Final Report

1. SECTOR-CAPITAL GOODS Capital Goods has been defined as any "product/ equipment of high value, durable (economic asset life 3 years), used as plant and machinery for agricultural, industrial and commercial (transportation etc.) purpose in production/ service delivery process". We have adopted "use based" classification to segment Capital Goods. From the list of classified segments, we have shortlisted five most representative segments based on - market size of the segment and its user industry, and IIP weight age of the segment. The five representative segments identified are as follows: Textile Machinery Machine Tools Electrical and Power Equipment which includes Boilers, Turbines, Diesel Engines, Transformers, Switchgear, Motors ,Generators, Earthmoving and Construction Equipment Process Plant Equipment which includes Pressure Vessels, Cooling Towers, Furnaces and Heat Exchangers

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2. OBJECTIVE OF THE PROJECT Major issues











Economy analysis Industry analysis Company line of business. Comparative statement analysis Ratio analysis Common size analysis CAGR analysis Du-Pont analysis Cash flow analysis Trend analysis

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3. METHODOLOGY We have taken four major companies in capital goods sector i.e. BHEL Larsen and toubro Crompton greaves Thermax These companies will be analysed using various models which are discussed as follows:

3.1Comparative Statement Analysis Statement on which balance sheets, income statements, or statements of changes in financial position are assembled side by side for review purposes. Changes that have occurred in individual categories from year to year and over the years are easily noted. The key factor revealed is the trend in an account or financial statement category over time. Benefits of comparative
Comparing generated revenue from one period to a different period can add another dimension to analyzing the effectiveness of the sales effort, as the process makes it possible to identify trends such as a drop in revenue in spite of an increase in units sold.
A comparative statement helps to address changes in production costs.
By comparing line items that catalog the expense for raw materials in one quarter with another quarter where the number of units produced is similar can make it possible to spot trends in expense increases, and thus help isolate the origin of those increases.

3.2Compound Annual Growth Rate - CAGR The compound annual growth rate is calculated by taking the nth root of the total percentage growth rate, where n is the number of years in the period being considered.



      1
       Where r= No of Periods

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3.3Cash Flow Analysis A cash flow statement or statement of cash flows is a financial statement that shows a company's incoming and outgoing money (sources and uses of cash) during a time period (often monthly or quarterly). The statement shows how changes in balance sheet and income accounts affected cash and cash equivalents, and breaks the analysis down according to operating, The cash flow statement is intended to: 1. provide information on a firm's liquidity and solvency and its ability to change cash flows in future circumstances 2. provide additional information for evaluating changes in assets, liabilities and equity 3. improve the comparability of different firms' operating performance by eliminating the effects of different accounting methods 4. indicate the amount, timing and probability of future cash flows

3.4Dupont Analysis This is a technique which is used to analyze profitability of a company using traditional performance and management tools. To enable this, DuPont model integrates elements of the income statement with those of balance sheet. Return on net asset (RONA) is a measure of firm’s operating performance. It indicates the firm’s earning power. It is a product of asset turnover, gross profit margin and operating leverage. Thus RONA can be computed as follows:    !    " ! 

 

3.5 Common size Analysis A company financial statement that displays all items as percentages of a common base figure. This type of financial statement allows for easy analysis between companies or between time periods of a company. Why common size analysis?
The common-size statement is a financial document that is often utilized as a quick and easy reference for the finances of a corporation or business.
The use of a common-size statement can make it possible to quickly identify areas that may be utilizing more of the operating capital than is practical at the time, and allow budgetary changes to be implemented to correct the situation. 4


The common size statement can also be a helpful tool in comparing the financial structures and operation strategies of two different companies.
The use of percentages in the common size statements removes the issue of which company generates more revenue, and brings the focus on how the revenue is utilized within each of the two businesses.
Often, the use of a common-size statement in this manner can help to identify areas where each company is utilizing resources efficiently, as well as areas where there is room for improvement.

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4. ECONOMY ANALYSIS The Indian economy, characterized by strong macro-economic fundamentals, has drawn the world’s attention as one of the fastest growing economies with future promise. The nation has continued on its high growth trajectory registering an impressive growth of 9.4% during fiscal year 2006-2007. The average GDP growth rate reported for the last 4 years is a record 8.6 percent. The industrial sector remained buoyant, driven by robust performances from manufacturing, services and construction sectors. Foreign trade has been growing at an average rate of 27% during the past 3 years. Savings and investment rates are estimated at a healthy 32.4% & 33.8% of GDP respectively. It is heartening to note that foreign direct investment during the fiscal year 2006-2007 has doubled to USD 15 billion and is expected to scale up with further opening up of core and infrastructure sectors. The global economy recorded a growth of 5.4% during the year 2006 with an improved US economy recording a growth of 3.3%. However, some moderation in growth is forecast for the year 2007 with the global growth rate falling to 4.9% and the US economy slowing to 2.2%. The oil rich countries, particularly in Middle-East & South East Asian region, have accelerated investment in the infrastructure & construction sectors. With growing cooperation amongst the oil producing countries, thanks to windfall gains from stable high oil prices, joint efforts are being initiated for ramping up exploration facilities and distribution network.

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5.INDUSTRY ANALYSIS 5.1Competitiveness Analysis of Indian Capital Goods sector The study of the performance of the Capital Goods sector reveals that its fortunes are inextricably linked with that of the overall Indian industry. •

The Capital Goods value added contributes a fairly constant proportion (9-12 percent) of the total manufacturing value added, thus establishing that manufacturing as the key enduser sector of Capital Goods drives the performance of the latter.

•

Another key determinant of the demand for Capital Goods is the gross investment undertaken in the economy. The apparent consumption of Capital Goods constitutes a constant share (17-21 percent) of the total Gross Domestic Investment in the country.

On the supply side the output of Capital Goods is determined by investments in Capital Goods sector and capacity utilization. The investments in the Capital Goods sector have declined with the decline in the relative profitability of the Capital Goods sector with respect to other sectors. Based on the study of industrial development trajectory and share in world exports of Capital Goods, we have chosen to compare Indian Capital Goods sector’s competitiveness vis-à-vis three reference countries – China, Korea and Taiwan, and three benchmark countries – Japan, Germany and USA.

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Table: Revealed Comparative Advantage for the Capital Goods Sector1

5.2Business Environment Competitiveness Issues  Labour in the Indian Capital Goods sector is highly cost competitive, even after discounting a comparatively low labour productivity. The labour cost efficiency (which captures the cost and productivity aspects of labour) for Indian Capital Goods sector is 1.32 times that of China’s and 1.38 times that of Taiwan’s. Among the reference set of countries only Korea (whose labour cost efficiency is 1.31 times that of India’s) outscores India on this count. But since the labour factor proportion is low (approximately 7 to 21 per cent) in the total factor usage, this does not translate into a significant relative advantage. Inflexible labour policies have also eroded this advantage partly.  The raw materials used are largely domestic in origin. With the dismantling of various price controls on key inputs, Indian Capital Goods manufacturers now procure raw materials at market prices, which move in line with international prices. The raw material price indices have risen faster than the machinery price index. It is difficult for the Indian Capital Goods manufacturers to pass on the rise in prices to the customers, thereby impacting their profitability. However the rising cost of raw materials has prodded only a few Indian manufacturers to resort to value engineering techniques for efficient raw material usage and cost reduction. The quality of raw materials is also not up to the international standards in terms of dimensional tolerances and metallurgical properties, and this, in turn, affects the quality of the final product.  Indian Capital Goods manufacturers have working capital requirements as high as 45 per cent of net sales (against global benchmark of 15 per cent). High interest rate regime in India results in a substantial 7 to 8 per cent interest rate differential relative to the reference countries, amounting to 3.1 to 3.6 per cent capital cost disadvantage due to interest differential and 0.9 per cent due to higher working capital requirement. It is becoming increasingly difficult for the Indian Capital Goods sector to source capital. Total bank credit to engineering sector has steadily declined from 20.3 per cent (as share of total bank credit to all industrial sectors) in 1990 to 9.0 per cent in 2000. This is largely a result of the shift from developmental banking to universal banking by financial institutions initially set up to provide finance at lower costs to industry. With a bearish capital market and reduced FDI inflow (except for electrical machinery segment), the sector has been crowded out of project funding opportunities.

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Source: Capital Goods Industry Report, PriceWater House Coopers,2005

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 The technological competitiveness of the Indian Capital Goods sector is low. Indian Capital Goods firms present a full spectrum of technological capabilities - while there are few firms close to the international frontier in terms of product design capability and process technology, technological capabilities of most players are extremely limited. The advantage due to high availability of quality engineers and scientists is lost, partly due to brain drain and partly due to stagnation of skill sets of scientists and engineers within India. India has a number of high quality R&D institutions, but the industry–institute interactions are low, thereby reducing the chances of creation of commercially viable technologies. Capital Goods sector has a comparative disadvantage with respect to both product and process technologies. In the case of the Indian Capital Goods manufacturers, the human resources devoted to design and engineering activity is about 20 to 50 per cent less than in other industrialized countries. Although Indian firms are capable of achieving high levels of precision, they are unable to produce high quality products due to lack of supporting process technologies such as precision measuring, material engineering and process control.  Negative perceptions about "Made in India" image have damaged the ability of Indian Capital Goods manufacturers to compete at optimal capacity in world markets, while promoting their products abroad. This invariably results in price concessions by Indian manufacturers to offset product bias in export markets, thereby compounding cost disadvantage. So strong is the negative image that leading Indian Capital Goods exporters play down their "Made in India" identity as the association of 'country of origin' is more harmful than helpful. The problem has been further exacerbated by negative self perception of Indian buyers and lack of strong "Buy Indian" sentiment.  The quality of infrastructure (transport, communication and power) is poor, thus affecting competitive delivery schedules and increasing operating costs. The delivery time of locally made Capital Goods in many cases is 1.5 to 2 times longer than in industrialized nations. Companies tend to lose orders on delivery schedules. Inland transport is slow, although the railroad density is among the highest in the world. The cost of electric power is comparable to that in other nations, but the reliability is poor. Many Indian Capital Goods firms have set up their own captive power plants to obviate the problem. This has added to the costs. Overall the infrastructure inadequacies are estimated to translate into 5 per cent cost disadvantage for Indian Capital Goods manufacturer’s vis-à-vis foreign manufacturers.  Indian Capital Goods industry derives some degree of comparative advantage from cauterization in certain segments like foundry; electronics etc., while engineering consulting services has exhibited competitive advantages relating to the accumulation of knowledge assets and advanced tools. However, in the larger frame of picture, ancillaries 9

and supporting industries (for bought-outs like hydraulics etc.) are far from being competitive in terms of technical capability, quality and delivery. The industry is characterized by relative lack of sub-contracting arrangements, despite large scale SME presence in engineering sector, thus losing out on opportunities to exploit horizontal economies of scale or specialization.  Indian Capital Goods sector is strengthened by large home demand with high growth potential (on flip side even inducing inward orientation). At the same time, low degree of buyer sophistication neutralizes any accruing size advantage as the companies can get away with less than desirable quality, with little incentive to innovate. 5.3Firm-level Competitiveness Issues  The ownership pattern in Indian Capital Goods Industry is marked by the dominance of Public Sector Enterprises (PSEs) in heavy engineering, machine tools, boiler manufacturing, while private firms prevail in industrial machinery segments such as cement, sugar and most other non-electrical machinery. The impending privatization of these large PSEs would radically change the industry structure. The firm structures and their ownership pattern at the end of the privatization process would significantly affect the development of this sector in the future.  The Indian Capital Goods sector at present is concentrated in terms of output shares. In most product groups, there are a few companies at the top of the pyramid, generally large Public Sector Enterprises (PSEs), followed by a middle layer of companies comprising large private companies and Multi- National Companies (MNCs) operating in India and a large number of small units at the bottom. Although the last decade has seen the decline in PSE’s market share, the dominance of PSEs is partly maintained through preferential policies like purchase preference. This results in sub-optimal market functioning, leading to less innovation and thereby low competitiveness.  Indian Capital Goods sector is characterized by a large width of products (almost all major Capital Goods are domestically manufactured) - a legacy of import-substitution policy. This is reflected in the import and export weights calculated for the various reference and benchmark countries. The import weight is defined as the ratio of imports to domestic consumption and the export weight as the ratio of exports to total domestic production. Low values for both weights would indicate an inward oriented economy focused on catering only to its demand through domestic production. In the case of India, the import weight works to 21 percent, while the export weight is 7 percent. A case in point is the vibrant German Capital Goods sector, which has an import weight of 32 percent and export weight of 41 percent with a self-sufficiency of 115 percent. Even 10

nations with advanced Capital Goods sector do not produce the entire range of Capital Goods, but instead focus on select segments or sub segments. The Indian Capital Goods sector, on the other hand, lacks sufficient depth largely due to low demand sophistication of the Indian market, thus, resulting in comparatively low competitiveness.  Indian firms, in general, lack export thrust in their marketing strategies. The emergence of global market, through lowering of tariff barriers, has led to blurring of margins between domestic and export markets. Worldwide Capital Goods firms are increasingly becoming global in operations. Very few Indian firms have a global mindset. The focus is largely on the domestic market; exports gain importance only in case of fall in domestic demand.  Most Indian manufacturers define quality of Capital Goods largely by performance parameters and dimensional accuracy, and not in terms of aesthetics or finish of the goods. Most Indian Capital Goods are functionally at par with equipment made elsewhere in the world, but they rank poorly as far as finish is concerned. This has adversely impacted the competitiveness of the Indian Capital Goods in a discriminating and sophisticated export market.  The limited presence of Indian Capital Goods firms in the value chain leads to diminished cost and differentiation advantage. An emerging trend amongst Capital Goods companies around the world is the transformation of these engineering companies to a more service based organization. Some large international firms earn a substantial proportion of their revenue from services through significant investment in downstream activities.  Indian firms invest less in marketing activities and have low customer orientation. Very little effort is expended on branding. Investments in marketing, increased customer orientation and branding could act as entry barriers for foreign firms into the Indian market. The trend internationally has been towards adopting a solutions approach to selling. Indian firms continue to adopt a product-oriented approach towards their customers  Firm level innovation is very low in India. Indian Capital Goods firms source technology, but very few of them improve upon it. The research spending as a percentage of sales amongst Indian Capital Goods are low when compared to the R&D spends of companies in Taiwan and Korea.  Indian Capital Goods firm operational efficiencies are comparatively low. Very few Indian firms use technology to make their business processes like procurement,

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distribution, marketing and servicing more efficient. Also the use of techno-managerial processes like JIT, TQM, TPM etc. are limited to large firms only. 5.4Strategic Goals for Indian Capital Goods industry The strategic goal for the Indian Capital Goods sector can be represented a multiplier of value of production and export weight. We have created medium-term (2002-07) and long-term (200712) scenarios, co-terminus with tenth and eleventh five-year plan. Below we enumerate the strategic goals under the two scenarios:

Scenario

Baseline Medium Term Long Term

Terminal Year 2001 2007

Input Variables VoP VoP CAGR 20 31.7 8%

2011

51.1

12%

Export Weight 5% 20%

Output Indicators Export Export Value CAGR 1 6.35 36.2

RCA Index 0.2 0.91

30%

15.33

1.51

19.3

Table: Scenario for Strategic Goals2

Thus a two-pronged thrust is needed to achieve export competitiveness. The productivity growth is obviously preferable to growth due to increases in factor inputs, since the latter might be subject to diminishing marginal returns. Also since the factor inputs are usually supplyconstrained in short and medium run, an improvement in factor efficiency is distinctly more significant. The sources of TFP growth for Indian Capital Goods industry broadly comprise infrastructure, reorientation in the industrial policies, restructuring of PSEs and adoption of technology. The growth in TFP has to be complemented by increased export orientation resulting in higher export weight for Indian Capital Goods. 5.5Firm-level Strategies  Enhance Market Position [Capital Goods Firms]  Attain market leadership through acquisition and consolidation to gain economies of scale in a price sensitive industry. Market leadership will also create clout with distributors and make it easier to reinvest in maintaining product leadership. 2

Source: Capital Goods Industry report, Thomson Research, 2006

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 Build and nurture brands for creating a franchise in the export markets and stabilizing market shares in a sector characterized by slow pace of technological development  Enhance value-chain presence by providing custom-engineered products and special design services to cement relationships with customers and mitigate price pressures  Provide value to the customers in terms of return on investment with emphasis on solutions-approach instead of product-approach to selling. In order to satisfy demanding customers, Capital Goods firms can provide better value-for-money by either adding more sophisticated controls or reducing equipment complexity.  Build and strengthen distribution channels through direct marketing channel in export markets or regional distribution network to sell on 'stock-and-sale' basis  Build technology leadership [Capital Goods Firms]  Adopt latest product and process technologies to enhance product quality, productivity, manufacturing flexibility, and operating efficiency. Allocate more resources for in-house R&D in product development.  Embrace technologies in business processes by investing in internet technologies (like ecommerce through b2b e-markets or private exchanges, e-procurement, e-CRM etc.) and supply chain management to provide better value to the customers (in terms of pricing and convenience), and to boost profitability by finding new avenues of sales growth and productivity gains  Increase emphasis on diversified product lines, customer bases, and markets [Capital Goods Firms]  Build diversified product lines to reduce business risk and mitigate cyclical pressures. New products, offering increased value to customers, enable the price base to be reset, also easing price pressures. However, Indian Capital Goods firms should guard against over-diversification, which would dilute focus and core competency.  Enhance service-orientation and focus on fee-based activities to optimize mix of project services and products portfolio  Increase presence in after-market products (used in maintenance and repair functions) as these are less sensitive to general economic conditions and may even be counter-cyclical.

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6.COMPANY OVERVIEW Larsen & Toubro Limited (L&T) Larsen & Toubro Limited (L&T) is India's largest engineering and construction conglomerate with additional interests in Electricals, electronics and IT. A strong customer-focus approach and constant quest for top-class quality have enabled L&T to attain and sustain leadership position over 6 decades. L&T enjoys a premiere brand image in India and its international presence is on the rise, with a global spread of over 30 offices and joint ventures with world leaders. Larsen & Toubro Limited (L&T) is India's largest engineering and construction conglomerate with additional interests in Electricals, electronics and IT. A strong customer-focus approach and constant quest for top-class quality have enabled L&T to attain and sustain leadership over 6 decades. EPC project business constitutes a critical part of the L&T's engineering core. L&T has integrated its strengths in basic and detailed engineering, process technology, project management, procurement, fabrication and erection, construction and commissioning, to offer single point responsibility under stringent delivery schedules. Strategic alliances with world leaders enable L&T to access technical know-how and execute process intensive, large scale turnkey projects to maintain its leadership position. L&T's international presence is on the rise, with a global spread of over 30 offices and joint ventures with world leaders. Its large technology base and pool of experienced personnel enable it to offer integrated services in world markets. L&T enjoys a brand image in India and several countries offshore. With factories and offices located all over the country and abroad, L&T operations are supplemented by a comprehensive distribution network and nationwide ramifications for customer service and delight THERMAX LTD •

Sustainable solutions in Energy and Environment, on this principle Thermax has developed energy-efficient and eco friendly solutions for industry and commerce. For over 3 decades, Thermax has been helping customers improve their processes, conserve energy, increase their competitiveness and adhere to environmental norms.

Thermax equipment helps several tens of thousands of customers the world over enjoy increased profitability, and earn community goodwill by: • •

Maximizing energy efficiency and slashing operating costs Minimizing waste 14

• •

Recovering precious resource from waste Keeping pollutants out of the waters and the air

Thermax products and systems are in use in over 40 countries over the world, supported through a network of subsidiaries, manufacturing facilities and Sales and Service offices in 14 countries. Thermax main operations are headquartered in India, with five manufacturing facilities, 12 sales and service offices and a widespread franchisee and dealer network. Business Areas In focus with the business mission; to provide Sustainable solutions in Energy and Environment, Thermaxs core business comprise 6 major business areas. • • • • • •

Boilers and Heaters Absorption Cooling Water and Waste Solutions Chemicals for Energy and Environment applications Power and Cogeneration systems Air Pollution and Purification

Thermax provides standard products in these 6 areas of business. Drawing on decades of research and experience in process productivity improvement and energy generation, Thermax also customizes integrated sustainable solutions for the project requirements of a wide range of industries. Strategic Alliances Thermax has sourced cutting-edge technologies for its business operations through alliances with world technology majors, like Babcock & Wilcox USA, Kawasaki Thermal Engineering Company, Japan; Eco Tech, Canada; Honeywell, USA; Bloom Engineering, Germany; Struthers Wells and Ozone Systems, USA.

BHARAT HEAVY ELECTRICALS LTD. BHEL is the largest engineering and manufacturing enterprise in India in the energyrelated/infrastructure sector, today. BHEL was established more than 40 years ago, ushering in the indigenous Heavy Electrical Equipment industry in India - a dream that has been more than realized with a well-recognized track record of performance. The company has been earning profits continuously since 1971-72 and paying dividends since 1976-77.

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BHEL manufactures over 180 products under 30 major product groups and caters to core sectors of the Indian Economy viz., Power Generation & Transmission, Industry, Transportation, Telecommunication, Renewable Energy, etc. The wide network of BHEL's 14 manufacturing divisions, four Power Sector regional centres, over 100 project sites, eight service centres and 18 regional offices, enables the Company to promptly serve its customers and provide them with suitable products, systems and services -- efficiently and at competitive prices. The high level of quality & reliability of its products is due to the emphasis on design, engineering and manufacturing to international standards by acquiring and adapting some of the best technologies from leading companies in the world, together with technologies developed in its own R&D centres BHEL has acquired certifications to Quality Management Systems (ISO 9001), Environmental Management Systems (ISO 14001) and Occupational Health & Safety Management Systems (OHSAS 18001) and is also well on its journey towards Total Quality Management. BHEL has Installed equipment for over 90,000 MW of power generation -- for Utilities, Captive and Industrial users. Supplied over 2,25,000 MVA transformer capacity and other equipment operating in Transmission & Distribution network up to 400 kV (AC & DC). Supplied over 25,000 Motors with Drive Control System to Power projects, Petrochemicals, Refineries, Steel, Aluminum, Fertilizer, Cement plants, etc. Supplied Traction electrics and AC/DC locos to power over 12,000 kms Railway network. Supplied over one million Valves to Power Plants and other Industries. BHEL's operations are organized around three business sectors, namely Power, Industry including Transmission, Transportation, Telecommunication & Renewable Energy - and Overseas Business. This enables BHEL to have a strong customer orientation, to be sensitive to his needs and respond quickly to the changes in the market. BHEL's vision is to become a world-class engineering enterprise, committed to enhancing stakeholder value. The company is striving to give shape to its aspirations and fulfill the expectations of the country to become a global player. The greatest strength of BHEL is its highly skilled and committed 42,600 employees. Every employee is given an equal opportunity to develop himself and grow in his career. Continuous training and retraining, career planning, a positive work culture and participative style of management all these have engendered development of a committed and motivated workforce setting new benchmarks in terms of productivity, quality and responsiveness. 16

CROMPTON GREAVES LTD. Crompton Greaves (CG) is part of the US$ 3 billion Avantha Group, conglomerate with an impressive global footprint. Since its inception, CG has been synonymous with electricity. In 1875, a Crompton 'dynamo' powered the world's very first electricity-lit house in Colchester, Essex, U.K. CG's India operations were established in 1937, and since then the company has retained its leadership position in the management and application of electrical energy. Today, Crompton Greaves is India's largest private sector enterprise. It has diversified extensively and is engaged in designing, manufacturing and marketing technologically advanced electrical products and services related to power generation, transmission and distribution, besides executing turnkey projects. The company is customer-centric in its focus and is the single largest source for a wide variety of electrical equipments and products. With several international acquisitions, Crompton Greaves is fast emerging as a first choice global supplier for high quality electrical equipment. The company is organized into three business groups viz. Power Systems, Industrial Systems, Consumer Products. Nearly, two-thirds of its turnover accrues from products lines in which it enjoys a leadership position. Presently, the company is offering wide range of products such as power & industrial transformers, HT circuit breakers, LT & HT motors, DC motors, traction motors, alternators/ generators, railway signaling equipments, lighting products, fans, pumps and public switching, transmission and access products. In addition to offering broad range of products, the company undertakes turnkey projects from concept to commissioning. Apart from this, CG exports its products to more than 60 countries worldwide, which includes the emerging South-East Asian and Latin American markets. Thus, the company addresses all the segments of the power industry from complex industrial solutions to basic household requirements. The fans and lighting businesses acquired "Super brand" status in January 2004. It is a unique recognition amongst the country's 134 selected brands by "Super brands", UK. The quality of households is enhanced when their money is invested into products such as fans and lighting for basic comforts. Their lives are literally touched by delight. Similarly, Crompton helps electricity boards and other utilities to reach electricity to the last home and factory. Therefore, every individual in India who uses electricity can be considered as Crompton customer. Hence, the company continues to further and consolidate the initiatives that Colonel Crompton set into motion by focusing on meeting increasing customer demands for products that are eco-friendly, energy efficient and with intelligent monitoring and control Systems.

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7.ANALYSIS 7.1COMPARATIVE ANALYSIS 7.1.2 L & T Comparative Balance sheet 2003

2004

2005

2006

2007

CAGR (%)

Liabilities & Capital Current Liabilities Yoyo % change Long term liabilities YoY % change Share Capital YoY % change Reserves YoY % change Total

296.20 40.52 2769.19 -41.09 24.88 -90.00 2622.44 -11.64 5712.71

487.65 64.64 3453.70 24.72 25.98 4.42 3289.95 25.45 7257.28

601.23 23.29 3497.08 1.26 27.48 5.77 4937.00 50.06 9062.79

1137.66 89.22 6431.78 83.92 56.65 106.15 6864.90 39.05 14490.99

52.42

15443.58 43.00 2214.98 3.50 13182.1 21.84 30840.66

19459.23 5.97 2973.46 34.24 16445.55 24.76 38878.24

30496.10 12.74 82.80 5453.86 -0.39 83.42 24876.02 16.86 51.26 60825.98

Assets Current Assets YoY % change Net Fixed Assets YoY % change Other Assets YoY % change Total

210.79 4700.71 248.71 2967.89 8128.10

18877.74 12929.76 31.90 5539.05 2140.1 -61.36 13338.69 10819.12 -18.89 37755.48 25888.98

8.15 -30.92 23.32

Comparative Income Statement

Sales % change COGS % change Gross Profit % change Total expenses

2003 2004 10691.14 10979.10 2.69 304.27 336.51 10.60 469.33 1068.07 127.57

2005 14524.89 32.30 468.07 39.10 1405.23 31.57

2006 16657.75 14.68 682.09 45.72 1737.46 23.64

2007 20678.81 24.14 786.52 15.31 3004.24 72.91

CAGR (%) 17.15 23.65 29.50

10750.62 11424.41 14337.77 16087.77 19955.76 14.96 18

% change PAT % change

374.02

6.27 771.06 106.15

25.50 1127.69 46.25

12.21 1306.12 15.82

24.04 2271.52 73.91

31.01

Current Liabilities The current liabilities of the company have shown fluctuation, this is due to the repayment because in the year 2005 the company spent large some on the payment of short term liabilities. But again the current liability increased. It grew at a rate of 52% in this period of five years

YoY % change Current Liabilities 100 80 60 40 20 0 2003 YoY % change

2004

2005

2006

2007

40.52

64.64

23.29

89.22

Long Term Liabilities The long term liability has increased constantly over the period of five years. This shows that the company is increasing its long term borrowings. This can be also related to the increase of debt equity ratio over the period and the increase in EPS and ROE. The long term borrowings increased at a constant growth rate of 8% over the period of 5 years.

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YoY % change long term liabilities 100 80 60 40 20 0 -20 -40 -60 -80 2003 YoY % change

2004

2005

2006

2007

-41.09

24.72

1.26

83.92

Share Capital The share capital has shown year on year decrease of 30%. This is because of the company going for a buyback in the year 2004. This is also reflected in the increase of the D/E ratio and the increase in the EPS in the corresponding year.

YoY % change Share Capital 150 100 50 0 -50 -100 -150 -200 2003 YoY % change

2004

2005

2006

2007

-90.00

4.42

5.77

106.15

Reserves The reserves increased by more than 200% in the period of 2003 to 2007 with a CAGR of 23%. The increase in on account of higher retention ratios. The company’s retention ratio has decreased but the profit has increased with a CAGR of 31%.

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YoY % change Reserves 60 50 40 30 20 10 0 -10 -20 -30 2003 YoY % change

2004

2005

2006

2007

-11.64

25.45

50.06

39.05

Current Assets The current asset has increased by a CAGR of 12%. Most of this increase can be explained by the increase in the receivables of the company which increased to three times of its value in 2003. This is also reflected in the increase in the current ratio of the company. The sharp decline in the years 2006 is due to the decline in the rate of change of the current asset.

YoY % change Current Asset 90 80 70 60 50 40 30 20 10 0 2003 YoY % change

2004

2005

2006

2007

31.90

43.00

5.97

82.80

Net fixed Assets The net fixed asset of the company has decreased at a constant rate of 0.39%. This is because the company has not invested in fixed asset in the span of 5 yrs. This shows that the company has

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not gone for expansion projects. Net fixed asset in the given period declined from Rs 5823 Cr to Rs 5453 Cr.

YoY % change Assets 100 50 0 -50 -100 -150 2003 YoY % change

2004

2005

2006

2007

-61.36

3.50

34.24

83.42

Other Assets Other assets comprises of the deferred tax assets and the investments by the company in shares, mutual funds, marketable securities, bonds and other companies. An increase of 16% is seen in this type of assets. The company has resorted to investing the cash available into other assets. The investments increased by more than 7 times in the span of 5 years.

YoY % change other Assets 60 40 20 0 -20 -40 2003 YoY % change

2004

2005

2006

2007

-18.89

21.84

24.76

51.26

Sales The sales of the company have a CAGR of 17%. This can be attributed to the growth in the infrastructure sector of the economy which also grew at CAGR of more than 10%.

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% change Sales 35 30 25 20 15 10 5 0 2003 % change

2004

2005

2006

2007

2.69

32.30

14.68

24.14

% change COGS 50 45 40 35 30 25 20 15 10 5 0 2003 % change

2004

2005

2006

2007

10.60

39.10

45.72

15.31

Gross Profit The gross profit of the company increased by a CAGR of 29.5% throughout the 5 year period. This is because of the increased efficiency on account of better management of the inventory, other current assets and investments of the company. Although the year on year growth rate declined as shown in the graph.

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% change Gross Profit 140 120 100 80 60 40 20 0 2003 % change

2004

2005

2006

2007

127.57

31.57

23.64

72.91

Expenses Total expenses increased at a CAGR of 15%. This change can be accounted by the increase in expenses of raw material which increased approximately 4 times in the span of 5 years. Other significant contributor to the increase in the expenses is the compensation to employees and purchase.

% change total Expenses 30 25 20 15 10 5 0 2003 % change

2004

2005

2006

2007

6.27

25.50

12.21

24.04

PAT 24

The profit after tax has increased at a CAGR of 31%. This increase can be attributed to the management’s efficiency in manufacturing, advertising and selling the products. This is also reflected in the net profit margin ratio of the company. although the rate of increase of PAT is showing e declining trend.

% change PAT 120 100 80 60 40 20 0 2003 % change

2004

2005

2006

2007

106.15

46.25

15.82

73.91

7.1.2 Thermax items 2002 current liabilities 201.75 % change long term 14.88 liabilities % change reserve % change sh . Cap % change total liabilities % change

339.96 23.83 614.67

2003 210.79 4.4807931

2004 296.2 40.519

2005 2006 2007 487.65 601.23 1137.66 64.635381 23.291295 89.222095

1.25 91.599462 363.6 6.9537593 23.83 0 632.44 2.890982

9

6.64 26.222222 384.97 11.864358 71.49 0 968.83 28.16907

620 344.14 -5.3520352 71.49 200 755.9 19.52122

25

7

2.17

5.4216867 435.57 13.143881 23.83 -66.6667 1087.25 12.22299

-69 566.12 29.97222 23.83 0 1749.9 60.94734

items net fixed assets % change Investments % change Current assets % change Total assets % change

2002 110.43

2003 101.99 -7.64285 242.21 42.167048 492.525 9.8913262 632.44 2.890982

170.37 546.59

614.67

2004 102.38 0.38239 286.53 18.298171 601.8

2005 134.97 31.83239 318.43 11.133215 872.845

2006 144.42 7.001556 396.97 24.664761 979.95

2007 189.74 31.3807 574.12 44.625538 1609.585

22.186691 755.9 19.52122

45.03905 968.83 28.16907

12.270793 64.251748 1087.25 1749.9 12.22299 60.94734

Axis Title

% change in current liabilities 100 90 80 70 60 50 40 30 20 10 0 1

2

3

4

5

Series1 4.48079306 40.5189999 64.6353815 23.2912949 89.2220947

We can see that thermax current liabilities is increasing at an increasing rate. trend line also shows that how these current liabilities is increasing and shows a increasing trend .thermax may have liquidity problem if it grow s at such a faster rate .

26

Axis Title

% change in long term liabilites 700 600 500 400 300 200 100 0 -100 -200 1 Series1 -91.599462

2

3

620

4

-26.222222 5.42168674

5 -69

Here thermax long term liabilities show that it’s decreasing at increasing rate and thus trend line also shows the down trend. we can say that company is try to decrease its financial risk by decreasing the long term liabilities like borrowing, debt etc. it want to decrease the obligation of paying the net interest rate .

Axis Title

% change in reserve 35 30 25 20 15 10 5 0 -5 -10 1

2

3

4

5

Series1 6.95375926 -5.3520352 11.8643575 13.1438813 29.9722203

We can see that thermax is increasing the reserve at an increasing rate. Thus despite of fall of reserve one year the overall reserve is much higher .its shows that company is increasing its retained earnings and thus decreasing the cost of debt .

27

% change in share capital 250 200 Axis Title

150 100 50 0 -50 -100 Series1

1

2

3

4

5

0

200

0

-66.66666

0

Company share capital remains same after period of 5 years. During this five years company once issue the shares to preference share holders but after the two years company buy back the same amount of preference share, leaving the overall share capital constant.

% change in total assets 70 60 Axis Title

50 40 30 20 10 0 1

2

3

4

5

Series1 2.89098215 19.5212194 28.1690699 12.2229906 60.9473442

Company total asset is increasing at an increasing rate and thus trend line shows the upward movement. We can say that company is having growth opportunity as it’s increasing its assets and at the same time increasing its reserve by giving less dividend.

28

% change in total liabilities 70 60 Axis Title

50 40 30 20 10 0 1

2

3

4

5

Series1 2.89098215 19.5212194 28.1690699 12.2229906 60.9473442

Company total liabilities is increasing just because of increase in reserve and partly because of increase in current lialiities.it is not at all bad as its suggest the company is having a growth opportunity.

Axis Title

% change in investment 50 45 40 35 30 25 20 15 10 5 0 1

2

3

4

5

Series1 42.1670481 18.2981710 11.1332146 24.6647614 44.6255384

Company is increasing its investment first a decreasing rate then at a increasing rate .mainly investment is in mutual fund which shows that company is looking income other than its core business. It is very good for any business to have multiple source of income which thrermax is trying to do. Mutual fund holds around 95 % of total investment of this company.

29

Axis Title

% change in current asset 70 60 50 40 30 20 10 0 -10 -20 1

2

3

4

5

Series1 -9.8913262 22.1866910 45.0390495 12.2707926 64.2517475

Here we can see that company is increasing its current asset at an increasing rate. We have also seen early that company is also increasing its current liabilities at increasing rate. This shows that company is using its current asset to pay back its current liabilities .this strategy is appropriate for any company. It will decree the cost of capital.

Axis Title

% change in fixed assets 35 30 25 20 15 10 5 0 -5 -10 1

2

3

4

5

Series1 -7.6428506 0.38239043 31.8323891 7.00155590 31.3806951

Company is increasing its fixed assets at a much faster rate. This shows that company possibility of future earnings.futher company is using the retained earnings to pay for fixed assets which are further reducing the cost of capital.

30

Comparative Income Statement items

2002

2003

2004

2005

2006

2007

Sales % change COGS % change Gross Profit % change Total expenses % change PAT % change

618.35

734.51 18.79 304.27 11.60 430.24 24.45

818.28 11.40 336.51 10.60 481.77 11.98

1312 60.34 468.07 39.10 843.93 75.17

1700.3 29.60 682.09 45.72 1018.21 20.65

2246.91 32.15 786.52 15.31 1460.39 43.43

713.92 14.06 58.56 112.87

798.82 11.89 65.46 11.78

1274.65 59.57 67.20 2.66

1634.90 28.26 102.53 52.57

2121.62 29.77 187.80 83.17

272.64 345.71

625.93 27.51

% change in sales 70.00 60.00 Axis Title

50.00 40.00 30.00 20.00 10.00 0.00 Series1

1

2

3

4

5

18.79

11.40

60.34

29.60

32.15

Here we can see that company sales has increase at a faster rate .its shows company compatibility, reach and competitiveness in the market. It suggests that company is growing rapidly. With trend line also suggest the upper trend which suggest that in future also company is expected to show its growth in the same manner. 31

Axis Title

% change in cogs 50.00 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 Series1

1

2

3

4

5

11.60

10.60

39.10

45.72

15.31

Here we see that company cost of goods sold has increased in third year very rapidly because of high cost of input .even in fourth year the cost increases very much. but In 5th year that is in 2007 company COSG of goods sold is increase but at a decreasing rate which is good and company should focus to reduce it in a high rate to bring it close to the market values.

% change in gross profit 80.00 70.00

Axis Title

60.00 50.00 40.00 30.00 20.00 10.00 0.00 Series1

1

2

3

4

5

24.45

11.98

75.17

20.65

43.43

Here we see that inspite of increase in cogs company gross profit I increasing at a faster rate .it shows that increase in cogs didn’t create any problem and company was able to increase its gross profit. This suggest that company has increased the price of the project undertaken to cope up with the increase in the cogs.

32

% change in total expenses 70.00 60.00 Axis Title

50.00 40.00 30.00 20.00 10.00 0.00 Series1

1

2

3

4

5

14.06

11.89

59.57

28.26

29.77

Here we see that company total expenses is increased in third year very rapidly which caused the decline in pat at severe rate. Then again in the next year it manage to decrease the total expenses % change which was must for thermal to get and maintain a reasonable pat

% change in pat 120.00

Axis Title

100.00 80.00 60.00 40.00 20.00 0.00 Series1

1

2

3

4

5

112.87

11.78

2.66

52.57

83.17

% change in pat has decreased very much in 2 nd and third year because of increase in total expenses as well as cost of goods sold. But the point is that company is able to maintain the last year pat. It doesn’t show the negative growth in pat. After that year thermax increased its pat very much by bringing down the total expenses and cost of goods sold .trend line shows the constant change in pat over the 5 years. 7.1.3 Crompton & Greaves Ltd: PL STATEMENT 33

Total income:

TOTAL INCOME 120.00

Axis Title

100.00 80.00 60.00 40.00 20.00 0.00 2004-03

2005-04

2006-05

2007-06

CAGR

% INCREASE YEAR ON YEAR TOTAL INCOME

7.48

15.12

97.12

41.71

36.35%

The total income of the firm has increased every year with maximum % increase taking place in the year 2006 compared to year 2005. The total income of the firm is growing at a CAGR of 36.35%. The increase in the total income has come mainly from increase in industrial sales. Total Expenses:

TOTAL EXPENSES 120.00

Axis Title

100.00 80.00 60.00 40.00 20.00 0.00 2004-03

2005-04

2006-05

2007-06

CAGR

% INCREASE YEAR ON YEAR TOTAL EXPENSES

4.87

14.19

95.96

42.72

35.28%

The total expenses has shown a gradual increase year on year with the maximum increase taking place in the year 2006 which is understandable because in the same year the total income of the firm has shown the maximum % increase. So, there must be high demand for its products in that

34

particular year. From the income statement we can make out that the increase in total expenses is because of the increase in raw material expenses & also compensation to employees. PAT:

PAT Axis Title

200.00 150.00 100.00 50.00 0.00 2004-03

2005-04

2006-05

2007-06

CAGR

% INCREASE YEAR ON YEAR PAT

183.09

38.40

121.07

23.48

80.84%

Its PAT has been increasing year on year. But it has increased disproportionately in the year 2004 & 2006 compared to their previous year respectively. The high increase can be attributed to more % increase in sales compared to expenses. ASSET Total Assets:

Axis Title

TOTAL ASSETS 120.00 100.00 80.00 60.00 40.00 20.00 0.00 -20.00 2004-03

2005-04

2006-05

2007-06

CAGR

% INCREASE YEAR ON YEAR TOTAL ASSETS

-4.35

-7.20

110.58

48.93

29.17%

The total assets of the company have shown a dramatic increase of 110 % in the year 2006 compared to 2005 because of the increase in the current assets. The increase in 35

current asset is because of the increase in the receivables by about 117 % & inventories by about 235 %. Though there was an increase in investment in plant & machinery by about 100% it got discounted because of increase in depreciation in that particular year.

2005 inventories 177.75 receivables 604.75

% 2006 increase 595.89 235.24 1316.11 117.63

Investments:

INVESTMENTS 30 Axis Title

20 10 0 -10 -20 -30 2004-03

2005-04

2006-05

2007-06

CAGR

% INCREASE YEAR ON YEAR INVESTMENTS 23.9091933 8.79677754 -22.262032 -0.9678906

0.93%

The increase in the year 2004 is because of the investment in equity shares & in 2005 is because of increase in investment in mutual funds. The decrease in the last two years is because of redemption by the firm in its equity investments.

Current assets

36

Axis Title

CURRENT ASSETS 160.00 140.00 120.00 100.00 80.00 60.00 40.00 20.00 0.00 -20.00 2004-03

2005-04

2006-05

2007-06

CAGR

% INCREASE YEAR ON YEAR CURRENT ASSETS

-1.52

0.37

145.95

38.89

35.55%

The increase in current asset in the year 2006 is because of the increase in the receivables by about 100 % & inventories by about 200 %. LIABILITIES: Net worth:

NET WORTH 100.00 80.00

Axis Title

60.00 40.00 20.00 0.00 -20.00 -40.00 2004-03

2005-04

2006-05

2007-06

CAGR

% INCREASE YEAR ON YEAR NET WORTH

-22.70

19.90

87.46

23.36

21.00%

The decrease in the year 2004 is because of decrease in security premium reserves. The increase in the year 2006 is because of increase in free reserve.

37

Total borrowings

Axis Title

TOTAL BORROWINGS 140.00 120.00 100.00 80.00 60.00 40.00 20.00 0.00 -20.00 -40.00 200403

200504

200605

200706

CAGR

% INCREASE YEAR ON YEAR TOTAL BORROWINGS

-26.45

-7.16

34.22

114.24

18.37%

The drop in borrowings in the first two years is because of mainly decrease in bank & financial institution borrowings. The increase of about 117 % in the year 2007 is because of increase in foreign borrowings.

1. Current liabilities:

Axis Title

CURRENT LIABILITIES 180.00 160.00 140.00 120.00 100.00 80.00 60.00 40.00 20.00 0.00 -20.00 200403

200504

200605

200706

CAGR

% INCREASE YEAR ON YEAR CURRENT LIABILITIES

13.23

-10.49

163.00

44.41

40.07%

The increase of 163 % in the year 2006 can be attributed to the increase in sundry creditors, provision & deposits & advances from employees. 38

7.1.3.BHEL items current liabilities % change long term liabilities

2002 5288.13

14.88

% change reserve

4224.85

% change sh . Cap

244.76

% change total liabilities

10580.82

% change

items net fixed assets

2002 1239.03

% change Investments

10.34

% change Current assets

8588.66

% change Total assets % change

10580.82

2003 5401.42

2004 7429.42

2.1423452

37.545682 34.316003 34.918779

38.551972

1.25 91.599462 4558.91

9

2.17

7.9070263

10.797976 14.471074 22.041666

21.070711

244.76

244.76

244.76

244.76

244.76

0

0

0

0

0

10881.44

13405.47

16668.84

21417.5

27587.49

2.841179

23.19574

24.34357

28.48825

28.80817

2003 1236.57

2004 1203.26

2005 1141.91

2006 1173.11

2007 1294.88

-0.19854

-2.69374

-5.09865

2.732264

10.3801

10.38

28.98

8.95

8.29

8.29

0.3868472

179.19075 69.116632 -7.3743017

0

8963.68

11412.73

25268.27

4.3664553

27.321926 29.496799 31.510266

30.007162

10881.44

13405.47

16668.84

21417.5

27587.49

2.841179

23.19574

24.34357

28.48825

28.80817

620 5051.18

39

2005 9978.9

2006 13463.41

6.64 7 26.222222 5.4216867 5782.14 7056.62

14779.12

19436.06

2007 18653.82

-69 8543.5

Axis Title

% change in current liabilities 50 45 40 35 30 25 20 15 10 5 0 1

2

3

4

5

Series1 2.14234521 37.5456824 34.3160031 34.9187786 38.5519716

We can see that BHEL’s current liabilities increased at an increasing rate initially and then became more or less constant. Trend line shows that how these current liabilities are increasing and shows an increasing trend. BHEL is in a comfortable state as far as its current liabilities are concerned.

% change in reserve 25

Axis Title

20 15 10 5 0 1

2

3

4

5

Series1 7.90702628 10.7979758 14.4710740 22.0416662 21.0707109

40

We can see that BHEL’s reserve is increasing at an increasing rate. Its shows that company is increasing its retained earnings and thus using more of these internal sources of capital to fulfill its capital needs rather than going for debt .

% change in total assets 35 30 Axis Title

25 20 15 10 5 0 1

2

3

4

5

Series1 2.84117866 23.1957351 24.3435702 28.4882451 28.8081708

Company’s total asset is increasing at an increasing rate and thus trend line shows the upward movement. We can say that the company is having other investment opportunities as its increasing its assets and at the same time increasing its reserve by giving less dividend.

Axis Title

% change in total liabilities 35 30 25 20 15 10 5 0 1

2

3

4

5

Series1 2.84117866 23.1957351 24.3435702 28.4882451 28.8081708

41

Company total liabilities are increasing just because of increase in reserve and partly because of increase in current liabilities. It is not at all bad as it suggest that the company is having growth opportunity and so it is going for more sources of fund finance its needs.

% change in investment 200

Axis Title

150 100 50 0 -50 -100 1

2

3

4

Series1 0.38684719 179.190751 -69.116632 -7.3743016

5 0

BHEL’s investment increased initially and then has decreased sharply and later increased marginally but overall during the past 3 years the investment value has remained almost constant. Most of the company’s is in equities which is around 98% of the company’s investment.

Axis Title

% change in current asset 40 35 30 25 20 15 10 5 0 1

2

3

4

5

Series1 4.36645530 27.3219258 29.4967987 31.5102658 30.0071619

42

Here we can see that the company is increasing its current assets at an increasing rate. We have also seen early that company is also increasing its current liabilities at increasing rate. This shows that company is using its current asset to pay back its current liabilities. This strategy is appropriate for any company. It will decrease the cost of capital.

Axis Title

% change in fixed assets 12 10 8 6 4 2 0 -2 -4 -6 1

2

3

4

5

Series1 -0.1985424 -2.6937415 -5.0986486 2.73226436 10.3801007

The company’s fixed asset decreased at a greater pace initially and this is in fact a sign of worry for the company as it is capital intensive industry and fixed assets forms a major part of its investments. But later on the fixed assets grew at a greater pace thus offsetting the initial lag. Comparative income statement items

Sales

2002

2003

2004

2005

7551.52

7735.73

8906.71

10696.37 14772.21

19067.02

2.44

15.14

20.09

38.10

29.07

3334.68

3807.84

5299.1

7292.04

8792.13

-4.23

14.19

39.16

37.61

20.57

4401.05

5098.87

5397.3

7480.17

10274.89

8.14

15.86

5.85

38.59

37.36

7881.68

9012.63

10925.74 14148.01

% change COGS

3481.81

% change Gross Profit

4069.71

% change Total expenses

7613.13

43

2006

2007

17862.11

% change 467.95

PAT % change

3.53

14.35

21.23

29.49

26.25

444.51

658.15

953.4

1679.16

2414.7

-5.01

48.06

44.86

76.12

43.80

% change in sales 45.00 40.00

Axis Title

35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 Series1

1

2

3

4

5

2.44

15.14

20.09

38.10

29.07

Here we can see that company sales have increased at a faster rate .its shows company compatibility, reach and competitiveness in the market. It suggests that company is growing rapidly. With the trend line also suggesting the upper trend which suggests that in the future also the company is expected to show its growth in the same manner.

44

Axis Title

% change in cogs 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 -5.00 -10.00 Series1

1

2

3

4

5

-4.23

14.19

39.16

37.61

20.57

Here we see that the company’s cost of goods sold has increased rapidly in the first three years because of high cost of input. Then from the fourth year the cost of goods sold has started declining at an increasing rate. In 5th year that is in 2007 company’s COGS is increasing but at a decreasing rate which is good for the company and it should focus to reduce it in a high rate to bring its competitiveness in the market.

Axis Title

% change in gross profit 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 Series1

1

2

3

4

5

8.14

15.86

5.85

38.59

37.36

Here we see that the company’s gross profit has decreased sharply in the year 2005 and it can be because of sharp increase in the COGS for the company in the year same year. Then in the next year the gross profit has increased sharply basically due to sharp increase in the sales during that year, as explained in the above graph. 45

% change in total expenses 35.00 30.00 Axis Title

25.00 20.00 15.00 10.00 5.00 0.00 Series1

1

2

3

4

5

3.53

14.35

21.23

29.49

26.25

BHEL’s total expenses have been increasing sharply over the year and it has been one of the main reasons for decline in the profit of the company. This increase in the total expenses is due to increase in the raw material cost over the years. In the last year the total expenses cooled off a bit due to decrease in the COGS.

Axis Title

% change in pat 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 -10.00 Series1

1

2

3

4

5

-5.01

48.06

44.86

76.12

43.80

PAT of BHEL has been increasing at a decent rate over the years which are 41.57% at a normalized rate year on year. Its profit declined in the 3rd year mainly due to increase in the COGS and also in the 5th year due to decrease in the sales of the company.

46

7.2CASH FLOW ANALYSIS 7.2.1 L & T The table and the graph below show the cash flow positions at the end of years 2003 to 2007. As can be seen from the graph the net cash flow from the operating activities declined up to the year 2005 after which it again increased. In the period of 5 years the cash flow from operating activity has increased. The income statement it can be seen that the income is also increasing with a CAGR of 31%. The adjustment for depreciation decreased to almost half from 2003 to 2004. Cash out flow due to change in adjustments for (profit)/loss on sale of assets changed significantly between the years 2003 to 2004. Adjustment for dividend income has also varied between the years 2003- 2007. The fluctuation in the cash flow from operations can be attributed to the increase in inventory across the years.

Cash Flow 3000

2000

Rs In Crores

1000

0

-1000

-2000

-3000 2003

2004

2005

2006

2007

Net cash flow from operating activities (indirect method)

1316.73

660.23

297.29

1016.89

2225.17

Net CF from investment activities

-329.18

-13.58

-88.25

-1353.76

-2562.51

Net CF from financing activities

-819.26

-564.66

244.12

164.66

1239.37

47

It can be seen from the diagram that the company is investing and the investment has grown in the subsequent years. This is also in line with the high retention ratio of the company. The company has primarily invested in the purchase of fixed assets and purchase of investments. The expenditure for purchase of fixed assets is a capital expenditure and will be beneficial to the company in terms of increasing the operating efficiency. The increase in the profit across the years confirms the same. It can be seen that the investments of the company in bonds and shares of other companies is generating an increasing stream of dividends and interests. L & T’s cash flow engine is not only generating enough cash to cover “keeping the company whole”, it is also able to throw off increasing investment stream annually for growth and investment, and the amount of excess cash has increased in the span of 5 years as can be seen from the diagram below. A glance at the working capital account differences indicates that receivables, other than assets have grown over a period of 5 years. This picture is consistent with the company investing more on fixed asset and expansion. L & T has good news from the investing activity that the investing cash flow is negative. This implies that the company is looking to invest in capital and fixed assets and is in a growing curve.

Rs In Crores

Cash flow -closing balance 2000 1800 1600 1400 1200 1000 800 600 400 200 0 Cash flow -closing balance

2003

2004

2005

2006

2007

457.81

537.2

990.36

815.99

1718.02

The company has good news that the company is looking to grow by taking long term debts. This is also confirmed from the higher D/E ratio across the time window of 5 years. The company has a sustained and healthy repayment schedule to service its debt. A company like L & T has projects of higher gestation periods and long term financing when ensured with proper servicing of debt is a sign of growth i.e. a positive sign for the investors. This is also reflected in the increasing return on earnings and increasing EPS. 48

L & T is not issuing much stock; instead it is buying back substantial amount of its stocks. It is the single largest use of fund outside capital expenditure. This is a good news scenario because company may be cashing in what it considers a low price t buy back its stocks, or perhaps protecting itself from takeover attempts. In either event the company appears to have enough cash to make this large non- routine investment. 7.2.2 Thermax

CASH FLOW ANALYSIS 400 300 200 100 0 -100 -200 -300 Mar 2003

Mar 2004

Mar 2005

Mar 2006

Mar 2007

Net cash flow from operating activities (indirect method)

100.61

54.65

107.39

209.36

352.43

Net cash inflow/(outflow) from investment activities

-72.53

-33.1

-74.31

-90.77

-216.01

Net cash inflow/ (outflow) from financing activities

-27.31

-25.86

-37.76

-91.9

-93.92

Cash flow -- closing balance

37.04

32.73

28.05

54.74

97.24

From the analysis of the cash flow statements of Thermax Ltd., it can safely be inferred that the company has been steadily improving its cash position. The net cash flow in the year 2003 was very minimal, after which it drastically fell down to a negative figure for two consecutive years, following which it showed a steep rise in the recent financial two years. One justification for this steep rise in the cash flow movements on the positive side can be attributed to the rise in the firm’s investment and financing activities, and not only the operating ones. The firm’s investments have shown a steady increase, form which returns have also pushed its cash flow. At the same time, if we look at the firm’s tax figures, we can safely derive that it 49

has reduced its debt component steadily, due to which its outflow in the form of interest payments have come down substantially. 7.2.3 Crompton Greaves

Cash Flow Analysis 600 400

Axis Title

200 0 -200 -400 -600 -800 2003

2004

2005

2006

2007

Net cash flow from operating activities (indirect method)

161.5

195.4

125.24

192.53

370.35

Net cash inflow/(outflow) from investment activities

14.6

-14.69

-25.72

-102.63

-724.5

Net cash inflow/ (outflow) from financing activities

-86.2

-157.32

-29.38

50.48

388.29

Net cash inflow/(outflow) due to net increase/(decrease) in cash & cash equivalents

89.9

23.39

70.14

140.38

34.14

1. The company is getting a positive cash flow from operating activities & it is showing an increasingly upward trend. This is happening because of more efficient management of working capital by getting enough leverage from the creditors by postponing the payment to them. This gets reflected in increasing bills payable compared to bills receivable. 2. During these five years, the company has increased its investment in CAPEX. The funding for its CAPEX has been done mainly from borrowing which gets reflected in increasing debt-equity ratio. The company couldn’t manage to fund its CAPEX from cash flow from operating activities because most of the years its CAPEX is more than its cash inflow from operating activities. During these periods the company has not raised any fresh equity capital. The company has also been very liberal in paying out dividends because for the last four years it has paid dividends. 3. The cash flow from financing activities is negative in the first two years because the company was repaying its past borrowing & the CAPEX was less in those years & the funding for it was mainly done from cash flow from operating activities. During the last 50

two years the cash flow from financing activities is coming out to be positive because it has to borrow money to fund its increasing CAPEX. 7.2.4 BHEL BHEL has been performing quite well over the years as its cash flow from its operating activities has really been good except in 2005 when it declined drastically from 1695 cr in 2004 to 818 cr in 2005. The major reasons for this decline can be attributed to the sharp increase in its receivables from 632 cr in 2004 to 1555 cr in 2005. Also its inventories have increased sharply from 7 cr in 2004 to 103 cr in 2005. The cash outflow in 2005 is less than the other years which might seem to be a matter of concern for the company but on looking deep into the components of investing activities, it reveals that the company’s purchase of fixed assets has infact increased over the previous years at a handsome rate of 11.11%. The major reason for the investing activity to be less in this year is due to receipt of 112.19 crores as interest which is 43.3% more than the last year and thus makes the total investing activity to be less than the other years.

Rs Crore

Cash Flow Analysis 7000 6000 5000 4000 3000 2000 1000 0 -1000 -2000 Mar 2003

Mar 2004

Mar 2005

Mar 2006

Mar 2007

Net cash flow from operating activities (indirect method)

1240.28

1695.51

818.3

1623.83

2821.37

Net cash inflow/(outflow) from investment activities

-110.26

-109.57

-35.26

-156.51

-212.66

Net cash inflow/ (outflow) from financing activities

-285.7

-247.21

-264.82

-511.21

-933.77

Net cash inflow/(outflow) due to net increase/(decrease) in cash & cash equivalents

844.32

1338.73

518.22

956.11

1674.94

Cash flow -- closing balance

1320.91

2659.64

3177.86

4133.97

5808.91

The cash outflow for the years 2006 and 2007 has increased a lot as compared to the other years and the reason for this is that the company has gone for dividend payout to the tune of 474 cr and 51

405 cr in the two years respectively which was an increase of 116% in 2006 as compared to the previous year. The net cash inflow in the year 2005 is less as compared to the other years even though the net outflow due to investing activity has decreased in this year. The major reason for this a substantial decrease in the net cash flow from operations and this is mainly due to increase in the trade receivables and inventories, as explained above. If we ignore this year then the overall increase in the net cash flow over the years has really been good. 7.3.COMMON SIZE STATEMENT ANALYSIS

Industrial Sales as % of Sales % of Sales

102.00 100.00 98.00 96.00 94.00 92.00 90.00 88.00 86.00 84.00 Mar 2003

Mar 2004

Mar 2005

Mar 2006

Mar 2007

BHEL

99.41

99.33

99.37

99.49

99.52

L&T

94.83

93.74

90.51

92.59

90.51

CROMPTON GREAVES

99.64

99.65

99.66

99.81

99.86

THERMAX

99.17

99.44

99.78

98.96

99.64

Since BHEL, L&T, Crompton Greaves and Thermax are in the Capital Goods sector and therefore their major sales would be industrial sales and all most all the players are having 99% of their sales in the industrial segment only except L&T, which is having around 90% in the last year which is really good for the company since its sales are diversified to some extent as it is also having infrastructure and InfoTech as its subsidiary and so it is in a better position to hedge itself in case of a downturn in the Capital Goods Sector.

52

% of Sales

Raw Material Expenses as % of Sales 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 Mar 2003

Mar 2004

Mar 2005

Mar 2006

Mar 2007

BHEL

40.63

40.54

47.48

47.81

44.75

L&T

29.72

39.69

39.60

39.14

39.60

CROMPTON GREAVES

62.15

43.89

44.02

51.31

56.21

THERMAX

57.66

58.05

63.75

59.37

61.44

L&T is again efficient in sourcing raw materials at cheaper rates as compared to its competitors and over the years it has been almost at the same of its sales. Its nearest competitor, BHEL is sourcing raw materials at a rate which is around 5% more than L&T as a percentage of sales. So this gives L&T a major advantage over its competitors.

% of Sales

Compensation to Employees as % of Sales 25.00 20.00 15.00 10.00 5.00 0.00 Mar 2003

Mar 2004

Mar 2005

Mar 2006

Mar 2007

BHEL

21.44

20.99

15.60

12.72

12.42

L&T

6.88

6.98

7.35

6.33

7.35

CROMPTON GREAVES

9.33

7.75

6.52

12.58

11.99

THERMAX

12.25

12.38

8.73

9.40

8.91

Again L&T is having an edge over its competitors and is able to source cheap labour for its projects. Other players are also ok but a major concern is for BHEL as it is in this business for 53

long and still its labour cost is way above the major players which could reduce its profit margins. Though BHEL has improved itself a lot over the years whereas Crompton Greaves has given its edge in sourcing cheap labours over the years. Thermax is having good capabilities in sourcing cheap labour which around the industry average.

% of Sales

Selling and Distribution Expenses as % of Sales 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 Mar 2003

Mar 2004

Mar 2005

Mar 2006

Mar 2007

BHEL

1.79

1.98

1.69

1.48

1.39

L&T

7.25

1.57

1.24

1.39

1.24

CROMPTON GREAVES

4.22

3.66

3.81

3.70

4.08

THERMAX

4.66

4.49

4.06

4.14

3.13

BHEL and L&T are having low selling and distribution expenses as compared to the other two players because they are in this industry for long and have established a long network of distribution channels as compared to the other players. Also, they have build up their brands over the years which has lead to cheaper selling and distribution expenses Despite all the above mentioned problems, BHEL is being able to overtake its competitors in PBDITA margin as percentage of its sales and over the years it has been increasing consistently. Though other players are also improving but there are minor hiccups in between. L&T was also growing consistently over the years except in 2006 where it got a hit in its profit due to increase in its cost for outsourced manufacturing jobs which rose from 16.75 in 2005 to 20.31 in 2006 as a percentage of sales. Even Thermax got a hit on its PBDITA in the year 2005 due to increase in the raw material expenses from 58.05 in 2004 to 63.75 in 2005 as a percentage of sales.

54

PBDITA as % of Sales % of Sales

25.00 20.00 15.00 10.00 5.00 0.00 Mar 2003

Mar 2004

Mar 2005

Mar 2006

Mar 2007

BHEL

13.28

15.23

17.48

19.40

21.18

L&T

11.60

12.92

17.66

13.56

17.66

CROMPTON GREAVES

8.66

9.92

8.80

8.89

9.89

THERMAX

12.42

11.83

8.73

10.99

12.97

EBIT as % of Sales % of Sales

25.00 20.00 15.00 10.00 5.00 0.00 Mar 2003

Mar 2004

Mar 2005

Mar 2006

Mar 2007

BHEL

10.92

13.00

15.44

17.73

19.75

L&T

7.41

11.03

16.00

12.10

16.00

CROMPTON GREAVES

5.82

7.01

6.34

7.17

8.26

THERMAX

10.81

10.90

7.98

10.26

12.50

Again EBIT of BHEL has been impressive over the years as compared to other players and has been increasing consistently. EBIT of around 20% in the last year for BHEL has really been good. L&T was also growing consistently over the years except in 2006 where it got a hit in its 55

profit due to increase in its cost for outsourced manufacturing jobs which rose from 16.75 in 2005 to 20.31 in 2006 as a percentage of sales. Even Thermax got a hit on its EBIT in the year 2005 due to increase in the raw material expenses from 58.05 in 2004 to 63.75 in 2005 as a percentage of sales.

% of Sales

Depreciation as % of Sales 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 Mar 2003

Mar 2004

Mar 2005

Mar 2006

Mar 2007

BHEL

2.36

2.22

2.05

1.66

1.43

L&T

4.19

1.88

1.66

1.46

1.66

CROMPTON GREAVES

2.58

2.33

1.91

1.72

1.63

THERMAX

1.98

1.51

0.91

0.94

0.81

Depreciation for Thermax has been the lowest as compared to the other players. For most of them it is almost the same and has been consistently declining over the years.

% of Sales

PAT as % of Sales 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 Mar 2003

Mar 2004

Mar 2005

Mar 2006

Mar 2007

BHEL

5.75

7.39

8.91

11.37

12.66

L&T

3.50

7.02

10.98

7.84

10.98

CROMPTON GREAVES

1.49

3.91

4.72

5.27

4.79

THERMAX

7.97

8.00

5.12

6.03

8.07

56

PAT of BHEL has been impressive over the years as compared to other players and has been increasing consistently. L&T was also growing consistently over the years except in 2006 where it got a hit in its profit due to increase in its cost for outsourced manufacturing jobs which rose from 16.75 in 2005 to 20.31 in 2006 as a percentage of sales. Even Thermax got a hit on its PAT in the year 2005 due to increase in the raw material expenses from 58.05 in 2004 to 63.75 in 2005 as a percentage of sales. Common Size BS

% of Total assets

Depreciation as % of Total Assets 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 Mar 2003

Mar 2004

Mar 2005

Mar 2006

Mar 2007

BHEL

20.50

17.99

15.71

13.26

11.30

L&T

20.72

12.78

11.67

9.67

7.66

CROMPTON GREAVES

22.14

27.13

30.85

34.34

41.96

THERMAX

18.08

14.24

11.11

10.48

7.14

Depreciation as a % of total assets has been decreasing at almost a constant rate over the years for all the players except Crompton Greaves which has been increasing at a rapid pace. This is a matter of concern for Crompton Greaves because if we see at the investment rate of the company then it is almost constant or decreasing as a % of sales. But in contrast, Thermax is following an aggressive policy of investment over the years which are around 30-35% as a % of sales and it is way ahead of other players in this field.

57

% of Total assets

Net Fixed Assets as % of Total Assets 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 Mar 2003

Mar 2004

Mar 2005

Mar 2006

Mar 2007

BHEL

11.36

8.98

6.85

5.48

4.69

L&T

41.53

19.78

16.80

18.08

21.92

CROMPTON GREAVES

25.81

26.97

26.62

26.67

19.21

THERMAX

16.13

13.54

13.93

13.28

10.84

From the graph it is clear that BHEL has been the most efficient firm out of the four over here in terms of not engaging large resources in fixed assets as fixed assets carry a cost with it whether the firm is able to sell to its products or not. Other players are also improving upon it over the years.

% of Total assets

Current Assets as % Total Assets 100.00 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 Mar 2003

Mar 2004

Mar 2005

Mar 2006

Mar 2007

BHEL

82.38

85.13

88.66

90.75

91.59

L&T

50.58

67.93

71.41

67.61

65.05

CROMPTON GREAVES

52.18

57.94

59.65

64.52

75.35

THERMAX

41.78

46.11

51.44

48.58

55.17

58

Again BHEL is having more of current assets rather than fixed assets as compared to other players. But if we give a closer look at the components of the current assets then it reveals that BHEL is having large amount of cash and bank balance as a % of total assets as compared to other players, which shows that the company is not able to use its resources properly as its money is lying idle and might be the company is not having enough opportunities to invest.

% of Total assets

Cash and bank balance as % of Total Assets 25.00 20.00 15.00 10.00 5.00 0.00 Mar 2003

Mar 2004

Mar 2005

Mar 2006

Mar 2007

BHEL

12.14

19.84

19.06

19.30

21.06

L&T

3.43

4.97

7.51

4.96

6.91

CROMPTON GREAVES

3.72

3.77

5.54

5.01

7.35

THERMAX

5.86

4.33

2.90

5.03

5.56

BHEL is having large amount of cash and bank balance as a % of total assets as compared to other players, which shows that the company is not able to use its resources properly as its money is lying idle and might be the company is not having enough opportunities to invest.

% of Total assets

Inventories as % of Total Assets 25.00 20.00 15.00 10.00 5.00 0.00 Mar 2003

Mar 2004

Mar 2005

Mar 2006

Mar 2007

BHEL

18.39

15.69

17.66

17.65

15.42

L&T

13.03

18.18

18.47

15.06

14.78

CROMPTON GREAVES

11.08

13.14

12.44

13.31

21.19

THERMAX

9.67

10.84

13.50

11.80

15.00

59

Other players are maintaining a healthy bank and cash balance as which is around 6-7% of its total assets on an average which is good for an industry like capital goods. Since Capital Goods industry is a capital intensive industry and these companies need substantial amount of resources to be engaged in inventories, so looking at this fact we can say that an inventory of around 15% of total assets on an average is good for these companies as maintained by them.

% of Total assets

Receivables as % of Total Assets 50.00 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 Mar 2003

Mar 2004

Mar 2005

Mar 2006

Mar 2007

BHEL

46.10

41.67

43.08

43.82

43.57

L&T

34.12

44.79

45.43

47.59

43.36

CROMPTON GREAVES

37.37

41.03

40.90

45.29

46.81

THERMAX

23.54

28.39

33.19

29.71

32.84

Receivables for Thermax has been less as compared to other players which shows that the company is able to sell its products more in cash rather than on credit which shows that the company is having good demand for its products.

60

% of Total Libilities

Net Worth as % of Total Liabilities 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 Mar 2003

Mar 2004

Mar 2005

Mar 2006

Mar 2007

BHEL

44.15

39.51

36.16

34.09

31.86

L&T

24.11

24.47

25.15

30.19

27.82

CROMPTON GREAVES

26.17

30.05

24.28

31.38

27.93

THERMAX

61.26

54.98

47.11

42.25

33.71

Initially BHEL and Thermax were having more of reserves and surplus as part of net worth in their kitty which they used it over the years for their operations or investing activities and finally have come to the industry level. L&T and Crompton Greaves are maintaining a constant rate of net worth as a % of their total liabilities. All the companies are maintaining more or less the same paid up capital over the years as a source of financing.

% of Total Libilities

Reserves and Surplus as % of Total Liabilities 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 Mar 2003

Mar 2004

Mar 2005

Mar 2006

Mar 2007

BHEL

41.90

37.68

34.69

32.95

30.97

L&T

22.25

24.24

24.96

30.02

27.60

CROMPTON GREAVES

23.01

26.57

20.64

27.45

26.07

THERMAX

57.49

45.53

39.74

40.06

32.35

61

% of Total Libilities

Initially BHEL and Thermax were having more of reserves and surplus as part of net worth in their kitty which they used it over the years for their operations or investing activities and finally have come to the industry level. L&T and Crompton Greaves are maintaining a constant rate of net worth as a % of their total liabilities.

Total Borrowings as % of Total Liabilities 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 Mar 2003

Mar 2004

Mar 2005

Mar 2006

Mar 2007

BHEL

4.89

4.01

3.21

2.59

0.31

L&T

35.24

25.60

26.20

21.26

25.86

CROMPTON GREAVES

33.51

30.62

23.55

23.56

15.01

THERMAX

0.20

1.19

0.69

0.64

0.12

Since BHEL had more of bank and cash balance with it and Thermax had more of reserves and surplus with it over these years, so these companies didn’t go for any huge borrowings whereas L&T and Crompton Greaves had to resort to borrowings to finance its operations and projects.

62

% of Total Libilities

Sundry Creditors as % of Total Liabilities 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 Mar 2003

Mar 2004

Mar 2005

Mar 2006

Mar 2007

BHEL

14.37

12.96

12.60

13.09

12.83

L&T

16.84

20.95

24.24

27.21

25.54

CROMPTON GREAVES

30.81

34.56

40.22

38.62

32.07

THERMAX

15.04

14.70

21.39

15.21

17.81

Sundry Creditors for L&T has been increasing over the years at a constant rate which is a good sign for the company as its credibility is increasing in the market. Also the sundry creditors as a % of total liabilities for Crompton Greaves are above the industry average which shows that the company is utilizing its credibility with its suppliers in an efficient way.

63

7.4 .CAGR ANALYSIS Balance Sheet

Current Liabilities Long term liabilities Share Capital Reserves Current Assets Net Fixed Assets Other Assets

Bhel

Larsen & toubro

36.32

52.42

-36.59 ---17 29.56 1.16 -5.46

8.15 -30.92 23.32 12.74 -0.39 16.86

Crompton greaves 40.1 18.37

thermax 54.10 -38.20

8.77 22.34 35.55 27.95 .93

---13.60 31 14.5 35.5

Findings from the CAGR analysis of balance sheet items :•

Larsen & toubro current liabilities is increasing at a much faster rate i.e. 52 % and at the same time the current assets is increasing just 12.74 % which suggest that company is using its short term liabilities for the long term assets which may bring the problem of liquidity and at the same time cost of capital increases .so l & t should be cautious and should try to decrease its current liabilities.

•

Bhel and thermax are decreasing its long term liabilities at around 35 % which suggest that company is reducing its financial risk .at the same time both company has not issued any share capital wchich suggest that company instead of investing in fixed assets ,they are reducing their obligation to pay back the interest .

•

Crompton greaves has cagr of 27.95 % in net fixed assets which suggest that company is in growth stage and expected to grow in future at a much faster rate .

•

Larsen & toubro has decreased its share capital by 30 .92 % which will increase the EPS of of the company and thus valuation of stock will increase . Thus wealth maximization , the main aim of company , will be achieved.

64

Cagr Analysis Of Income Statement

Sales COGS Gross Profit Total expenses PAT

Bhel

Larsen & toubro

25.30 27.42 23.6 22.70 52.67

17.15 23.65 29.5 14.96 31.01

Crompton greaves 36.35 30.91 37.36 35.28 80.84

thermax 32.25 26.80 35.73 31.3 33.82

Findings from the CAGR analysis of INCOME STATEMENT items In terms of sales, Crompton greaves is best performing company as its is having the cagr of 36.35 % while Larsen is growing at a average rate of 17.15 % .

•

We can see that in terms of cogs , larsen & toubro is very much cost efficient but at the same time Larsen gross profit cagr is lesser than Crompton greaves and thermax which suggest that Larsen price for the project undertaken is also low.

•

In terms of total expenses Larsen and toubro is doing a excellent job as it is increasing at only 14.96 % whereas other three companies is increasing at a much higher rate .

•

Well pat cagr shows something different its Crompton greaves , which pat is increasing at 80 % for the last five years .whereas bhel pat cagr is also very good as it increasing at 53.67 % ehich is much above than l & t and thermax pat cagr

65

7.5DUPONT ANALYSIS 7.1.Larsen and toubro

Turn Over Gross Margin Operating Leverage C.EBIT/GP D.EBIT/NA(AxBxC) RONA Financial leverage E. PAT/EBIT Financial leverage F. NA/NW D.PAT/NW ROE (DxExF) Retention H. RE/PAT Equity Growth I. RE/NW (GxH) profit margin J. EBIT/Sales A. Sales/NA B.GP/ sales

2003 0.80 0.04

2004 1.01 0.10

2005 1.10 0.10

2006 1.01 0.10

2007 0.83 0.15

3.24 0.11

2.64 0.26

1.33 0.14

1.25 0.13

1.30 0.16

0.30

0.54

0.62

0.58

0.62

4.15

4.09

3.98

3.31

3.59

0.12 1.52 0.18 0.14

0.29 1.24 0.36 0.26

0.34 1.29 0.44 0.13

0.26 1.18 0.31 0.13

0.33 1.27 0.42 0.19

It can be seen that the L & T’s RONA has a almost constant value except for the year 2004 where is increased sharply from 11% to 26%, this is because of the increase in the asset turn over in the corresponding year. The return on net asset in the year ending 2007 stands at 16%. The return on equity shows an impressive increase from 12% in 2003 to 33% in 2007. This is on account of increase in financial leverage and better RONA. L & T’s PAT/EBIT has increased where as NA/NW has declined but the combined effect has been favorable. RONA increased by .05 percent points. The dividend paid has increased on account of increase in dividend paid from 2003 to 2007. The retention ratio has hence decreased. Although retention ratio has decreased slightly, the return on earnings has shown an increase, this is due to increase in financial leverage. This has translated into equity growth which has also increased to 42% in 2007. The Chart below (DUPONT Chart) is showing L & T’s performance in terms of share holder’s return.

66

DuPont Chart: L & T’s Financial performance, 2007

9.5.2.Crompton greaves

A. sales/NA B GP/sales C. EBIT/GP D EBIT/NA (A*B*C) E.

PAT/EBIT

F. NA/NW G. PAT/NW (D*E*F) H. RE/PAT I.

RE/NW(G*H)

2003 1.193399 0.37

2004 2005 2006 2007 1.346846 1.666038 1.564805 1.428264 0.35 0.35 0.37 0.32

0.24

0.28

rona financial leverage financial leverage

0.105974

0.131991 0.145778 0.138955 0.141684

0.17

0.39

0.53

0.59

0.48

3.32

4.11

3.18

3.58

4.32

roe retention equity growth

0.059812 1

0.211568 0.245695 0.2935 0.27 0.83 0.9

0.293796 0.5

0.059812

0.057123 0.203927 0.26415

0.146898

turnover gross margin operating leverage

67

0.25

0.24

0.31

7.5.3.BHEL

A. Sales/NA

B.GP/ sales C.EBIT/GP

2003

2004

2005

2006

0.72

0.73

0.71

0.78

16.03 19.04

7.65

10.99

0.57

0.60

0.61

0.66

0.65

6.52

8.33

3.3

5.62

7.49

0.53

0.57

0.58

0.64

0.64

2.27

2.53

2.77

2.93

3.14

9.25

12.43

15.82

23.00

27.48

0.78

0.71

0.81

0.72

0.83

7.21

8.79

12.83

16.51

22.87

0.09

0.11

0.05

0.07

0.10

Turn Over

Gross Margin Operating Leverage

D.EBIT/NA(AxBxC) RONA Financial leverage E. PAT/EBIT Financial leverage F. NA/NW G.PAT/NW ROE (DxExF) H. RE/PAT

Retention

I. RE/NW (GxH)

Equity Growth

J. EBIT/Sales

profit margin

2007 0.78

14.80

It can be seen that the BHEL’s RONA has been fluctuating over the years and it also came to a low of 3.3% in 2005. It is mainly because of decrease in the gross profit margin in the year 2005 to 7.65 from 19.04 in the previous year. It is because of sharp increase in the COGS for the company in the same year. The return on equity shows an impressive increase from 9.25% in 2003 to 27.48% in 2007. This is on account of increase in financial leverage of the firm. BHEL’s PAT/EBIT has declined where as NA/NW has increased but the combined effect has been favorable. The dividend paid has increased on account of increase in dividend paid from 2003 to 2007. The return on earnings has shown an increase, this is due to increase in financial leverage. This has translated into equity growth which has also increased to 27.48% in 2007. The Chart below (DUPONT Chart) is showing BHEL’s performance in terms of share holder’s return.

68

DuPont Chart: BHEL’s Financial performance, 2007

69

7.6. SUSTAINABLE GROWTH RATE MODEL

return on equity 40.00

in terms of %

35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 2003

2004

2005

2006

2007

l&t

11.63

29.13

34.01

26.31

32.82

bhel

9.25

12.43

15.82

23.00

27.48

thermax

15.11

15.75

14.72

22.32

32.71

crompton greaves

5.93

21.70

25.05

29.54

29.57

industry

10.48

19.75

22.40

25.29

30.65

The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.it is a measure of a corporation's profitability that reveals how much profit a company generates with the money shareholders have invested. Here we can see that roe for all the companies are more or less same at the end . so we cant judge which company is better in terms of roe . As a risk averse investor I would like to invest in bhel because this is the only stock which is growing at a consistent rate and all other are having volatility in their roe . so less risk will be there , but obvious less return will be there . As a risk taker investor I will prefer to go with thermax because for last three years company’s roe is growing at a rapid pace which suggest high future return followed by high future risk.

70

Financial Leverage

Financial Leverage 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 31.03.2003

31.03.2004

31.3.2005

31.3.2006

31.3.2007

L&T

4.15

4.09

3.98

3.31

3.59

Cromton Greaves

4.15

4.09

3.98

3.31

3.59

Thermax

3.33

4.12

3.19

3.58

4.32

Bhel

2.27

2.53

2.77

2.93

3.14

Industry

3.47

3.71

3.48

3.28

3.66

Larsen and Tubro has a very high D/E ratio as compared to the industry values. This value is high owing to the high amount of debt at 25 percent of the total asset (see common size Balance sheet). Simultaneously the company has decreased the equity capital within this span of 5 years from 2 percent in 2003 to 0.22 percent in 2007. The higher value of the debt to equity ratio leads to an increase in the earnings per share from Rs 15 in 2003 to 85 in year 2007. Again when we look at the debt equity ratio of crampon and greaves, it has decreased marginally across the time window. This is also reflected in the EPS of the shares which show a marginal decrease. Thermax on the other had has a very low debt to equity ratio. BHEL has a low debt equity ratio compared to the industry average. It is around 0.10 from 2003 to 2006 but decreases sharply in the year 2007. The decrease is because bonds worth 500 corers expired in mar 2006. After paying back 500 corers the borrowings component decreased. Debt to Asset Ratio The debt to asset ratio for BHEL is quite good compared to the industry average, while its debt to equity is not as high. This shows the company has large assets and it is a healthy sign. The decrease in the debt – asset ratio is because the company has disposed some of its fixed asset in the latter years. L & T is also has a good debt to asset ratio which is almost constant across the 71

time window. Considering the debt to asset ratio it can be said that out of the companies BHEL and L& T are comparatively highly levered. For a sector like this where the gestation period of the projects is high and the inventory cost ids high, debt- equity and debt – asset ratio is bound to be on the higher side. Also when we look at thermax, it is not relying on the debt. This makes the company’s stocks less riskier.

return on assets 16.00 14.00

in terms of %

12.00 10.00 8.00 6.00 4.00 2.00 0.00 2003

2004

2005

2006

2007

l&t

2.80

7.13

8.55

7.94

9.13

bhel

4.14

5.42

6.34

8.82

9.85

thermax

9.39

9.43

7.79

9.97

13.60

crompton greaves

1.78

5.27

7.86

8.25

6.84

industry

4.53

6.81

7.64

8.75

9.86

Return on assets measures a company’s earnings in relation to all of the resources it had at its disposal [the shareholders’ capital plus short and long-term borrowed funds]. Return on assets [or ROA for short] tells an investor how much profit a company generated for each re1 in assets. The return on assets figure is also a sure-fire way to gauge the asset intensity of a business. Here also we see that in case of return of assets thermax is rank 1 for the last two years company is able to use its asset in a best possible manner. We can say that less money can be reinvested into it to continue generating earnings .this is a good thing . The lowest return on assets is of Crompton greaves where for last two years there return on assets is decreasing which suggest that they are very much less efficient in using their total assets .The lower the profit per rupee of assets, the more asset-intensive a business is. The higher the profit per dollar of assets, the less asset-intensive a business is. All things being equal, the 72

more asset-intensive a business, the more money must be reinvested into it to continue generating earnings. This is a bad thing

net profit margin 14.00 12.00 in terms of %

10.00 8.00 6.00 4.00 2.00 0.00 2003

2004

2005

2006

2007

l&t

3.50

7.02

7.76

7.84

10.98

bhel

5.75

7.39

8.91

11.37

12.66

thermax

7.97

8.00

5.12

6.03

8.70

crompton greaves

1.49

3.91

4.72

5.27

4.79

industry

4.68

6.58

6.63

7.63

9.28

Net Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin is displayed as a percentageThe Net Profit Margin measures the Net Earnings in relation to the Net Sales. After all the bills are paid and expenses covered, this ratio measures how much net profit remains out of each dollar of sales. As with the other margin ratios, the higher the Net Profit Margin, the better. Here in our industry we can see that bhel has increased its net profit margin from 5 .75 % to 12 .66 %. Its really show its effeicieny and continous improvement . further it is having highest highest net profit margin in comparision to others players . so in terms of profit margin bhel is a best stock among the other three players . Further the caution is we have seen that thermax was having highest gross margin but in terms of net profit margin below industry average . this is mainly because the thermxa is having 2.5 % of the total expenses outsourced.they .Have incurred outsourced profeesional expenses whereas no other company have this expense and their income from interst and dividend is also very low in comparison to other companies . companiation of this low indirect income and high indirect expenses have resulted in low net profit margin instead of very good high gross profit margin. Crompton greaves is well below the industry average in terms of net profit margin also. 73

2. Dividend pay-out ratio

Dividend Payout 35 30

Axis Title

25 20 15 10 5 0 31.03.2003

31.03.2004

31.3.2005

31.3.2006

31.3.2007

L&T

26.6

25.03

15.98

30.28

17.84

BHEL

0.22

0.29

0.19

0.28

0.17

C&G

0

7

1

0

2

0.02

0.04

0.03

0.02

0.00

Thermax

This ratio looks at the dividend payment in relation to net income and can be calculated as follows: # $  !%&  # $  '(

)( !"

Generally, the low growth companies have higher dividends payouts and high growth companies have lower dividend payouts.

74

Tax Rate

Tax Rate 50.00 45.00 40.00

Axis Title

35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 31.03.2003

31.03.2004

31.3.2005

31.3.2006

31.3.2007

L&T

20.30

27.80

19.75

24.82

24.39

BHEL

43.49

40.07

39.26

34.43

35.12

C&G

29

21

10

16

34

25.57

26.20

35.20

40.67

35.36

Thermax

The general trend in the industry in terms of its tax rate is showing a steady trend, except for Crompton and Greaves which is showing an upward trend. This can be attributable to the reduction in its debt component. By seeing at the ratios from the Sustainable Growth Rate Model we can conclude that L&T has outsmarted most of the stocks over the years. This is because of its higher ROE over the years than the industry and its competitors. Also its Net Profit Margin is the second highest after BHEL. Though BHEL has the highest Net Profit Margin but it was not able to capitalize on this as its ROE is lowest among the competitors and the below the industry average. The possible reason for this is that BHEL has almost zero debt and it is not utilizing its financial leverage to its best use. Also, L&T has distributed highest dividend as compared to other players and it is way ahead of them. The effective tax rate for L&T has also been one among the lowest which shows that the company is managing its resources in an efficient manner as compared to others.

75

7.7 OTHER RATIOS Acid test/Quick ratio A stringent test that indicates whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory. The acid-test ratio is far more strenuous than the working capital ratio, primarily because the working capital ratio allows for the inclusion of inventory assets. Companies with ratios of less than 1 cannot pay their current liabilities and should be looked at with extreme caution. Furthermore, if the acid-test ratio is much lower than the working capital ratio, it means current assets are highly dependent on inventory. Retail stores are examples of this type of business. The term comes from the way gold miners would test whether their findings were real gold nuggets. Unlike other metals, gold does not corrode in acid; if the nugget didn't dissolve when submerged in acid, it was said to have passed the acid test. If a company's financial statements pass the figurative acid test, this indicates its financial integrity.

Quick Ratio 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 31.03.2003

31.03.2004

31.3.2005

31.3.2006

31.3.2007

L&T

1.16

1.08

1.15

1.13

1.18

Cromton Greaves

1.16

1.02

1.14

0.98

0.91

Thermax

0.96

0.69

0.55

0.67

0.62

Bhel

1.16

1.08

1.15

1.13

1.18

Industry

1.11

0.96

1.00

0.98

0.97

76

Laresen & Tubro The quick ratio of the company is very much constant in this time span, showing that it has a sound liquidity. A value greater than one also indicates that the company has sufficient quick assets to dispose its quick liabilities. Crompton & Greaves Crompton Greaves has a healthy value of quick ratio in the years 2003 to 2005. It is less than one in 2006 and 2007. The decline is due to the decrease in the current assets or the increase in the inventories compared to the previous years. This is because the current liabilities increased by nearly 400 percent while the quick assets (current assets- inventories) increased only by 200 percent.

Thermax The quick ratios of thremax over the time window of 5 years is less than one, which shows a bad liquidity position of the company. It goes on decreasing constantly, which is partly due to increase in inventory, decrease in current assets and increase in current assets. This is because the current liabilities increased by more than 450 percent while quick assets increased by only 175 percent. this is because of lower inventory turnover and larger holding period of inventory. Thus if thermax’s inventory do not sell, and it has to pay all its current liabilities, it may find it difficult to meet its obligations as the quick ratio stands at 0.62 at the end of financial year 2007.

BHEL The quick ratio is close to one throughout the time window of 5 years. The balance sheet shows that both the current assets and current liabilities have increased over the years. The company has a sound liquidity position and the values are at par with the industry.

77

CASH RATIO The cash ratio is an indicator of a company's liquidity that further refines both the current ratio and the quick ratio by measuring the amount of cash; cash equivalents or invested funds there are in current assets to cover current liabilities. The operating cash flow ratio can gauge a company's liquidity in the short term. Using cash flow as opposed to income is sometimes a better indication of liquidity simply because, as we know, cash is how bills are normally paid off.

Chart Title 0.60 0.50 Axis Title

0.40 0.30 0.20 0.10 0.00 31.03.2003

31.03.2004

31.3.2005

31.3.2006

31.3.2007

L&T

0.26

0.28

0.33

0.38

0.45

Cromton Greaves

0.36

0.52

0.45

0.47

0.49

Thermax

0.18

0.11

0.06

0.09

0.09

Bhel

0.24

0.36

0.32

0.31

0.31

Industry

0.26

0.32

0.29

0.31

0.33

Larsen & Tubro Larsen and tubro has an increasing cash ratio over the 5 year time window. This shows that the company has a very comfortable liquidity situation and that the company can meet 45% of the current liability with the most liquid asset i.e. cash. The cash reserve of the company has increased by 275% in the span of 5 years.

78

Crompton Greaves Crompton greaves has also performed better than the industry average and has a healthy cash ratio. The cash and bank balance has increased by 340 percent in this period. The liquidity position of the company is comfortable as it has better ratios than the industry average. Thermax The cash ratio suggests that the company has liquidity crunch, it has very low liquidity compared to the industry average. This is because the current liabilities have increased by 463 percent while the cash and bank balance has increased only by 175 percent. This may be because of the money being invested in other long term investments. The investments have increased by more than 600 percent in this period. The company may not be having high liquidity because it is investing in long term assets.

BHEL BHEL has cash ratio which is close to the industry average. It has been almost constant throughout the period. It shows an efficient management of cash in investing activities. There has been an investment of 1294.51 cr in fixed assets in the past 5 years. Although the operating cash flow increased by nearly 240 percent, cash ratio remained almost constant because the company invested in fixed assets.

79

LEVERAGE RATIOS Leverage ratios are used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations. There are several different ratios, but the main factors looked at include debt, equity, assets and interest expenses. A ratio used to measure a company's mix of operating costs, giving an idea of how changes in output will affect operating income. Fixed and variable costs are the two types of operating costs; depending on the company and the industry, the mix will differ. Debt to Equity ratio The Debt to Equity Ratio measures how much money a company should safely be able to borrow over long periods of time. It does this by comparing the company's total debt (including short term and long term obligations) and dividing it by the amount of owner's equity. The Graph below shows the debt to equity ratio for the four companies in the capital goods sector.

D/E Ratio 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 31.03.2003

31.03.2004

31.3.2005

31.3.2006

31.3.2007

L&T

0.68

0.96

0.96

1.42

1.08

Cromton Greaves

1.02

0.97

0.75

0.54

0.93

Thermax

0.00

0.02

0.01

0.02

0.00

Bhel

0.11

0.10

0.09

0.08

0.01

Industry

0.45

0.51

0.45

0.51

0.51

80

Larsen & Tubro Larsen and Tubro has a very high D/E ratio as compared to the industry values. This value is high owing to the high amount of debt at 25 percent of the total asset (see common size Balance sheet). Simultaneously the company has decreased the equity capital within this span of 5 years from 2 percent in 2003 to 0.22 percent in 2007. The higher value of the debt to equity ratio leads to an increase in the earnings per share from Rs 15 in 2003 to 85 in year 2007.

Debt to Asset Ratio

Chart Title 0.80 0.70 0.60 Axis Title

0.50 0.40 0.30 0.20 0.10 0.00 31.03.2003

31.03.2004

31.3.2005

31.3.2006

31.3.2007

L&T

0.76

0.76

0.75

0.70

0.72

Cromton Greaves

0.76

0.76

0.75

0.70

0.72

Thermax

0.31

0.24

0.24

0.15

0.22

Bhel

0.56

0.60

0.64

0.66

0.68

Industry

0.60

0.59

0.59

0.55

0.59

81

1. DEBTORS TURNOVER RATIO: It indicates the number of times the turnover of debtors take place in a year.

Chart Title 6 5 Axis Title

4 3 2 1 0 2003

2004

2005

2006

2007

AVG

DEBTORS TURNOVER RATIO L&T

2.34

2.26

2.42

2.12

1.91

2.21

BHEL

1.48

1.68

1.68

1.78

1.78

1.68

THERMAX

4.34

4.5

4.89

5.28

5.1

4.822

CROMPTON GREAVES LTD

2.91

3.29

3.68

3.34

3.35

3.314

2.7675

2.9325

3.1675

3.13

3.035

3.0065

AVG

a. L& T: For L & T, debtor turnover ratio is always less than the industry average throughout the five years which means that its debtors remain outstanding for a longer period of time compared to industry peers. Moreover, the ratio is showing a declining trend over the last five years. It can happen because of either of following two reasons: 1. It has not been able to manage its debtors more efficiently. 2. It has got a liberal credit policy compared to industry.

Since, it is a big firm with a very high turnover, so the high debtor turnover ratio may not affect its financial position much.

82

b. BHEL: It has got the lowest debtors turnover ratio compared to the rest of the firms. There is no particular trend in the way the ratio is moving over the last five years. The low turnover ratio can be attributed to the reasons cited above.

c. THERMAX: It has got the highest debtors turnover ratio among the four firms. The high ratio implies that it has got less average collection period. It means that there is a prompt payment on the part of the debtors which helps the company to maintain liquidity. d. CROMPTON & GREAVES LTD: It has got higher turnover ratio compared to industry average throughout the last five years. In 2005, the ratio increased by around .4 & next year it decreased by same margin.

% YEAR ON YEAR INCREASE SALES DEBTORS 2004-03 7.950805 -4.65003 2005-04 14.79234 2.761257 2006-05 97.78128 117.6288 2007-06 35.93383 35.75765

The high increase in the year 2005 can be attributed to more % increase in sales compared to debtors & the decrease in 2006 can be attributed to more % increase in debtors compared to sales. So, there is a no particular trend about this ratio.

83

WORKING CAPITAL TURNOVER: This ratio indicates the efficiency with which it generates sales using its working capital.

Chart Title

Axis Title

140.00 120.00 100.00 80.00 60.00 40.00 20.00 0.00 -20.00 -40.00 2003

2004

2005

2006

2007

AVG

WORKING CAPITAL TURNOVER L&T

4.40

4.66

4.31

4.75

3.70

4.36

BHEL

2.17

2.24

2.23

2.47

2.88

2.40

THERMAX

13.75

15.64

122.39

-23.26

-13.3

23.04

CROMPTON GREAVES LTD

6.17

10.21

8.52

7.70

8.45

8.21

AVG

6.62

8.19

34.36

-2.08

0.43

9.50

a. L & T: it has got an average working capital turnover of 4.36 which means that for generating 1 unit of sales it needs .23 of working capital. The remaining amount can be met from other sources of funds. Since, it is large firm with a very high market share so its low WCT can’t be attributed to low sales. It can be only because of high working capital. b. BHEL: It has go the lowest WCT among the four firms when compared to the industry average. The low value of WCT can’t be attributed to its sales because sales have been increasing year on year which can be seen from the table below.

SALES

% INCREASE YEAR ON YEAR 2004-03 2005-04 2006-05 2007-06 15.1373 20.0934 38.1049 29.0736

84

The low value of WCT can be attributed to high working capital in the denominator. The high working capital is because of high value of current assets compared to liabilities. The high value of current assets is because of high value of accounts receivable compared to accounts payable in the current liability side. c. THERMAX: It has got the highest WCT among the four firms in the first 3 years & after that it has got negative working capital in the last two years. Moreover in the year 2005 it has shown dramatic rise in its WCT & in the next year its WCT has become negative from the value of 122. The high increase in the year 2005 can be attributed to dramatic decrease in working capital which is due to about 85 % increase in sundry creditors. The negative value of WCT in the subsequent year is due to working capital becoming negative. The working capital became negative because of continued high increase of sundry creditors which made current liability more than current asset.

sundry creditors

% INCREASE YEAR ON YEAR 2004-03 2005-04 2006-05 2007-06 16.79807 86.47286 -20.1747 88.46363

% INCREASE YEAR ON YEAR 2004-03 2005-04 2006-05 2007-06 CURRENT LIABILITIES CURRENT ASSETS

40.519 64.63538 23.29129 89.22209 31.90145 43.0002 5.973474 82.80002

d. CROMTON & GREAVES LTD: Its average WCT is less than the industry average. Moreover, its WCT is increasing year on year.

85

Earning Per Share (EPS)

EPS 120 100

Axis Title

80 60 40 20 0 31.03.2003

31.03.2004

31.3.2005

31.3.2006

31.3.2007

L&T

15.04089239

61.98142027

86.79600538

95.06952092

80.18900702

BHEL

18.16

26.89

38.95

68.60

98.66

C&G

5.11

14.48

20.04

44.30

7.81

2.45740663

2.746957616

2.819974822

8.608732158

15.76826196

Thermax

Whatever income remains in the business after all prior claims, other than owners claims (i.e. ordinary dividends) have been paid, will belong to the ordinary shareholders who can then make a decision as to how much of this income they wish to remove from the business in the form of a dividend, and how much they wish to retain in the business. The shareholders are particularly interested in knowing how much has been earned during the financial year on each of the shares held by them. For this reason, an earning per share figure must be calculated. Clearly then, the earning per share calculation will be: !" 

 *&+ ,(   !(,(* # $  & &,  ( (% ")(

As we can see from the chart above, the industry is showing a diverse trend in terms of its Earning per share. One one hand, Bhel and Thermax are showing an upward trend, but on the other hand, Larsen &Tubro and Crompton & Greaves are showing a downward trend. Price/Earning Ratio (P/E ratio)

86

Price Earning Ratio 45 40 35 Axis Title

30 25 20 15 10 5 0 L&T

BHEL

C&G

Thermax

31.03.2003

35.04

12.30

10.06

11.23

31.03.2004

15.84

22.48

10.64

27.13

31.3.2005

11.52

19.70

21.62

42.11

31.3.2006

25.59

32.75

23.69

36.17

31.3.2007

20.20

22.91

25.54

24.32

The P/E ratio is a useful indicator of what premium or discount investors are prepared to pay or receive for the investment. The higher the price in relation to earnings, the higher the P/E ratio which indicates the higher the premium an investor is prepared to pay for the share. This occurs because the investor is extremely confident of the potential growth and earnings of the share. The price-earning ratio is calculated as follows: !( *  &  (   & 

-(. !( * '(")( !"

\ High P/E generally reflects lower risk and/or higher growth prospects for earnings. As we can see from the chart above, only Crompton & Greaves is showing an upward trend, the rest three industry players are showing a downward trend. The year 2004, 2005,and 2006 are showing an upward trend for the whole industry. It can be indicative of a general economic upturn in those three years which is leading to a flourishment in the whole industry.

87

Market Value to Book Value Ratio

Market Value to Book Value Ratio 60.00 50.00

Axis Title

40.00 30.00 20.00 10.00 0.00 31.03.2003

31.03.2004

31.3.2005

31.3.2006

31.3.2007

L&T

12.62

25.86

20.38

24.14

17.53

BHEL

1.14

2.79

3.12

7.53

6.30

C&G

0.60

2.31

5.92

7.00

7.55

Thermax

16.26

17.44

19.15

38.57

49.53

The industry is showing a general downturn, with Thermax showing a upward trend in this ratio.

88

Profitability Ratios Dividend Yield Ratio

Dividend Yield 8 7 6 Axis Title

5 4 3 2 1 0 31.03.2003

31.03.2004

31.3.2005

31.3.2006

31.3.2007

L&T

0.75

1.58

0.75

0.83

0.56

BHEL

1.79

1.16

0.85

0.76

0.64

C&G

0

7

1

0

2

0.018518856

0.018124491

0.012018464

0.009704015

0.020236969

Thermax

The dividend yield ratio indicates the return that investors are obtaining on their investment in the form of dividends. This yield is usually fairly low as the investors are also receiving capital growth on their investment in the form of an increased share price. It is interesting to note that there is strong correlation between dividend yields and market prices. Invariably, the higher the dividend, the higher the market value of the share. The dividend yield ratio compares the dividend per share against the price of the share and is calculated as: # $  /  

#!" "
0 !( *

#!"  & # $  /&. &, )( & 

For this industry in the specified time frame, all the market players are showing a downward trend in this ratio. This is indicative of the nature of the Capital Goods sector, where there is always a need of a very high capital investment, which compels companies in the domain to retain most of their earnings and distribute less of it in the form of dividends. From the above ratios it is evident that the smaller player’s i.e Crompton Greaves and Thermax are riding the show as they are getting high valuation for their share prices and it is totally justified by looking at the efficiency at which they are managing their affairs and their better 89

future prospect of earnings. If we see at the cash and quick ratio of Thermax then it is really low as compared to other players and the industry average and it can be a matter of concern for the company as it can run out of cash but if we look at the debtors turnover ratio of Thermax, it is high as compared to others players and this shows that the company is highly efficient in getting back its cash from its debtors, so it can afford to go for lower cash and quick ratio. Also the working capital turnover of Thermax and L&T is high which shows their efficiency in managing their working capital to generate sales. If we look at the debt/equity ratio then L&T has been utilizing its financial leverage to the best use of the company s that it can save tax and generate more earnings for the share holders. BHEL is having low D/E ratio which show under utilization of its financial leverage. Though EPS of L&T and BHEL are higher as compared to the smaller players because they are older in this industry as compared to the smaller players. But if we look at the dividend yield then it is really high for Crompton Greaves and the higher P/E of C&G and Thermax is really justified by seeing their future prospect

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8. FINDINGS & CONCLUSION

Findings from DU-PONT analysis

40.00

return on equity

35.00 30.00 in terms of %

25.00 20.00 15.00 10.00 5.00 0.00 2003

2004

2005

2006

2007

l&t

11.63

29.13

34.01

26.31

32.82

bhel

9.25

12.43

15.82

23.00

27.48

thermax

15.11

15.75

14.72

22.32

32.71

crompton greaves

5.93

21.70

25.05

29.54

29.57

industry

10.48

19.75

22.40

25.29

30.65

The ROE is useful for comparing the profitability of a company to that of other firms in the same industry. it is a measure of a corporation's profitability that reveals how much profit a company generates with the money shareholders have invested. Here we can see that roe for all the companies are more or less same at the end . so we cant judge which company is better in terms of roe . As a risk averse investor i would like to invest in bhel because this is the only stock which is growing at a consistent rate and all other are having volatility in their roe . so less risk will be there , but obvious less return will be there . As a risk taker investor i will prefer to go with thermax because for last three years company’s roe is growing at a rapid pace which suggest high future return followed by high future risk. Findings from CAGR analysis According to cagr analysis we would rank 1 to Crompton Greaves as it is having a highest cagr of around 28% in its net fixed assets which will give future benefit at a high rate .further it is also having a growth rate 0f 80.84 % in its pat which is really appreciable .and it is having a very low 91

difference in cagr of current liabilities and current assets which will remove the liquidity problem. We would rank 2 to bhel , firstly because it stand second in the cagr of pat i.e. 50 % and secondly company is total expenses is having a low cagr in comparison except Larsen and toubro. We would rank 3 to thermax as it cagr in sales is much higher than Larsen and toubro .and further thermax gross profit is also high in comparison to larsen . Finally Larsen and toubro will be rank 4 as it is less competitive in terms of cagr. Findings from Common size analysis We would rank 1 to bhel because company cogs to sales % . selling and distribution expenses as a % of sales stands very low in comparison to other companies and at the same time its pat to sales % and net fixed assets to total assets % is very high which suggest that company present and future condition both is good . We would rank 2 to Larsen and toubro because company stand next to bhel, in terms of cogs to sales % . selling and distribution expenses as a % of sales. Futher at the same time in terms of profitability also company stand next to bhel. We would rank 3 to thermax as its pat to net sales % and cosg to net sales as well and distribution to sales % is much better than Crompton greaves. Finally Crompton greaves will be the 4 th one as it is having lowest pat to sales % , highest selling expenses to sales % etc. Findings From Cash Flow Analysis 1. L &T: The net cash flow –closing balance of L & T has increased by 200% over the last five years & it is the maximum among the four firms. This increase can be attributed to increased cash flow from operating activities which has come mainly from CAPEX. The company is not reluctant to raise more debt from the market in order to fund its CAPEX & in the same time the company keeps repaying its debt. 2. BHEL: The net cash flow-closing balance of BHEL has increased by 100 % over the last 5 years. Like L & T , it has also maintained positive cash flow from operating activities because of healthy management of its working capital. 3. CROMPTON & GREAVES LTD: In the first two years it had a negative cash flow but now it has improved it dramatically because of better working capital management where it has been able to get enough cushion from its creditors by postponing the payment. 4. THERMAX: It had a negative cash flow but in the last two years it has been able to make a turnaround in generating positive cash flow. But to fund its CAPEX it is not raising any capital from market. Instead it is funding it from cash flow operating activities which is not a good sign. Findings From sustainable growth rate model

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By seeing at the ratios from the Sustainable Growth Rate Model we can conclude that L&T has outsmarted most of the stocks over the years. This is because of its higher ROE over the years than the industry and its competitors. Also its Net Profit Margin is the second highest after BHEL. Though BHEL has the highest Net Profit Margin but it was not able to capitalize on this as its ROE is lowest among the competitors and the below the industry average. The possible reason for this is that BHEL has almost zero debt and it is not utilizing its financial leverage to its best use. Also, L&T has distributed highest dividend as compared to other players and it is way ahead of them. The effective tax rate for L&T has also been one among the lowest which shows that the company is managing its resources in an efficient manner as compared to others. Findings from Benchmarking Ratios By looking at the Benchmarking ratios, it is clear that the smaller players like Crompton greaves and Thermax are managing their resources in an efficient manner as their gross profit margin is really good and above the industry average and their current assets and average receivables period are lower than the industry and above the way ahead of the two bigger players L&T and BHEL. Also their inventory turnover ratio is higher than the other players, which shows that these stocks can outperform the bigger players in the future with unexpected profits due to their efficient inventory management and better demand for their goods in the market which is evident from the lower receivables period. But overall, L&T has again outsmarted the players as it is around the industry average or above it in almost all the parameters and its gross and net profit margin has been impressive. Findings from Other Important Ratios From the above ratios it is evident that the smaller players i.e Crompton Greaves and Thermax are riding the show as they are getting high valuation for their share prices and it is totally justified by looking at the efficiency at which they are managing their affairs and their better future prospect of earnings. If we see at the cash and quick ratio of Thermax then it is really low as compared to other players and the industry average and it can be a matter of concern for the company as it can run out of cash but if we look at the debtors turnover ratio of Thermax, it is high as compared to others players and this shows that the company is highly efficient in getting back its cash from its debtors, so it can afford to go for lower cash and quick ratio. Also the working capital turnover of Thermax and L&T is high which shows their efficiency in managing their working capital to generate sales. If we look at the debt/equity ratio then L&T has been utilizing its financial leverage to the best use of the company s that it can save tax and generate more earnings for the share holders. BHEL is having low D/E ratio which show under utilization of its financial leverage. Though EPS of L&T and BHEL are higher as compared to the smaller players because they are older in this industry as compared to the smaller players. But if we look at the dividend yield then it is really high for Crompton Greaves and the higher P/E of C&G and Thermax is really justified by seeing their future prospect.

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From the above table we can see that Larsen & Toubro and Bhel are very close to each other. Larsen ranks highest in terms of cash flow analysis and sustainable growth rate model and stand next to Bhel in case of benchmark ratios. whereas Bhel rank highest in only in common size analysis and stand next to Larsen & toubro in terms of sustainable growth rate model .at the same time Bhel rank lowest in benchmark ratios and other important ratios .so we can say that Larsen & toubro is the better company In comparison to Bhel .so Larsen & toubro is best company among the companies which we have taken in our capital goods industry. Bhel stand next to Larsen and toubro and its far better than other two companies i.e. Crompton greaves and thermax.While in comparison to Crompton greaves and Thermax, both of the companies are more or less same efficient.

Cash flow analysis Common size analysis Cagr Du pont Sustainable growth rate model Benchmark ratios Other imp. ratios

L&T 1 2 4 ----1 2 3

Bhel 2 1 2 -----2 4 4

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Crompton greaves 3 4 1 ----3 3 2

Thermax 4 3 3 ---4 1 1

9. REFERENCES 1.

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