COMPANY ANALYSIS

BHEL & CROMPTON GREAVES

Submitted by H1 – Group 1

Aditi Tyagi – FT11101

Aadish Parmar – FT11102
Aditya Goel – FT11105
Ashish Bulchandani – FT 11114
Rahul Kurup – FT 11151
 INDIA ECONOMY 2009 & 2010 SNAPSHOT
 The GDP growth rate decreased significantly in year 2009 to 6.8%, but rate is showing
signs of improvement with first quarter 2010 results as 7.4%.

 India had established itself as the world's second fastest growing major economy.

 High Fiscal deficit, 6.8% of GDP, leaves the danger on sovereign credit downgrading.

 Service industry accounts for 55% of the GDP while the industrial and agricultural sector
contribute 28% and 17% respectively.

 Electrical energy generation would be required to grow at 9% p.a. during the 11th plan
period
 MACRO ECONOMY MEASURES
Macroeconomic indicators
  2006 2007 2008 2009
Real GDP growth 9.7 9 6.5 6.8
Inflation 5.2 4.7 8.4 4.5
Consumer price index 6.7 6.2 8.8 4.5
Wholesale price index (WPI) 5.4 4.7 8.6 0.5
Short-term interest rate 8.2 8.9 9.6 5.3
Long-term interest rate 7.8 7.9 8.4 7.8
Fiscal balance (per cent of GDP) -7.4 -6.1 -10 -11
Current account balance (per cent of GDP) -1.1 -1 -1.3 -1.3

THERMAL BREAKUP
TOTAL
SECTOR HYDRO NUCLEAR TOTAL (%)
THERMAL
Coal Lignite Gas/LNG
36655
9685 23810 22060 1000 750 3160
Central (53.2%)
22989
2637 20352 19365 375 612 -
State (33.4%)
Private 3263 5962 5210 0 752 - 9225 (13.4%)
All-India 15585 50124 46635 1375 2114 3160 68869 (100%)
 ELECTRICAL EQUIPMENT INDUSTRY
ANALYSIS

Firms that manufacture power-generating equipment and other heavy electrical equipment,
including power turbines, heavy electrical machinery as well as household electrical appliances.

Gross Quick Current

P/E Margin Operating Margin Ratio Ratio D/E ROI ROA ROE

25.69 7.38% -0.71% 3.35 3.96 66.58 -1.63% -0.87% -4.05%

Factors affecting the sector:

 Socio – Economical:
Increase in the average house hold income
Rise in the extent of electrification
Development and Industrialization

 Competition:
Many players in heavy as well as light equipment category
Government backed PSUs; Usually play on margin

 Technological:
Fast technological advancements in electrical as well as electronic sector

 Government Policies:
Developmental government policies and reforms
 COMPANY ANALYSIS
BHEL
 Largest engineering and manufacturing enterprise in India in the energy-related/infrastructure
sector
 Operations are organized around three business sectors, namely Power, Industry - including
Transmission, Transportation and Renewable Energy - and Overseas Business.
 Manufactures over 180 products under 30 major product groups and caters to core sectors of the
Indian Economy

Crompton Greaves
 Part of the US$ 4 bn Avantha Group, a conglomerate with an impressive global footprint,
operating in over 10 countries.
 Organized into three business groups viz. Power Systems, Industrial Systems, Consumer
Products.
 Diversified extensively and is engaged in designing, manufacturing and marketing technologically
advanced electrical products and services related to power generation, transmission and
distribution
RATIO ANALYSIS
RATIO ANALYSIS
Current Ratio and
Quick Ratio
Similar Current Ratio for all -
less than the Industry
average
Quick Ratio reveals that CG
has slightly more
inventory/current liability ratio
(meaning less cash as part of
the current assets) than its
Quick Ratio peer
Reveals the capital intensive
nature of the heavy
engineering industry (evident
from industry average as well
as the trend)
RATIO ANALYSIS CONTD …

Inventory Turnover

Inventory Turnover

CG is much better than BHEL in this regard.

Both these companies are R&D focused heavy engineering organizations
BHEL works on a different model - receives orders and executes them
over multiple years
BHEL could possibly be more profitable if it manages WIP plus other
inventory better
 RATIO ANALYSIS CONTD …
Profit Margin
Profit Margin on Sales

BHEL excels despite low

Inventory Turnover
BHEL’s near zero interest
liability pushes profits up

Return on Equity

Yet, BHEL lags on the Return

to the Common Shareholders
Might hinder capital raising
endeavor in future
ROE CG makes better use of
shareholder’s equity
 PAYOUT RATIOS
Crompton and Greaves

Dividend payout ratio

15.28 21.59 21.85 27.93 25.63
(net profit)

Dividend payout ratio

14.09 19.39 19.35 23.19 20.17
(cash profit)

Earning retention ratio 82.82 83.21 74.85 69.62 75.73

Cash earnings retention

84.31 84.57 78.11 75.15 80.69
ratio

BHEL
Dividend
payout ratio 31.02 30.54 28.67 24.09 23.33
(net profit)
Dividend payout
ratio (cash 28.03 27.66 26.04 21.02 18.97
profit)
Earning
67.69 70.07 71.73 70.40 68.01
retention ratio

Cash earnings
70.92 72.83 74.30 74.91 75.67
retention ratio
SWOT ANALYSIS
SWOT ANALYSIS
BUSINESS STRATEGY
 GROWTH DRIVER FOR BHEL
 Driving factor - not new funds raised through Equity or Debt

 The cash & bank balances as a percentage of TA has gone up form 20% to 27% in last 5 years

 The company is banking on its internal cash flow to drive the growth.

 This model is peculiar to Indian PSUs - PSUs have Rs 95,349 crore in cash and as bank balance
at the end of 2008

 Financial leverage V/S Internal cash flow.

  Cash & Bank Balances

  2008 2007 2006 2005 2004

BHEL 27.32% 24.93% 22.74% 21.17% 21.88%

CG 6.66% 10.59% 7.82% 4.88% 5.71%

 INVENTORY MANAGEMENT
 CG maintains relatively low levels of inventories.

 BHEL makes products which are highly complex and unique.

 BHEL follows job order processing

  Inventory

  2008 2007 2006 2005 2004

BHEL 18.69% 18.10% 20.60% 19.43% 17.31%

CG 11.11% 15.07% 11.99% 13.41% 13.08%

IS BHEL’S HIGH INVENTORY HURTING
COMPANY?
 BHEL also has an order backlog of Rs.117000 Cr as of 2009-2010

 As given in the Schedule 8 of Annual report for 2008-9, 24% of BHEL’s inventories are
accounted by raw materials and 50% by work in progress inventory.

 Maintaining higher inventory levels helps BHEL to absorb supply shocks and on time
project delivery
 ALTMAN BANKRUPTCY PREDICTION
MODEL
Z = 1.2T1 + 1.4T2 + 3.3T3 + .6T4 + .999T5
T1 = Working Capital / Total Assets
T2 = Retained Earnings / Total Assets
T3 = EBIT / Total Assets
T4 = Market Value of Equity / Book Value of total Liabilities
T5 = Sales / Total Assets

Z > 2.99 “Safe” Zone 1.8 < Z < 2.99 “Grey” Zone Z < 1.80 “Distress” Zone

  CG BHEL

T1 0.041 0.725

T2 1.195 0.183

T3 0.588 0.411

T4 0.005 3.886

T5 4.216 2.008
Z 7.839 6.801

Thus, Both the firms fall within the Safe Zone

"Our very business in life is not to get
ahead of others... but to get ahead of
ourselves."

Thank You!