ASSIGNMENT 1 OF SAPM

FUNDAMENTAL ANALYSIS OF BHEL

SUBMITTEDTO-: SUBMITTED BY -: MR.ABHISHEK

INTRODUCTION Fundamental Analysis is a method of evaluating a security by attempting to measu re itsintrinsic value by examining related economic, financial and other qualita tive and quantitativefactors. The intension of this project is to study everythi ng that can affect the security's value,including macroeconomic factors like the overall economy, industry conditions and specificfactors like the financial con dition, management of companies etc.It is a stock valuation method that uses fin ancial and economic analysis to predict themovement of stock prices. The fundame ntal information that is analyzed can include acompany's financial reports, and non-financial information such as estimates of the growth of demand for products sold by the company, industry comparisons, and economy-wide changes,changes in government policies etc The market price of a stock tends to move towards its real value or intrinsic value.

If the intrinsic/real value of a stock is above the current market price, then th e stock is called undervalued and then the investor would purchase the stock bec ause he knows that the stock price would rise and move towards its intrinsic or real value. If the intrinsic va lue of a stock was below the market price, then the stock is called overvalued a nd then the investor would sellthe stock because the stock price is going to fal l and come closer to its intrinsic value. So, Bybuying an underpriced security, and selling an overpriced security, an investor would be able tomake profits. VOLATILE MARKET CAPITAL The calendar year 2008 has seen a very volatile Indian capital market. From the highs of about 21000 in January 2008, the BSE Sensex came down to a low of about 9000 inDECEMBER 2008 In the process, it wiped out all the gains accumulated sin ce April 2007.In late 2007 and January 2008, the market marched higher on the ba ck of high GDPgrowth, good and corporate performance. The significant FII flows in late CY07 (September December 2007) helped markets ride higher. This euphoria led to the Indian markets out-performing Asian peers by about 15% in December 0 7 January 08.However, during this period of euphoria, markets ignored the factor s which wereimpacting the global markets negatively. These were in the form of r ising crude prices, the sub-prime crisis in USA and depreciation of the USD v/s major currencies including the JapaneseYen.These global concerns led to an event ual withdrawal of liquidity from Indian markets,resulting in a steep fall. Subse quently, domestic factors like rising inflation, increasing interestrates, risin g fiscal deficit (due to ever-increasing crude / commodity prices and subsidies) andprospects of an economic slowdown took over. This led to the under-performan ce of the Indian market

MONETARY POLICY CASH RESERVE RATIO Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down.When inflation was at its peak, RBI increased the CRR to dr ain out the excessive liquidity fromthe market. But, when the global crisis star ted, there was a redemption pressure on the FII s andthey started to withdraw fu nds from the Indian market as a result of which liquidity crunchstarted in the m arket, and RBI has to lower all the rates like CRR, SLR, REPO rate, reverse repo

REPO RATE Repo rate (short term interest rate) has been cut by 250 basis points since Octo ber tobring it down to 6.5%. RBI made first rate reduction in more than four yea rs to shield theeconomy from the global financial crisis

REVERSE RAPO RATE Reverse repo rate, at which the Reserve bank absorbs excess cash from the system

wasbrought down to 5% from 6%, its lowest in three years on Dec 2008. This was the first change inreverse repo rate since July 2006. These measures are taken t o step up demand and arrest thegrowth moderation INFLATION Inflation is a major indicator for any economy, specially for an emerging nation likeIndia. For growth, a country has to face moderate inflation but India till 2007 was able to grow atthe rate of more than 9 % with little inflation. But in 2008 with changing circumstances in world,India also feels the heat of high infl ation rate. To decrease the inflation govt. took major steps(increase in interes t rates) and growth was compromised for slowing down of inflation. As wecan see in the above figure inflation was 7.4 in October 2004 it was a bit high, but in October2005 inflation was 4.5 which was acceptable for a growing economy in 2005 and 2006 it was 5.4 DOMESTIC SAVING RATE Domestic saving rate of any country shows the proportion of consumption and savi ngs.Per capita income of India has increased significantly in last few years, th e consumption has alsoincreased significantly but Indian is also saving more. Do mestic saving as well as industrialsaving had increased in last few years, as we can see in the above figure that in 2003-2004 thedomestic saving was 26.4 % of total GDP of India. It was 28.3 and 29.1 in the consecutive years;it touched 30. 4 % in the year 2006-07 which was the higher ever domestic saving rate of Indian household. The consumption was though also very high, the consumption was not fr om thesaving but from the higher income. In 2007-08 it was 34.8 % of total GDP. Saving wasincreasing as well as consumption which is an excellent sign for the e conomy

FOREX RESERVE Forex reserve shows the strength of any economy, it helps to pay import bill, as Indianimports are more than Indian export a high forex reserve provides cushion to the economy. In thelast 4 years forex reserves have increased 3 folds. FII a nd FDI inflow to India has made itpossible as they are seeing India as a hot inv estment destination. In 2004 the forex reserve wasU.S. $ 110 billion in 2005 it was 140 billion a rise of around 30 % , in 2006 it was US $ 150billion and in ju ne 2006 it rose to US $ 200 billion, in june 2008 Forex reserve was US $ 280bill ion, in early 2008 forex reserve crosses the landmark of US $ 300 billion. AGRICULTURE PRODUCTION Agriculture production has an important role in any countries growth. India has a highimport bill due to crude oil import but as in India a large proportion of population depends onagriculture (though the contribution in the GDP has fallen significantly), India has managed tokeep its dependency low on agriculture impor t. Population of India has risen significantly butwith that agriculture producti on has also risen up. Agflation has also impacted inflation in India.In the abov e figure we can see that there is a steady growth in agriculture production, tot alagriculture production of India was 195.8 million tones which increased by 2-5 % every year.Average Indian income has raised in this period those results in h igher consumption rate

POWER GENERATION Power generation is a major indicator of healthiness of any economy, as we know India isfacing with deficit in power generation and still electricity is not ava ilable in a big portion of thecountry, in India power is majorly generated throu gh coal and hydro and it is expected that onceIndia will start generating power through nuclear reactors then this deficit will come downsignificantly.In the ab ove figure we can see that there is a growth in power generation in all the year sbut there is the deficit. In 2006-07 there has been a growth of 22 % and the de ficit has also comedown to 16 %, which is good sign, and with lots of power gene ration plants coming in. we cansay that that there will be no deficit in the nea r future INDUSTRY GROWTH RATE Industrial growth rate is an important component for any economy. In India agric ulturehas an important role but during last few years the industrial growth rate has gone up quitesignificantly, due to rise in consumption there is a high dema nd for industrial products, IIPnumbers have gone up quite significantly.In the a bove figure we can see that industrial growth rate was 8.3 % in 2004-05 ascompar ed to 2003-04, it dipped to 7.3 % in 2005-06, it rose to 10.2 % in 2006-07, the growthrate of Indian GDP was more than 9 % in this year, in the year 2007-08 ind ustrial growth dippedto 8.3 percent. There is a threat of global recession so th e demand has gone down which has animpact on the growth rate of industrial growt h rate

GROSS NATIONAL PRODUCT GNP of every country has an important role in any economy. More than the GNP its the growth rate by which it is increasing matters, in the last few years we have see n a 9 % growth inGDP as well as GNP of India, from GNP of US $ 793.32 billion in 2004-05 it has maintained agrowth rate of 8-10 % in the last 4-6 years. We can see it in the above figure that GP was 860billion dollars in 2005-06, US $ 941.8 8 billion in 2006-07, and in 2007-08 it was U.S. $ 1107.28billion. INDUSTRY ANALYSIS BHEL is not related to power industry rather it is within Heavy industry. One ca nwrongly interpret BHEL as a power company because it handles lot of power proje cts but actually it does not produce electricity, it gets projects mainly from power com panys likeNational Thermal Power corporation (NTPC), Damodar Valley Corporation (DVC) etc whogenerate power. It can be said that BHEL mainly helps those power company s by providingpower instruments and making power plant for them. In short though BHEL belongs toEngineering and Heavy industry, it gets projects mainly related to power. POWER INDUSTRY ANALYSIS The second phase of fundamental analysis consists of a detailed study of a spec ificindustry; its characteristics, past record, present state and future prospec ts. The purpose of industry analysis is to identify industries with a potential for future growth, and to invest inequity shares of companies selected from such industrie INDUSTRY LIFE CYCLE

As, the project is related to power industry, we will see the performance of ov erall powerindustry and decide whether the investor should invest in this indust ry or not. Every industryand company within a particular industry undergoes a li fe cycle with four distinct phases asshown below:We would benefit by investing i n an industry only in its pioneering and expansion stages.One should get out of industries which have reached the stagnation stage, and before they lapseinto de cline. The specific phase of an industry can be understood in terms of its sales andprofitability.Industries doing well today, may be faced with stagnation and decline in future as a result of changes in social habits, or from changes in st atutory control or from excess capacity andconsequent cut throat competition or as a result of rising prices. PERFORMANCE OF INDUSTRY The industrial sector recorded a growth of 9.2% (measured in terms of the Index of IndustrialProduction) during the period April- Nov. 2007-08 over and above th e growth of 11.6 %achieved in 2006-07. Capital goods sector, which posted a robu st growth of 17.4 % in April-Nov. 2006-07, has maintained its growth momentum du ring the current year as well. Accordingto the Index of Industrial Production, c apital goods sector posted a growth of 20.8% duringApril Nov. 2007-08. ABOUT THE COMPANY Bharat Heavy Electricals Limited (BHEL)was set up in 1959 by the Government of I ndiawith the objective of creating indigenous manufacturing base for power plant equipments.Today, BHEL is the 12th largest company in the world in Power Plant Equipmentsmanufacturing and the largest in India. The company has the ability to manufacture the entirerange of power plant equipment and has one of the largest capacities of power plant equipment inthe world. This enables the company to bi d for large power projects. BHEL's cost-competitiveness vis-a-vis international competition in the power sector can be attributed to thefactors like fully depre ciated manufacturing facilities, lower labor and freight costs and of scale.BHEL is the largest engineering and manufacturing enterprise in India and is one of thleading international companies in the field of power equipment manufacturer. The companyschairman and managing director is K. Ravi Kumar and is a government o wned company with67.72% shares held by President of India. BHEL operates around different business sectors,namely Power Industry including Transmission, Transpo rtation and Renewable Energy, International Operations etc. BHELs range of servic es extends from project feasibility studies toafter-sales services, successfully meeting diverse needs through turnkey capability. COMPANYS VISION A World-Class Engineering Enterprise Committed to Enhancing StakeholderValue. COMPANYS MISSION To be an Indian Multinational Engineering Enterprise providing Total BusinessSol utions through Quality Products, Systems and Services in the fields of Energy,In dustry, Transportation, Infrastructure and other potential areas

DIVERSIFICATION BHEL is more than 40 years old company. K Ravi Kumar took over the charge of com pany as CMD recently in the year 2007-08i. The main strength of BHEL lies in design, engineering

and manufacturing of high quality products in power generation, transmission, tr ansportation and renewable energy. BHEL sets account for nearly 65% of the total installed po wer generating capacity contributing 73% of the total power generation in the countr yii. Recently BHEL entered into a MoU with TNEB to set up 2x800 MW Supercritical Ther mal Power project and with NTPC to form a JV for jointly executing EPC projects and power equipment manufacturing. BHEL has access to technology for higher size gas turbi nes and can supply gas turbines of up to 279 MW unit size. To give a thrust to refurbish ing and modernization for plant performance improvement of old fossil fuel power plants, two joint venture companies have been floated with Siemens and GE respectively. BHEL manufactures and supplies major capital equipment and systems like captive power plants, centrifugal compressors, drive turbines, industrial boilers and auxiliaries, was te heat recovery boilers, gas turbines, pumps, heat exchangers, electric machines, valves, heavy castings and forgings, electrostatic precipitators, ID/FD fans, seamless pipes etc. BHEL has the capability to supply complete onshore drilling rigs, super deep drilling rigs, desert rigs, mobile rigs, work over rigs and sub sea well heads. The products manufactured by BHEL include power transformers, instrument transformers, dry type transformers, shunt reactors, ca pacitors, vacuum and SF6 switchgear, gas insulated switchgear, ceramic insulators, etc CORPORATE SOCIAL RESPONSIBILITY (CSR) As part of its Corporate Social Responsibility, BHEL adopted 56 villages having nearly80,000 inhabitants. Other examples of CSR activities are Blood Donation an d Health Check-upcamps, besides providing infrastructure support at these villag es. In addition, BHEL providesfinancial assistance to various NGOs/ Trusts/Socia l Welfare Societies that are engaged in socialactivities throughout the country. Environment Improvement Projects (EIPs) undertaken by the Company included massa forestation (over 31 lakhs) , host of rain water harvesting plants, water, energ y and preciousresource conservation plants besides projects which helped in redu ction of noise level,improvement in fume extraction , utilisation of NCES produc ts etc. As a result of these projectsBHEL has been able to maintain healthy envi ronment at its work places and townships besidessavings accrued through various resource conservation projects. SWOT Analysis of BHEL Strengths Technology is the major element in the corporate strategy of BHEL as most of its products are highly technology intensive in nature. BHEL has been upgrading its technology from time to time with tie ups with world leaders BHEL is amongst the highest investors in R & D in India Quality standards of BHEL have been recognized in India and abroad with all the major manufacturing divisions getting ISO 9000 certification Prompt and efficient attendance to customer issues is another USP of BHEL Weaknesses

 Though BHEL is competitive in the international majors in terms of cost, deliver y and equipment in the domestic market, the companys inability to match the financial packages provided by the multinationals has been one of its major weaknesses Opportunities Move towards electricity market restructuring and reforms gaining momentum Electricity sectors of developing Asian nations are expected to be the fastest g rowing sectors in the world Threats Global power industry is facing uncertainty because of rising fuel prices, limit ed non renewable energy sources and a wobbling global economy Unsatisfactory financial performance of many acquisitions in the international m arket SENSITIVITY ANALYSIS OF BHELS SCRIP VALUE

Beta is a measure of the volatility, or systematic risk, of a security or a port folio incomparison to the market as a whole. Beta is used in the capital asset p ricing model (CAPM), amodel that calculates the expected return of an asset base d on its beta and expected marketreturns. Here beta is calculated using regression analysis, and beta can be explained as thetendency of a security s returns to respond to swings in the market. A beta o f 1 indicates that thesecurity s price will move with the market. A beta of less than 1 means that the security will beless volatile than the market and a beta of greater than 1 indicates that the security s price will bemore volatile than the market. Here from the graph we can see that the BHELs stocks beta is 0.265, as 0.2 65<1therefore it can be said that this security is less volatile than the market .To estimate beta, this project made lists of returns for the BHEL stock prices and returnsfor the BSE index, our projects have taken weekly returns for the pur pose of calculating beta.Next, a plot was made with the BSE index returns on the x-axis and the BHEL stock pricesreturns on the y-axis, in order to check that t here are no serious violations of the linear regressionmodel assumptions. The sl ope of the fitted line from thelinear least-squares calculation is theestimated Beta. FINANCIAL ANALYSIS LIQUIDITY RATIO 1)Current ratio INTERPRETATION-: it measures the ability to pay its current debts.normally if r atio is less than one then it suggests that company would not be able to pay its obligations.here current ratio has decreased due to inc of debtors

2)Quick ratio

Interpretation-:this ratio determines the companies ability to pay debts without including inventory which is least liquid.this ratio should be less than 1. 3)Cash ratio Interpretation-: this ratio stands for(( cash and bank balance+current inv)/curr ent liabilities).this ratio is continously dec of bhel due to dec of cash and ba nk balance

Leverage ratios 1)Debt-Equity Ratio means what the creditors arerisking versus what the owners o wn in otherwords it can be said that it shows the relativecontributions of credi tors and owners.In general total liabilities should not exceed networth. This wo uld mean creditors have moreat stake than the owner.It is defined asDebt/Equity BHEL debt-equity ratio has declined over theyears due to decrement of total debt andsignificantly increment of the networth.Duringthe FY 2006-07 the total debt of BHELdeclined from Rs 558.24 million to Rs 89.33million and total equty increm ented from Rs7301.38 million to Rs 8788.26 million 2)Interest Coverage Ratio is defined as ProfitBefore Interest and Taxes (PBIT) / Interest. Interest coverage ratio of BHEL wassharply Increasing from year Mar04(11.16) to Mar08 (51.68). Although it wasdecreased marginally in the year Mar06(126.27) but it wa s always in increasingtrend. That indicates the company can easilymeet its inter est burden. It shows it the companys greater power of meeting debtcapacity. Since the companys debt fundwas d ecreasing year by year so its interestwas also decreasing TURNOVER RATIOS 1) Inventory ratio Interpretation-:This ratio shows how many times sundry debtors(accounts receivab le) turn over during the year.It is defined as Net credit sales / Average sundry debtors.Since the debtors turnover of BHEL decreased (1.80), it indicateslower efficiency of credit management of BHEL 2)Av. collection period Interpretation- The average collection period represents the number of days wort h of credit sales that is locked in sundry debtors.It is defined as Average sund ry debtors / Average daily credit sales. From this graph it is very clear that theaverage collection period of BHEL is mu ch higher 3)Total asset turnover

Interpretation-: The Total Assets Turnover is defined as Net sales / Average tot

al assets. The value of total assets turnover ratio is increasing gradually from Mar05 (1.5 5) toMar07 (2.07), but it decreased slightly fromMar07 (2.07) So assetsemploymen t was in reducing trend in the lasttwo years for BHEL Pofitability ratios 1)Gross profit margin Interpretation- The most important profitability ratios aregross profit, opera ting and net profit. Duringthe FY 2007-08 the gross profit has increasedfrom Rs 4027.52 million to Rs 4731.40 million as a result of which gross profitmargin in creased from 0.23 to 0.24. 2) ROA

Interpretation -: In this ratio numerator denotes the return toshareholders (equ ity and preference) and thedenominator represents the contribution of shareholde rs as well as creditors.Comparing other two players with BHEL it isfound that re turn on total assets of BHELwere much higher in all the years. 3)Earning power -: Interpretation-: Here interest charges and tax payments areexcluded in calculati ng earning power.Since earning power of BHEL was muchhigher in all the years

3)

ROE

Interpretation-: ROE in case of BHEL increased from the year Mar05 (0.17) onwards . It indicates greater profitability of equity funds invested in BHEL from Mar05 onwards. Only l ast two years this ROE ratio decreased a bitfrom 0.30 to 0.29

From the last five years cash flow statement it can be inferred that it is following the similar trends where operating profit is positive while Cash from investing and financing activities are negative. Here is some analysis on different sectio ns. Cash from Operating Activities: Cash from operating activities are representing an increasing trend. The major s ources of this cash are high sales and better realization capabilities of BHEL w hich are representing better shape of the organization. Cash from Investing Activities: Cash realized from investing activities are negative over last five years. Cash

flow statement is referring to purchase of fixed assets is the major investment BHEL is going for. BHEL as a plan to its expansion strategy is investing in fixe d assets and merging companies with in it. Other major contributor to this secti on is interest received. BHEL receives huge interest as a part of its investment which is another source of income for it Cash from Financing Activities: Cash from financing activities are also showing negative values over last five y ears. BHEL seems to be in good health as it has no liability to pay debts. In th e last five years it paid long term debt only in one year. The major contributor here is dividends paid. BHEL pays good amount of dividends to its investors. Cash Realization Ratio BHEL improved its cash realization capability considerably from 2005 to 2009. Wh ile it was realizing only 86% of its net profit in 2005 it realized 103% in the year 2009. This realization capability reached peak in 2008 (120%) and this year it declined considerably. The realization more than 100% \shows that BHEL is re ducing its accounts receivables which further reduce the chances of bad debts for the company. Modified Cash Realization Ratio: If it is changed from net profit to Profit before working capital, it represents the better cash realization ratio analysis. In case of BHEL however it is showi ng similar trends as cash realization analysis, BHEL is only realizing 75 % of i ts sales operations. These are investing activities and financing activities whi ch made it look for more than 100% realization. This occurred because of realization of debts from previous years. Use of more inventories further added to the effect. From the cash flow statement of BHEL it can be inferred that the heath of organi zation is good. It is having good realization capabilities and high sales. It is in improv ement stage of its realizing capabilities. It is investing in its future expansion plans and yi elds better dividends to its investors. It is putting more emphasize on its debtors and henc e able to extract some money Revenue Trends Revenue from operational activities (sales and services) forms the major part of the total revenue of BHEL. Revenue from non operational activities includes export incenti ves, dividend income and interest income and they are tabulated under other income Profitability Analysis

Interpretation From the above table it can be seen that there has been an increase in profit ma rgin from 2005 till 2008. The drop in profit margin in 2009 can be attributed to the globa l recessionary trend. Asset turnover ratio has decreased in recent years when compared to 2005. This indicates the decrease in efficiency of asset management. The return on assets ( ROA) has

decreased in the year 2009 even though asset turnover ratio has increased. This can be attributed to the decrease in the net profit margin in the year 2009.ROE is grea ter than ROA in all the years from 2005, indicating that BHEL earned more per rupee of shareh olders funda than per rupee of assets. From the commonsized balance sheet of 2009 it can be s een that 56.32% of company assets is financed by current liabilities which shows the exte nt of leveraging. Solvency Analysis The debt equity ratio of BHEL has decreased considerably in the last 3 years and it has remained below the industry average of 0.16. The high liabilities to equity rati o compared to the debt to equity ratio shows that the current liabilities form a major part of total debt of BHEL. Even though BHEL makes use of leveraging, the debt to equity ratio is low because it keeps rolling over short term obligations. Some of the items in current liabilit ies take a long term character and are not different from interest free debt

INTRINSIC VALUE OF BHEL BHEL price is : (as of 5/22/2009) INR Current Earnings per Share (2010 est.) are : INR Estimated Long Term Growth (% per Year) is : % INTRINSIC VALUE = 88.10 x (8.5 + 2 x 15.33) =3 450.00 INR MARGIN OF SAFETY = (3 450.00 - 1978.2 ) / 1978.2 = 74.40 %

Capital Market Analysis

BHEL in the year 2009 has interest coverage ratio of 23.33 which is higher than the industry average of 19.94. This high ratio indicates the stock markets confidence in the c ompanys future earnings growth. The very high price to book ratio shows BHEL shares are prices way above their book value in the markets and thus indicates that the market expects the stock to

earn at a rate higher than the required rate

CONCLUSION The biggest strength of BHEL is that it has no big competitors in the market. Th is gives it an unique natural monopoly position. BHEL has outstanding orders which are 2.5 time s its current serving capabilities. Thus there is a huge potential and opportunity for BHEL. BHEL provides 70% of the total equipments in power sector market. BHEL has been very slow in terms of expansion. BHEL has many pending orders. The received orders are greate r than the capabilities. As an investor some of the ratios that will have to be considered before investm ent are as follows: P/E ratio: A high price earnings ratio indicates the stock markets confidence in the companys future earnings growth. So a high P/E will be an incentive to the invest or to invest in the company. Debt-Equity Ratio: A high debt-equity ratio indicates solvency issues with the company and hence will attract less number of investors. So a prudent investor w ill consider this ratio before making his investment in the company Dividend yield and Price to Book ratio: This ratio indicates the market valuatio n of the company and thus provides useful info to the investor regarding the future m arket price of the company stock. ROA: This ratio is an excellent indicator of the overall performance of the comp any and hence the investor can use this to evaluate the profitability of the company and thus invest wisely The main take away from this exercise is that financial ratios cannot be used in isolation for the evaluation of the company. The company background and industry environment h ave to be considered along with the ratios. The industry average should be used as the benchmark

for the evaluation of the main ratios

REFRENCES 1)http: / / w w w . bhe l . com/ i mage s/ pdf/ ann ual _re port_2 0 0 7 -0 8. p df Pg No : 4 :-16 2)http: / / w ww . l i ve mint. com/ 2 0 0 9/ 02 / 03 22 5 11 1/ I nte l le ctua l - prope rty- ri ghts- i . html 3)http: / / w ww . the hi ndu. co m/ hol n us/ 0 0 12 00 90 6 19 18 1 0. htm 4)money.rediff.com/companies/bharat-heavy...ltd/.../balance-sheet 5)www.rbi.org 6)http://www.moneycontrol.com/ 7)equityahead.in/bhel-a-safe-long-term-bet/ 8)lastbull.com/bharat-heavy-electricals-limited-bhel-sensex-stocks-10/