val

per sha

3110.2257

Share Pric

2386.25 < Intrin

Va

PEG ratio: 0.6

Valuatio

Undervalu

Stock: BU



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BHEL – The Company Scenario

Business Activities:

BHEL, Bharat Heavy Electricals Ltd. manufactures over 180 products under 30 major product groups afterbeing a pioneer in the manufacture of heavy electrical equipment for the country. BHEL‟s operating activ ities

is contained in mainly 3 business sectors

Power Sector

Industry Sector

Overseas Business

Power Sector:

The power sector of BHEL includes Thermal, Nuclear, and Gas & Diesel Power. BHEL supplies sets which

account for 65% of the total installed capacity of the country. BHEL specialises in boilers, auxiliaries & TG

sets. It also is heavily involved in Gas Turbine technology. It has two major joint ventures in this business

division Siemens AG & GE. Also a tripartite Joint venture between Alstom, BHEL & the Nuclear Power Corporation of India was signed

which would enable the company to garner 45,000 MW of the Indian Nuclear Power market. The Indian

government is currently developing 8 Nuclear Power plants based on heavy water technology. The Navaratna

status, which allows the introduction of eminent part-time directors into the BHEL board, is expected to

facilitate the formation of more such joint ventures.

The installed capacity of BHEL supplied Utility sets went up to 91,481 MW and BHEL maintained its two-

third share in the country's total installed capacity. During the year, BHEL-built power generating sets

generated an all-time high 490 Billion Units of electricity which was 74% of the total power generation in the

country.

Industry Sector:

BHEL is also heavily involved in manufacture of compressors, waste heat recovery boilers, pumps, heat

exchangers, and valves, heavy castings to a number of industries such as mining, cement, fertilizers, and

refineries.

Transmission:

BHEL possesses a wide variety of Transmission products & systems which includes high voltage power &

distribution transformers. It also specialises in HVDC- High Voltage Direct Current systems.

Transportation:

The majority of the traction control equipment of the Indian Railways is provided by BHEL apart from the

provision of major broad gauge locomotives. Three out of every four engines of Indian Railways are of BHEL

make, sighting a clear monopoly. The transportation segment bagged single largest order valued at Rs.9900

Million for 150 numbers 5000 HP 25 kV AC mainline electric locomotives (type WAG -7) from Indian

Railways.

Telecommunication:

BHEL is mainly involved in the production of telecom switching equipment with focus increasingly shifting to

rural areas.



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Renewable Energy:

BHEL has begun talks with GE energy for a potential joint venture even as GE energy had plans to set up a

wind turbine generation plant in Chennai. BHEL has a wind generators manufacturing plant in Ranipet &

proposes to exploit the location advantage.

Overseas Business:

BHEL is currently involved in exporting power & industrial area equipment such as power stations, turn key projects for power plants and sub stations. BHEL achieved a physical export order inflow of Rs.3571 Crore

during the year, an increase of 9.4% over that of the previous year.The company's order book as of June 2010

stood at a staggering Rs.148,000 crore, which is 4.50 times its net sales of Rs.32,880.30 crore for the year ended

March 2010, giving a strong indication of the strength of its operating capabilities. BHEL had received the

highest ever orders from private sector customers in 2009-10 for supplying equipment of power generation

capacity to the tune of 14,689 MW.

In the face of stiff international competition, other significant orders contributing to the total order inflow

were received from JSPL, Sterlite, Monnet &Ispat Energy Ltd., Jai Prakash Associates, Action Ispat and Power

Ltd., PowerGrid, MRPL, HPCL, BCPL, NTPC, etc,.

Business Strategy:

BHEL is working towards improving efficiency, optimising costs and planning for execution of deliverables to

the desired specifications to the clients. BHEL has historically formed a series of Joint Ventures with a lot of

multinational companies. A Joint Venture has been signed with KPCL for a power plant at Yeramarus. A MoI

has also been signed with GSECL for setting up a power project. These strategic alliances are critical for

leveraging equipment sales in the Supercritical technology domain. Similar other alliances being pursued for

sourcing critical inputs, equipment, etc. include tie-ups with Kerala Electric & Allied Company Limited (KEL)

and Heavy Engineering Corporation (HEC).

Development of Intellectual Capital has been the forefront of the BHEL & the company has developedadequate training opportunities & instilling a positive work culture among the employees. Adequate

opportunities are given to the employees for the development of his/her career.

The following table gives the details of the major Joint Ventures of BHEL

Company DetailsNTPC Power equipment Toshiba Transmission equipment, higher horse power locomotivesHeavy Engineering Corp Ltd Supply of castings and forgings Sheffield, UK Power equipmentNPCIL Nuclear power equipmentGE Manufacture of fuel-efficient and environment-friendly locomotives

for Indian Railways TNEB Super-critical thermal power plant GE Diesel locomotiveBHPC Production of Industrial Boilers

In order to remain cost competitive and to retain market share, capability-building initiatives, through Design

to Cost (DTC), Lean Manufacturing (Lean) and Purchase & Supply Management (PSM) tools are being

planned to be continued for identified products at certain select units.



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BHEL is currently the leader in applying various new technologies to its products. Certain high end

technologies are however licensed to BHEL by vendors which are outside the country. Technology

development efforts undertaken by BHEL led to filing of 213 patents and copyrights, significantly enhancing

the company‟s intellectual capital.

SWOT Analysis: The following is the SWOT analysis of BHEL

Strengths:

The company has 180 products under 30 major product groups that cater to the needs of

several core sectors.

Also the way of diversification & the strength of Joint Ventures with various multinationals &

corporations add to its competitive advantage by granting access to latest technologies.

Largest source of domestic business which leading to major presence in the market in India.

Presence of well- established networks throughout the country resulting in the garnering of the

various orders from the clients. Ability to manufacture or procure or supply spares

Ability to successfully overhaul and renovate power stations equipment of different

international companies.

Low labour cost

Weakness:

There could be a displacement of social objectives by political objectives, which may lead to

redundant costs and rising costs.

There is also the danger of internal inefficiency of bureaucratic activity which comes from being

a company in which the government is the major stakeholder.

Larger delivery cycles in comparison with international suppliers of similar equipment. The state electricity boards which are BHEL‟s biggest customers are in poor financial position.

Inability to provide suppliers with credit, soft loans and financing power projects

Opportunities:

Ageing power plants would give rise to more spares and services business.

Demand for power and hence plant equipment is expected to grow at a great pace.

Export opportunities to tap the overseas expanding opportunities.

Private sector power plants to offer expanded market as utilities suffers resource crunch

Threats:

Increased competition is prevalent from both national & international players.

Decreasing protection from the Government in terms of introduction of competitive bidding of projects wherein earlier BHEL was given a price preference over other private players.

Multilateral agencies reluctant to lend to power sector because of poor financial management of

S.E.Bs.‡



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Industry Scenario Analysis The Indian capital goods space is a highly fragmented industry with dominance of PSUs in heavy engineering,

machine tools, boiler manufacturing. BHEL operates in a highly oligopolistic industry with a small number

of highly competitive companies.

Power Sector i. Major Drivers

High capital requirement

Capital cost for setting up a nuclear power plant is INR 6-7 crore.

Cost of setting up a hydro power plant is INR 5-6 crore per MW.

ii. Long gestation period

Returns from establishment of power plants are received after several years (3-5 years) post construction. Thus

the company must be able to sustain without any profit from the venture

iii. Extensive R&D

Various technologies in the energy sector are emerging rapidly. Thus continuous investment in R&D is a must

for increase in operational efficiencies.

iv. Government dominance

The power sector in India is dominated by the government. For example – NTPC, NHPC and NPCI.

The bulk of the transmission and distribution functions are also with the State utilities. The power

generation in India sector – wise split up is as follows:

Fig 1: Break Up of the Power Sector Ownership Fig 2: Break – up of Power Generation

Demand – Supply

The graph depicts the demand and supply trends in India from 1993 to 2004.

Power demand in India, measured by peak load, has grown at 5.4%CAGR in FY04-09 to 109.8 GW driven by

the robust economic growth (GDP grew at an 8.8% CAGR) and rapid industrial development in the country.



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Fig 3: Demand – Supply trends

It is clearly visible that though the availability of power has been steadily increasing, India has repeatedly fallen

short of the required demand.

Heavy Electricals

Boilers - High pressure steam is used directly as the working fluid in a prime mover to convert thermal

energy to mechanical work.

Switchgear and Control Gear – This industry is fully

developed, producing and supplying a wide variety of

switchgear and control gear for manufacturing voltage

range from 240 V to 800 KV.

Turbines - The capacity established for manufacture of

various kinds of turbines such as steam and hydro

turbines is more than 10,000 MW per annum.

Leading Players:

Categories Players

Switchgears ABB, Siemens, L&T, Crompton Greaves, BHEL

Turbines BHEL, Bellis India

Boilers BHEL, Thermax

Transportation

This sector includes erection, commissioning, operating and maintaining of various systems in addition to

consultancy services. It also includes supply of traction and control motors.

An oligopolistic sector with the following players:

BHEL, Chittaranjan Locomotive Works, Diesel Locomotive Works (DLW), Golden Rock Locomotive

Workshops and Bharat Earth Movers Limited

Renewable Energy

i. The current installed capacity of renewable energy is around 92204MW, constituting about 7.3% of India‟s

total installed generation capacity.

ii. Hydro Power Plants

India is already the fourth largest in the world in terms of wind energy installations.Very few companies

in this sector due to the nascence of the technology.

iii. Nuclear Energy

Indian government‟s willingness to co-operate and enter into civilian nuclear agreements with countries

like U.S., France and Russia via Hyde Act and 123 Agreement.

Nuclear power plant capacity targets as envisaged by the DAE are10,280MWe by 11th % year plan and

20,000MWe by 2020 indicating huge growth possibilities.



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Currently Atomic Energy Act 1962 does not permit private sector participation but the NPCIL may

eventually enter to JVs with private enterprises, thereby reducing threat of competition for BHEL.

Capital Market

Capital goods sector has registered a growth of 7.0% during the current year 2008-09.

Competitive ScenarioBHEL is a Navaratna public sector company which accounts for 73% of energy production. However BHEL

faces stern competition from the various players both in India and abroad.

BHEL does not suffer from lack of competitiveness; its problems are financial. Its inability to extend credit

while supplying equipment puts it at a disadvantage despite equity participation by equipment suppliers

being a norm in Independent Power Projects (IPP).

Moreover, BHEL's research and development (R&D) expenditure is small compared to its competitors.

BHEL‟s competitive position could be adversely impacted by appreciation of the rupee as well the rising

prices of key commodities which may reduce BHEL‟s margins. The government is considering a proposal to do away with 15% price preference to public sector

undertakings (PSUs) in procuring equipment for mega power projects.

Due to the legacy of self-reliance, BHEL's lengthy presence has meant highly depreciated assets in spite of

it being a mainly a supplier of investment goods that have a longer production cycle and larger capital

outlays and lower margins.

Countries

China

Chinese companies possess high competencies in manufacture of 600 MW units. Chinese manufacturers

follow BHEL with a share of 20% in the XIth Plan orders and 29% in XIIth Plan orders.

Competition is due to their low cost nature (10-15% cheaper than BHEL), superior project management

capabilities (timely deliveries) and nearly 29% share of private sector ordering to date in the XIIth plan.

Furthermore, the government‟s decision to not levy a 14% import duty on Chinese power equipment

imports adds to their competitiveness, in addition to the recent thumbs-up given by the CEA on quality of

Chinese equipment.

Already, large private sector power producers such as Reliance Power, Adani Power, JSW Energy, Sterlite

Energy and Lanco are sourcing power equipment from Chinese manufacturers.

Private Sector Enterprises

Larsen and Toubro

The biggest competitor L&T, though still a bit far away in terms of market share is a concern for BHEL

since it has greater turnover, profit and assets at present. It has been aggressively bidding for projects

against BHEL.in the recent months.

Increased price competitiveness as L&T plans to ramp up production capacity to 6 GW (from 4 GW) and

its lower target EBITDA margins of 13% (vs. 18% of Bhel in FY10).



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Suzlon

Gradually becoming a global wind turbine manufacturer (52 % market share in India & 5th largest in the

world).

It boasts of presence in China, Germany and USA and a global R&D centre

Continuous process of effective vertical integration has given them a cost advantage. Integration with REPower Systems AG provides an edge over rivals via European market penetration.

BGR Energy

It is in a unique position as a single-package BOP/EPC solution provider and its robust order book and

strong execution implies tough competition. It now has an edge in terms of cost and lesser sub-vendor

management.

A JV with Hitachi for the manufacture of supercritical boilers and turbines would enable it to meet the pre-

qualifying criteria for NTPC‟s bulk order of supercritical boilers.

BGR has scaled up to the next level, having won two major EPC orders combined worth of Rs8,000cr.

Bharat Earth Movers Ltd

It has three ranges of products like earth moving equipment, defence products and railways products. It is

a leader in the infrastructure revolution in the country with successful foray into hi-tech metro trains.

BEML was the first to introduce manufacture of metro coaches in India and is well placed to provide

metro coaches for the upcoming and on-going metro projects in several cities.

BEML‟s products are also exported to the countries across the world particularly in the West Asia, North

and South Africa and Latin America.

In order to tap the vast market potential in contract mining segment, BEML has entered into a JV with

M/s Midwest Granite, Hyderabad and M/s SMJ, Malaysia.

BHEL’s response to Competition

Within the company:

GOI‟s mission of “Power for All by 2012” will result in planned power capacity addition of 78,577 MW in

the 11th five year plan (2007- 12). BHEL being the largest power equipment supplier in the country will be

a direct beneficiary of the robust investments.

Aggressive expansion targets have translated to robust order inflows for power equipment manufacturers,

with the domestic industry leader BHEL enjoying a nearly 54% share in both the XIth and XIIth Plan

ordering to date. According to the Central Electricity Authority (CEA), nearly 60% of the power capacity addition for the

XIIth Plan will be based on supercritical technology (vs. 10% share in the XIth Plan) due to its higher

efficiency (and higher PLFs) and lower emission levels.

In the recently floated bulk equipment tender by NTPC and DamodarValley Corporation, BHEL enjoys a

strong position in the bid for at least 5 boilers and 4 turbines.



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BHEL also secured its largest order to date from Indian Railways (Rs 990 crore) to manufacture 150

electric locomotives.

BHEL is well-positioned to face the increased competition due to:

Its strong experience of executing power projects for the last 40-45 years; share of 64% in India‟s

total installed capacity of 138 GW in FY09

Wide product portfolio covering the entire range of equipment required to build power plantsPlans to increase installed production capacity to 20 GW by March 2012 (vs. 15 GW in FY10)

Mergers & Acquisitions

Joint Ventures: As mentioned above BHEL entered into several such agreements to increase their

competency and technical know-how

BHELs inorganic growth strategy ties in well with its capital structure of no long term debt. It also has

extensive reserves and thus wields considerable financial muscle. Its position as one of India‟s premier heavy

engineering companies is validated by the interest shown by large foreign collaborators.

In the normal course of things, such aggressive growth strategies may stretch a company, but with the low debt

balance sheet BHEL has, as well as the cautious approach of appointing a committee specifically to advise on

the matter, it would appear that BHEL will be able to use any future M &A actions to improve their

performance in the long term.

International Competition

Enhancing overseas business and increasing export orders/revenues by:

By positioning BHEL as an effective EPC contractor and attempting large projects through project

partnershipsLeveraging business through Govt. of India line of credit

Contracts:

It outbid its international counterparts under the international competitive bidding to win an order for 2

sets of 600MW in Madhya Pradesh.

Having established state-of-the-art technology for manufacture of HT Motors up to 28000 kw rating it

won a contract for supply of 650 HT Motors for Essar Steel Plant Valued at Rs. 650 million.

Credit Analysis:

The objective of evaluating the creditworthiness of BHEL is two-fold: to verify the viability of the business as

a whole from a creditors viewpoint, as well as to evaluate the ability of the company to raise external fund in

future in case of any contingency.

Capacity to repay funds: The single most important criteria here is the cash balance of the company.

BHEL maintained cash and bank balances of Rs.10314 cr as of 2009, a significant increase of 1928 cr from

2008. Current assets of 36901 cr, up from 27906 cr in 2008. Both these figures indicate that BHEL is

extremely solvent and should face no trouble servicing or repaying the capital of even very large loans.



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Capital invested into the business: BHEL has fairly small levels of Paid-Up-Share Capital at 489 cr.

However, the Reserves and Surplus of the company is extremely large at 12449 cr. It should be noted here

that BHEL is a mature company, and with extremely stable operations and income, capital contribution of

the promoters should not be an issue. Additionally, as a PSU, BHEL has the implicit commitment of the

Government itself, meaning capital contribution is relatively irrelevant to its evaluation.

Collateral that the company can provide: BHEL has fixed assets to the extent of 5225 cr gross of

depreciation. However, their current assets are extensive, including 15975 cr of debtors, which could be

used as collateral, or factored. Therefore, BHEL has more than adequate collateral to secure large loans if

required.

Conditions of the loan: BHEL would in all likelihood be able to negotiate strong terms of lending due to

its sheer size, past performance and Government backing.

Character of the Company: The corporate integrity of BHEL is exemplary. As a Navratna PSU, the

ability of its management to run the company with a high level of profitability is undoubted. Additionally,

BHEL has never been the target of any controversy, accusation or investigation of any nature.

Added to this is the fact that BHEL currently maintains zero long term debt and therefore any issued debt

will have primacy by default. Quite clearly, BHEL‟s creditworthiness is of the highest order, and they

should have no trouble obtaining external financing, nor should a lender have any hesitation in investing

money into BHEL.

Debt/Dividend Analysis:

The value of a company to an investor in common stock is directly related to the dividend paying history and

ability of the company. Thus, an investor needs to consider both the debt component of the company‟s capitalstructure as well as the divided record. High debt casts doubts on dividend paying ability.

Debt Scenario:

BHEL carries no secured loans, and unsecured loans of the amount Rs.166 cr in the form of leases taken for

fixed assets such as machinery. This means BHEL has a minimal debt burden, and its interest expense for the

year 2008-2009 was Rs.35 cr, which forms 0.1% of the revenue of the company. Thus BHEL has no leverage

problems and income expenditure is not a concern for shareholders in any shape or form.

Dividend Analysis:

The following is the dividend payout history of BHEL.

2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 1999-2000 1998-99

832 746 600 355 196 147 98 98 73 73 61

The dividends have been consistently paid out and increasing in quantity, with a 10 year CAGR of 29.87%.



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PAT figures have been growing around 20% which means that BHEL could potentially slow its dividend

growth rate in the future. However, even if the growth rate were to fall to 20%, this would still be a healthy

figure for a large mature firm. With the large amount of reserves and surplus that BHEL maintains, paying out

dividends even in lean years will not pose any difficulty at all. For the year 2008-2009, BHEL paid out 28.71%

of its Appropriations Profit as dividend. This is as compared to a figure of 26.03% in 2008 and shows a

relatively stable payout of dividends.

In conclusion, the picture presented by Dividend payout history as well as debt-burden adjusted dividend

payout capacity of the company, BHEL should prove to be a source of dividend income for an equity investor.

Securities Analysis

BHEL has only one component to its issued securities portfolio and that is common stock. There are no

outstanding bonds, any short term borrowings are in the form of leases or state government loans, which are

not securitized. There are no issued convertible debentures, warrants, or preference shares either. Thus, the

only outstanding security is common stock of the company.

As of 2009, BHEL has received authorization to issue 200,00,00,000 equity shares of face value rupees 10

each. Of this, they have issued 48,95,20,000 fully paid Equity Shares of Rs 10 each of which 7,41,11,200

shares were allotted for consideration other than cash and 24,47,60,000 shares allotted as bonus shares.

The Central Government has a controlling stake in BHEL to the extent of 67.71%, with institutions

holding a further 26.19%. This means that BHEL is well within the free float standards for PSUs (10%).

The stock is currently trading at Rs. 2496 with a 52 week high of Rs. 2585 and a 52 week low of Rs. 2103.

BHEL is the 7th largest stock on the Nifty Index, and has historically been a stable performer.

Overall, with the large market capitalization of the company, and no drastic negative corporate action

imminent, the share appears prima face to be a reasonable buy for the medium term.

Accounting Analysis:By going through the Annual Reports of BHEL for five financial years (from 2002-05 to 2008-09), it can be observed

that BHEL has selected and applied accounting policies consistently, and estimates made are reasonable and prudent in

order to give a fair picture of state of affairs of the company to its stakeholders.

Some of the salient features are as follows:

Depreciation on fixed assets is charged up to the total cost of the assets on straight-line method as per the rates

prescribed in the Companies Act, 1956.

Intangible Assets are capitalized at cost, provided it is probable that the future economic benefits that are attributable

to the asset will flow to the company and the company will have control over the assets.

Sales are recorded based on significant risks and rewards of ownership being transferred in favor of the customer.

Sales include goods dispatched to customers by partial shipment.



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Revenue is recognized on percentage completion method based on the percentage of actual cost incurred up to the

reporting date to the total estimated cost of the contract.

Exchange difference arising on settlement of transactions and translation of monetary items are recognized as

income or expense in the year in which they arise.

Quality of accounting principles can be influenced by three factors namely:

Rigidity of accounting rules

It can be observed that BHEL follows almost rigid accounting rules which may decrease the quality as nature of every

transaction is not same whereas, regulations treat every transaction uniformly. But in here BHEL, being a PSU, has

implicit commitment to follow the regulations etc.

Forecast errors

BHEL‟s forecasts had not been very far away from the real figures as future f igures released are based on the concept of

„reasonably certain‟ and it is a mature company with extremely stable operations and income.

Systematic reporting choices made by the managers.

Tax consideration: The external auditor of the BHEL stated that the company was found to be paying accurate taxes on

time.

Capital Market Consideration: Often accounting decisions are taken to influence the perceptions of the investors,

although temporarily, but BHEL being a stable company cannot take risk of taking „Time Inconsistency Problem‟ (in

short-run you are involved in certain activities that are not aligned to your long-run objective).

Accounting Strategy:

BHEL closely follows the GAAP and other regulations while preparing annual accounts and it is in line with the industry

norms. For example, Purely Temporary Erection such as wooden structures is fully depreciated in the year of construction.

BHEL has not changed its policies and estimates in past five financial years. Certain deviations observed that have

been given below.

Past policies and the estimates has been found realistic in five years of time. The estimates were not very from the

actual figures.

Quality of Disclosures:

BHEL has an internal audit committee which ensures that proper and sufficient care has been taken for the maintenance

of adequate accounting records in accordance with the provisions of the Companies Act for safeguarding the assets of

the Company and for preventing and detecting fraud and other irregularities. It can be observed that BHEL has neverbeen the target of any controversy, or investigation of any nature.

Some Deviations from the regular Accounting Policies:

2004-2005

Excess Depreciation of Rs. 263.10 lakhs has been provided due to charging of fixed Assets costing up to Rs. 10,000.



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Provision for Contractual obligations is made @ 2.5% but Institute of Chartered Accountants of India requires that

the provision should reflect the current best estimate of expenditure to be incurred.

Provision and payment of service tax has not been made in respect of commissioning and installation services up to

9th September 2004

2005-2006

Non-provision of liability towards leave travel concession/leave travel allowance entitlement to employees accrued

and not availed at the year end.

BHEL has neither billed nor accounted for Exchange Rate Variation amounting to Rs. 12.90 crore in respect of

Super Rapid Gun Mounts supplied to various customers though the same was receivable in terms of the agreements.

This has resulted in understatement of sundry debtors and profit by Rs. 12.90 crore.

2006-2007

Balances of Sundry Debtors, Creditors, and Contractors‟ Advances are subject to confirmation and reconciliation but

it doesn‟t have any significant impact on the accounts.

2008-2009

Provision of Liability towards Leave Encashment has to be made on actuarial valuation but was made on accrual

basis.

Provision for Depreciation is made without making a technical assessment of useful lives of the assets, but it was

done due to paucity of time and a fresh technical assessment will be done in coming financial year.

Penal charges levied and demanded by the Regional Provident Commissioner have not been acknowledged as a

Debt.

Financial Analysis

Financial Statement Analysis: Individual and Industry

Balance Sheet: Application of Funds:

Reserves:

The industry maintains huge reserves, contributing

maximum to the sources of funds.

The Industry average, calculated as an average of the 5

largest companies in terms of market capital is

6661.482 Crores (66.9% of the Average Total

Liabilities).

On March 2009, BHEL‟s reserves were at 12449.29

Crores (99.5% of BHEL‟s Total Liabilities), denoting

it to be following the industry trends.



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The significance of maintaining large reserves for the industry can be attributed to the fact that the energy

industry retains their earnings in order to invest them into areas where the company can create growth

opportunities, such as buying new machinery or spending the money on more research and development. The

numbers suggest heavy reinvestment speculation by BHEL, and the industry.

Unsecured Loans:

The industry average of the Heavy electrical

industry is huge 1818.964 crores. BHEL has a

significantly small, 149.37 crores as their unsecured

loan amount. This signifies that BHEL does not

necessitate issuance of unsecured loans, because of

its huge reserves and government backed source of

funds. The ability of the industry to provide high

unsecured loans denotes the high credit rating, and

its ability to finance the work in capital andperception of the industry as a one having high

returns.

Application of Funds

Gross Block

BHEL has a Gross Block of 1469.96 crores in

comparison to its closest competitor, L&T, which

has 4153.61 crores. It even stays slightly above of

the industry average, 1304.322 crores, which incomparison to its market cap, is small. This

difference can be a function of the fact that its

competitors‟‟ businesses are diversified and

segmented. BHEL has concentrated operations,

where in L&T has a huge variety of businesses. In

comparison to L&T and Suzlon, BHEL‟s

businesses are older and the accumulated

depreciation is bigger, reducing the net block.

Capital WIP

BHEL has the highest Capital WIP in the industry

of 1469.96 crores, denoting huge capital expansion,

as compared to the industry average of 513.938

crores, making it an ideal prospect to observe

phenomenal growth.



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Investments:

The industry has a tendency to have high investments

with an average of 3091.318 crores, denoting its affinity

to diversify risks into other businesses. BHEL, whereas

has a low Long term investment figure, of 52.34 crores, which reinstates the claim of its government majority

stock and confidence in the returns of core activites,

which makes it a high return low risk firm.

Current and Long Term Assets:

BHEL maintains huge cash balances of 1,950.51 crores in comparison to the industry (3243.908), or the closest

competitor, L&T ( 693.13 crores), denoting its cash richness and accumulation.

Its huge Fixed Deposits of 8,364.16 crores also reinstates the same in comparison to the industry average of

1869.55 crores.

Profit and Loss Statement:

Sales Turnover:

The company has robust financials through all the years

.The turnover, net income and cash flows are

continuously increasing through all the years .The Sales

turnover of BHEL is much above the industry average,

but below L&T‟s. This can be attributed to the wide

variety of businesses L&T is into.



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Expenses:

The expense break up (54% of the expenses being of

Raw materials)clearly denote concentration of BHEL‟s

business‟s which are primary segments, dependent upon

raw materials, wherein other competitors like L&T whose businesses are diversified, accounts for its high

figures in the „other manufacturing expenses‟ (44.1% of

the expenses being of Raw materials)in comparison to

the „raw materials‟

Interest:

Interest payments of BHEL (30.71 crores) is way below

the industry average of 274.378 crores, which can be anattribute of the huge amounts of unsecured bonds

issued by the competitors.

Dividend:

BHEL pays the largest amount out as dividends, a 832.18 crores, in comparison to an industry average of

303.744 crores and closest competitor amount of 614.97 crores, which translates from a high EPS, of BHEL,64.11 Rs per share in comparison to L&T‟s 59.45 and industry‟s 40.194 and translates into DPS of 17 in

comparison to L&T‟s 10.5 and industry‟s 10.625 . . In 2007-08 bonus shares were issued by BHEL in the ratio

of 1:1.



17

Ratios

Profitability ratios:

There is continuous increase in the ordersreceived by company from its customers that

kept on increasing its profitability. After 2007,

profitability ratios declined from previous

years. It was mainly due to increase in

provisions (net) in 2007-08 is mainly due to

provision for wage revision due w.e.f.

01.01.2007.

The industry has high profitability ratios,

with an average of 13.188 Operating Profit

Margin%, BHEL striking close, but greater

than it, of 15.73

The industry also works on high ROCE, and RONW ratios, of 20.88 and 15.918, respectively. BHEL has an

ROCE ratio of 37, which is the highest in the industry, but a smaller RONW figure, because in comparison to

L&T, it has a bigger share of the source of funds as Net worth.



18

Liquidity And Solvency Ratios

Company is also having a sound liquidity solvency position .The cash flows are healthy enough to meet the short term

and long term obligations .

After 2006 , the current liability of the company increased resulting to a decline in the liquidity ratios as compared to the

previous year. Current liabilities are increased mainly due to the increase in advances received from customers. Total debt

has been decreased since 2007 due to retirement of secured loan which resulted in decrease of debt-to-equity ratio.

Secured loan of Rs. 500 crore towards bonds were redeemed during the year and repaid on its maturity.

The industry denotes a very healthy average

current ratio of 1.162.When both BHEL andLT&T shows a current ratio of 1.36 and 1.22,

its quick ratios are the lowest of in the

industry of 1.02 an 0.97 respectively, in

comparison to the industry average of

1.46.This could be because of the low figures

in sundry debtors item (BHEL – 68% of CL,

L&T – 66% of CL) in comparison to Suzlon,

for instance, which has a 144% of Current

liabilities as sundry Debtors.



19

Debt Equity Ratio:

Owing to its minimal debt figures, as discussed

earlier, BHEL has a small Debt equity ratio 0.01

in comparison to the industry 0.646

Inventory Turnover Ratio:

The industry has a huge inventory turnover ratio,

denoting short cycle times of an average heavy

electrical project or order. BHEL, wherein has an

inventory turnover ratio of 3.4, signifying the

bigger magnitude of the projects it undertakes.



20

Debtors turnover ratio

BHEL has a good Debtor‟s turnover ratio(1.9), denoting minimal debtor‟s outstanding, wherein L&T shows

bigger numbers (3.89) – this could be attributed to the diversity of businesses it is into and the ratio skews

according to a particular segment, which demands greater debtors outstanding.

The industry works, in a smaller, 2.27 debtors turnover ratio, on an average denoting healthy debtor‟s

outstanding.

Projected P&L statement

Profit & Loss account

Sales Projections using the y = 267.19x2 + 2664.8x + 8018.3 polynomial function, R² = 0.9881

Items calculated using CAGR projected common size percentages

In Crores of Rupees Year

Mar '10 Mar '11 Mar'12 Mar'13 Mar'14

Sales Turnover 33625.94 39764.21 46436.86 53643.89 61385.3 Total Income 33657.79 40150.76 47299.28 55119.1 63626.28

Total Expenses 26174.98 30830.24 35860.8 41261.97 47029.1PBDIT 7482.813 9320.524 11438.48 13857.13 16597.18Interest 20.73446 15.15852 10.94393 7.815859 5.529258PBDT 7462.079 9305.366 11427.54 13849.32 16591.65Depreciation 334.5088 346.7644 354.9883 359.4847 360.6065Profit Before Tax 7127.57 8958.601 11072.55 13489.83 16231.04

Tax 2401.547 2945.091 3566.638 4272.737 5070.375Reported Net Profit 4726.023 6013.51 7505.91 9217.097 11160.66Preference Dividend 0 0 0 0 0Equity Dividend 1110.732 1362.309 1650.04 1976.971 2346.35Shares in issue (lakhs) 4,895.20 4,895.20 6922.858 6922.858 6922.858

Earning Per Share (Rupees) 96.54403 122.845 108.4221 133.14 161.2147



21

Projected Balance Sheet

Balance Sheet

Items calculated using CAGR projected common size percentages

In Crores of Rupees Year


Sources Of Funds Total Share Capital 617.8 812.5 1,122.7 1,626.8 2,474.5Equity Share Capital 617.8 812.5 1,122.7 1,626.8 2,474.5Share Application Money 0.0 0.0 0.0 0.0 0.0Preference Share Capital 0.0 0.0 0.0 0.0 0.0Reserves 15,711.6 20,662.2 28,551.0 41,370.9 62,930.5Revaluation Reserves 0.0 0.0 0.0 0.0 0.0Networth 16,329.4 21,474.7 29,673.7 42,997.7 65,405.0Secured Loans 0.0 0.0 0.0 0.0 0.0Unsecured Loans 188.5 247.9 342.6 496.4 755.1

Total Debt 188.5 247.9 342.6 496.4 755.1 Total Liabilities 16,517.9 21,722.6 30,016.2 43,494.1 66,160.0 Application Of Funds

Gross Block 5,633.2 6,231.8 6,894.1 7,626.8 8,437.3Less: Accum. Depreciation 4,145.6 4,551.1 4,996.3 5,485.1 6,021.7Net Block 1,487.6 1,680.7 1,897.8 2,141.7 2,415.6Capital Work in Progress 2,250.1 4,227.0 7,940.7 14,917.3 28,023.5Investments 52.3 52.3 109.4 109.4 109.4Inventories 9,700.2 12,484.5 16,067.9 20,679.8 26,615.5Sundry Debtors 20,648.5 26,820.9 34,838.4 45,252.5 58,779.6Cash and Bank Balance 1,968.2 2,070.3 2,177.8 2,290.8 2,409.6

Total Current Assets 32,316.9 41,375.7 53,084.0 68,223.1 87,804.8Loans and Advances 6,124.0 6,491.4 6,880.7 7,293.5 7,731.0Fixed Deposits 13,472.1 20,212.8 30,326.3 45,500.1 68,266.1

Total CA, Loans & Advances 51,913.0 68,079.9 90,291.1 1,21,016.7 1,63,801.9Current Liabilities 32,000.8 44,202.9 61,057.8 84,339.5 1,16,498.7Provisions 7,184.4 8,114.5 9,165.0 10,351.5 11,691.6

Total CL & Provisions 39,185.2 52,317.4 70,222.8 94,691.0 1,28,190.3

Net Current Assets 12,727.8 15,762.5 20,068.3 26,325.7 35,611.6 Total Assets 16,517.9 21,722.6 30,016.2 43,494.1 66,160.0



FCFE Valuation:

FCFE Valuation method

In Crores of Rupees Year Source of Data

Mar '10 Mar '11 Mar'12 Mar'13 Mar'14Net Income 4726.023 6013.51 7505.91 9217.097 11160.66 From income statement

Net Capital Expenditure -17.68 -193.1 -217.05 -243.88 -273.92 Change in Fixed assets

Change in Net WorkingCapital -421.9 -505.62 -549.64 -593.66 -637.67

As a ratio of 0.082 of the sales: ratio derived from year 2009

New Debt 39.14 59.4 94.65 153.82 258.68 Net increase in Debt

FCFE 4325.582 5374.185 6833.874 8533.382 10507.747

WACC calculation:

Rf =6.54%Rm-Rf = 9%Beta = 0.95

WACC (ignorable cost of debt because of its low weight in captial) =

Ke (Cost of Capital) =6.54+(0.95*9)

=15.09

Item Year


WACC (k ) 15.09 15.09 15.09 15.09 15.091+k 1.15 1.15 1.15 1.15 1.15(1+k)^n 1.15 1.32 1.52 1.75 2.02

PVn 3758.43 4057.30 4482.85 4863.75 5203.81

PV infinity (g= 7%, k=15.09%) : (FCFE (2014)/(k-g)) 129885.63Sum of all PVs : FCFEs 152251.77No. of Shares 4895.2 lakhs

Intrinsic Value per share 3110.225776 Share Price, 2386.25 < Intrinsic Value : BUY

PEG Ratio Valuation:

PEG Valuation BHEL L&T Suzlon BGR Energy BEML2009 64.11 54.95 -3.13 15.98 64.56

2010 92.08 57.09No

Data 33.49 55.57Growth rate 2009-2010 43.63% 3.89% NA 109.57% -13.93%

P/E 26.87 32.34 _ 24.82 18.32

PEG ratio 0.615886915 8.304126168 NA 0.226512621 NA Valuation decision Undervalued Stock: BUY Overvalued Stock NA Highly Undervalued Stock NA

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