SAPM Valuation Ass

Company Bharat Heavy

Submitted By
Samarth Gupta 9020241026
Vishal Singla 9020241048
Valuation Assignment
Bharat Heavy Electricals Limited
 The Discounted Free Cash Flow Model for a Complete Business

Bharat Heavy Electricals Limited

Particulars Actual Forecasted
Mar '08 Mar '09 Mar '10 2011 2012 2013 2014 2015
High Growth Period Moderate Growth Period Stable Growth Period
Total 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 value
Free Cash Flow 2,211.80 1,930.99 3,833.30 5,059 6,090 8,430 9,037 10,563 234663

WACC 2011 2012 2013 2014 2015 Terminal value

Present Value of Free Cash Flows
17.04% 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
 Assumptions
1 Selling , general and administrative expenses grow by 10 % every year
2 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%

Based on analysts report and annual reports' management discussions, it is inferrred that ne
and hence the high growth phase will gradually slow down in the coming years.Increasing ca
7 result in net downside of the growth plans.

The depreciation is calculated as a percentage of fixed assets based on avg fraction of fixed a
8 growth in fixed assets(gross block)

Three growth phases have been assumed after taking the reports and management discussio
9 24.56,Moderate Growth Rate: 16% ,Stable Growth Rate: 12%
10 Terminal value of free cash flow is calcuated assuming constant growth rate once the growth

11 Terminal values and other free cash flows are discounted at present value including the valu

Cost Of Funds

Cost Of Equity
Weight Of Equity
Cost Of Debt
Weight Of Debt
Weighted Average Cost of Capital
Average 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 Rate
Stable Growth Rate

Depreciation as a percentage of fixed assets

Fixed Assets
Depreciation as %age of fixed assets
Average % of depreciation over fixed assets historically
Growth percentage of Gross block of fixed assets

Fixed Assets
Growth %
Average growth in fixed assets
Average Growth %
ear

ons, it is inferrred that new orders are not as per the expansion plans,
oming years.Increasing capex coupled with not so significant new orders will

on avg fraction of fixed assets over the years as well as average

nd management discussions in prespective - High Growth Rate:

wth rate once the growth stabilises to 12% after 5 years.

t value including the value of free cash flow for period ending March 2010.

2008 2009 2010 Beta Of BHEL 0.93

17.20 17.202 17.202 Risk Free 6.6
0.991243 0.988587 0.9920381 Market Return 18
8.80% 8.80% 8.80% Risk Premium 11.4
0.008757 0.011413 0.0079619
17.05214 17.00668 17.06574
17.04%
Rating By CRISIL AAA
Default Spread 0.80%
Base Rate 8%
27.13%
22%
24.56%

24.56%
16%
12%

Mar-08 Mar-09 Mar-10

4,443.03 5,224.43 6,580.14
6.69% 6.40% 6.96%
6.68%
 Mar-08 Mar-09 Mar-10
4,443.03 5,224.43 6,580.14
1.175871 1.2594943
1.217683
21.77%
 Bharat Heavy Electricals Limited
Balance 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
Limited

2010

489.52
489.52
0
0
15,427.84
0
15,917.36
0
127.75
127.75
16,045.11
2010
Forecasted
Mar '11 Mar '12 Mar '13 Mar '14 Mar '15
6,580.14 8012.522 9756.709 11880.58 14466.77 17615.94
4,164.74
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 Limited
Cash 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

Net (decrease)/increase In Cash and Cash
Equivalents -2577.11 1928.65
Opening Cash & Cash Equivalents 8386.02 8386.02
Closing Cash & Cash Equivalents 5808.91 10314.67
ited
2010
12 mths
6590.65
1585.06

-966.64

-1143.01

-524.59
10314.67
9790.08
 Bharat Heavy Electricals Limited
Profit & 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
ted
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

4,895.20
88.06
233
325.16
 2008
Income Statement
Sales 21,391.53
Costs 16,621.81
EBT 4,769.72
Taxes(34%) 1621.7048
Net Income 3,148.02
Dividend on equity shares 746.52
Basic earnings per share (Rs.) 58.41
Retained Earning 2,401.50

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

Internal Growth Rate

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

Sustainable Growth Rate

ROE 0.292180605352968
Retention Ratioretained earning/net income 0.762860103089718
Numerator 0.222892926720381
Denominator 0.777107073279619
SGR 28.68%

Debt/Equity Ratio
Present 0.008834058367156
With SGR 0.008834058367157
Performa Income Statement 28.36% 28.68%
Sales(Projected) 27458.169 27527.133
Costs 21335.756 21389.343
Taxable Income 6122.4127 6137.79
Taxes(34%) 2081.6203 2086.8486
Net Income 4040.7924 4050.9414
Dividend on equity shares 958 961
Retained Earning 3083 3090
Retained Earning(%age) 76.29% 76.29%

Performa Balance Sheet 28.36% 28.68%

Shareholders’ funds 13857 13865
Loan funds 95.18 95.18
Deferred tax liability (net) 0 0
Total 13952 13960
Fixed assets 1258.9806 1262.1427
Investments 10.641044 10.667771
Net current assets 12682.328 12714.181
Total 13951.949 13986.991
Increase in assets Required 3082.5593 3117.6015
Extra Funds Needed 0 27
 2009
Income Statement
Sales 28,783.76
Costs 23,577.90
EBT 5,205.86
Taxes(34%) 1769.9924
Net Income 3,435.87
Dividend on equity shares 832.18
Basic earnings per share (Rs.) 64.11
Retained Earning 2,603.69

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

Internal Growth Rate

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

Sustainable Growth Rate

ROE 0.265547418966659
Retention Ratioretained earning/net income 0.757796255012853
Numerator 0.201230839621263
Denominator 0.798769160378737
SGR 25.19%

Debt/Equity Ratio
Present 0.011544338312411
With SGR 0.01154433831241
Performa Income Statement 24.83% 25.19%
Sales(Projected) 35931.833 36035.142
Costs 29433.165 29517.79
Taxable Income 6498.6678 6517.3523
Taxes(34%) 2209.547 2215.8998
Net Income 4289.1207 4301.4525
Dividend on equity shares 1039 1042
Retained Earning 3250 3260
Retained Earning(%age) 75.78% 75.78%

Performa Balance Sheet 24.83% 25.19%

Shareholders’ funds 16189 16198
Loan funds 149.37 149.37
Deferred tax liability (net) 0 0
Total 16338 16348
Fixed assets 1835.0055 1840.2814
Investments 65.33796 65.525815
Net current assets 14438.116 14479.628
Total 16338.46 16385.435
Increase in assets Required 3250.2796 3297.2548
Extra Funds Needed 0 38
 2010
Income Statement
Sales 35,296.38
Costs 28,221.49
EBT 7,074.89
Taxes(34%) 2405.4626
Net Income 4,669.43
Dividend on equity shares 1,140.58
Basic earnings per share (Rs.) 88.06
Retained Earning 3,528.85

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

Internal Growth Rate

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

Sustainable Growth Rate

ROE 0.293354387913573
Retention Ratioretained earning/net income 0.755734503977939
Numerator 0.221698032839616
Denominator 0.778301967160384
SGR 28.48%

Debt/Equity Ratio
Present 0.008025828403705
With SGR 0.008025828403705
Performa Income Statement 28.19% 28.48%
Sales(Projected) 45247.876 45350.496
Costs 36178.285 36260.335
Taxable Income 9069.5915 9090.1608
Taxes(34%) 3083.6611 3090.6547
Net Income 5985.9304 5999.5061
Dividend on equity shares 1462 1465
Retained Earning 4524 4534
Retained Earning(%age) 75.57% 75.57%

Performa Balance Sheet 28.19% 28.48%

Shareholders’ funds 20441 20451
Loan funds 127.75 127.75
Deferred tax liability (net) 0 0
Total 20569 20579
Fixed assets 3096.4003 3103.4227
Investments 102.35017 102.58229
Net current assets 17370.134 17409.528
Total 20568.884 20615.533
Increase in assets Required 4523.7741 4570.4231
Extra Funds Needed 0 36
 2007 2008 Change 2009 Change
Inventories 4,217.67 5,736.40 1,518.73 7,837.02 2,100.62
Sundry Debtors 9,695.82 11,974.87 2,279.05 15,975.50 4,000.63
Current Liabilities 11,957.32 16,632.97 4,675.65 23,415.10 6,782.13
Net change in working capital needs -877.87 -680.88
 2010 Change
9,235.46 1,398.44
20,688.75 4,713.25
28,023.74 4,608.64
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

Profit Before Interest And Tax
Margin(%) 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
Return on Assets Excluding
Revaluations 220.1 264.32 325.16
Return on Assets Including
Revaluations 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
Financial Charges Coverage Ratio
Post Tax 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 --

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

Imported Composition of Raw
Materials Consumed 27.73 27.81 35.15

Selling Distribution Cost Composition 1.22 1.09 --

Expenses as Composition of Total
Sales 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