HAMDARD UNIVERSITY

PREFACE
MBA program requires a student to undergo 6 weeks summer training in an organization so as to give student an exposure to practical management and to make them familiar with various activities taking place in corporate world.

I must say that being an MBA student, aspiring to take specialization in the field of Finance, I was quite familiar with the business environment theory after completing one year of my studies. But my summer training had enabled me to get an in depth knowledge of the realities of corporate world.

There is no doubt that theoretical knowledge acquired by a student during the pursuance of his MBA lays down a foundation with the help of which the student, in consideration, can expect to have the widest exposure of the reality show of the corporate world. But, one should not take it for granted that the so-called theoretical concepts can be applied to the business environment in totality. This is to say that, there actually is a difference between the theoretical and practical environment in totality.

One Part of the story is that one has to take into consideration, the feasibility of a specific theoretical concept before one is to apply the same in the typical/complex business situation. Decisions taken out of thin air, in an ad-hoc manner, may spell a disaster for the organization as a whole. Another part of the story is that if one has applied a theoretical concept, in the light of its feasibility and after effective consideration of the Cost and Benefit Analysis, the same can prove to be very fruitful for the organization.

This report is about the practical training done at M/s Bharat Heavy Electricals Limited, Corporate Office, New Delhi as per the curriculum of MBA of Hamdard University, New Delhi.

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ACKNOWLEDGEMENT
I wish to express my heart full gratitude to Shri Sumit Salhotra (Sr. Mgr. Finance) for allowing me to do my summer training at BHEL and Shri S. M. Arora (Sr. DGM Finance) and Mrs. Anita Bahri (DGM Finance) for extending his help during the completion of my project. I would like to thank Shri Deepak Kumar (Manager Finance) for being always readily available for all sorts of guidance, under whose gratitude I undertook this project. I would like to thank all these people for extending their advice and direction that is required to carry on a study of this nature and for helping me with the intricate details of the project at every step. Their continued cooperation and encouragement have made it possible for me to complete this report. They encouraged me and challenged me throughout summer process, never accepting less than my best efforts.

I would like to thank all the other people at BHEL who always helped me in completion of my project. I wish to thank my college supervisor, Shri P. S. Raychaudhuri at Hamdard University for their constant motivation and help.

BHUPINDER PAL SINGH MBA (GENERAL) BATCH 2009-11 HAMDARD UNIVERSITY

GUIDED BY:

SHRI DEEPAK KUMAR MANAGER (FINANCE)

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EXECUTIVE SUMMARY

This Project work gives an overview of the various sections of corporate finance at BHEL. It showcases the financial analysis of the most well known PSU Bharat Heavy Electricals Limited. Various aspects about the awareness of financial area have been made clear through this project report. This project focuses on different functions of corporate finance at BHEL. However, the main focus is on financial analysis of BHEL, Debtors Management, Provident fund and capital budgeting. The financial analysis gives a comparative ratio analysis of BHEL for last 5 years. This part also focuses on working capital and its associated ratios. The debtors part of the project shows the system followed and project work undertaken for finding out status of power sector projects for non liquidation of debtors. The Capital budgeting part of the project analyses the various aspects that are considered while checking the financial feasibility of a project. It analyses the various techniques and tools that are used to see whether a project is worth investments and provides suggestions for the betterment of this process. The Provident fund part of the project shows the various policies followed by PF department for investment. The project will help in exploring those dimensions which were not known to many but study of this project will bring those to the light. The basic purpose of preparing this project was to make a detailed study and understand its various concepts and outcomes.

While working on this project various topics and concepts came to my knowledge which was unheard and unknown to me before.

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Table of Contents
EXECUTIVE SUMMARY...................................................................................................................3 Table of Contents..................................................................................................................................4 COMPANY OVERVIEW: BHEL.........................................................................................................6 SWOT ANALYSIS...............................................................................................................................7 I. BUSINESS SECTORS.........................................................................................8 (A) POWER SECTOR.........................................................................................9 (B) INDUSTRY.................................................................................................10 (C) INTERNATIONAL BUSINESS......................................................................11 ..................................................................................................................... 11 II. RESEARCH AND DEVELOPMENT....................................................................12 III. QUALITY ASSURANCE...................................................................................12 IV. JOINT VENTURES..........................................................................................13 BHEL - The continuing growth momentum:.......................................................................................13 Strategic business initiatives in year 2009-2010..............................................14 Future Dimension.............................................................................................14 Corporate social responsibility in BHEL............................................................15 MOU signed by BHEL........................................................................................17 CAPACITY EXPANSION.......................................................................................17 GLOBAL FORAYS...............................................................................................18 WORKING CAPITAL........................................................................................................................18 The dangers of excessive working capital:.......................................................19 The dangers of inadequate working capital:.....................................................19 .............................................................................................................................................................20 FINANCIAL PERFORMANCE.........................................................................................................21 CHALLENGES:..................................................................................................................................21 BALANCE SHEET.............................................................................................................................22 PROFIT & LOSS ACCOUNT ............................................................................................................24 FINANCIAL RATIOS........................................................................................................................25 COMPARISON OF BALANCS SHEETS..........................................................................................37 OVERVIEW OF THE BHEL CORPORATE FINANCE DEPARTMENT........................................38 CASH MANAGEMENT.........................................................................................39 CORPORATE BOOKS..........................................................................................39 ESTABLISHMENT...............................................................................................39

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5 INTERNAL AUDIT...............................................................................................40 FINANCIAL SERVICES DEPARTMENT..................................................................40 TAXATION......................................................................................................... 40 PROVIDENT FUND TRUST..................................................................................41 DEBTORS.......................................................................................................... 45 CAPITAL BUDGETING....................................................................................................................51 Techniques of capital budgeting ......................................................................55 CAPITAL BUDGETING AT BHEL...................................................................................................59 Objective of the investment proposal:..............................................................59 BEGINNING OF THE CAPITAL BUDGETING PROCEDURE....................................62 Five year plan................................................................................................62 Annual plan:.................................................................................................. 62 EVALUATION OF AN EXISTING PROJECT............................................................66 CONCLUSION...................................................................................................................................69 REFERENCES....................................................................................................................................70

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COMPANY OVERVIEW: BHEL

Established

in

the

late

50s

BHARAT heavy electrical limited (BHEL) is a name which is recognized across the industrial world. It is largest manufacturing enterprise in India and one of the leading international companies in the field of power equipment manufacturer. BHEL offers a wide spectrum of products and services to core sectors of the Indian economy, viz., power, transportation, oil & gas, renewable energy, defence.etc. A dynamic 45000 strong team embodies the BHEL philosophy of professional excellence to take up future challenges. With corporate headquarters at New Delhi, 14 manufacturing units, one subsidiary, a widespread regional services network and project sites all over India and abroad, BHEL is Indias industrial ambassador to the world with an export presence in more than 70 countries. BHEL has a consistent track record of growth, performance and profitability. The world bank in its report on the Indian public sector, has described BHEL one of the most efficient enterprise in the industrial sector at par with international standards of efficiency BHEL has already obtained ISO-9000 certification for quality management and all major units/divisions of the company including the corporate office have been upgraded to the latest ISO-9000: 2000 VERSION.BHEL has secured iso-14001 certification for environmental management system and OHSAS-18001 certification for occupational health & safety management systems, for all its major units.

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A world class engineering enterprise committed to Enhancing Stakeholder Value

VISION

VALUES

areas.

Zeal to excel and zest for change.

Integrity and fairness in all matters. Respect for dignity and potential of individuals. Strict adherence to commitments. Ensure speed of response. Foster learning, creativity and team work. Loyalty and pride in the company

other potential

infrastructure and

transportation,

industry,

fields of energy,

and services in the

products, systems

through quality

business solutions

providing total

enterprise

engineering

multinational

To be an Indian

MISSION

SWOT

ANALYSIS

Strengths

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Good corporate image Complete range of products for transmission and distribution Established Brand Name Considered to be having design ability

Weakness
The procurement process in the company is cumbersome and subject to auditing Low exposure to the needs and dynamics of distribution business Role clarity on the requirement of being an equipment supplier or a solution provider Acceptance of customers to execute low value high volumes jobs

Opportunities
Huge investment leading to greater demand of goods and services Demand leading to industry operating at full and over capacity Better price realizations Earl birds to learn faster and achieve repeat orders Formation of business groups and tie ups for joint bidding Healthier working environment and increased private sector participation in operation of distribution circles also.

Threats
Purchased preference maybe extended to distribution sector Increased in number of small contractors leading to price wars Emergence of new player in market. Political pulls and pressures may jeopardize the hole process, raising alarm about the privatization and being anti-people

I. BUSINESS SECTORS
BHELs operations are organized around three business sectors, namely Power, industryincluding Transportation, Transmission, Telecommunication & Renewable Energy and Overseas Business. The major business (approx 80%) is from power sector.

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(A) POWER SECTOR

BHEL manufactures a wide range of products and systems for thermal, nuclear, gas and hydro based utility power plants to meet customer requirements for power generation and transmission. Its capability ranges from supplying individual equipment to setting up complete power plants on turnkey basis, packed by reliable after sale-services. BHEL turnkey capabilities have been proved in a number of projects in India and abroad. BHEL built power generation sets account for nearly two-third of the overall installed capacity and three-fourth of the power generated in India. The company has proven expertise in plant performance improvement through renovation, modernization and upgrading of a variety of power plant equipment, besides specialized know how of residual life assessment (RLA), Health diagnostics and Life Extension Program (LEP) of plants. o Thermal BHEL supplies steam turbines, generators, boilers and matching auxiliaries up to 800 MW rating including supercritical sets of 660/800 MW. o Nuclear BHEL has manufactured and supplied steam turbines and generators for 220 MWe, 235 MWe and 540 MWe ratings .

o Hydro BHEL engineers and manufactures custom-built hydro power equipment. Its range covers turbines of Francis, pelton and Kaplan type. Pump turbines, bulb turbines.

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(B) INDUSTRY
BHEL manufactures and supplies major capital equipment and systems like captive power plants, centrifugal compressors, drive turbines, industrial boilers & auxiliaries, waste heat recovery boilers, gas turbines, pumps, heat exchangers, electric machines, valves, heavy castings and forgings, to a number of industries other than power utilities, like metallurgical, mining, cement, paper, fertilizers, refineries and petro-chemicals. BHEL has also emerged as a major supplier of controls and instrumentation systems especially distributed digital control systems for industries, and simulators for various applications. BHEL is supplying X'mas tree valves and well heads up to a rating of 10,000 psi to ONGC and Oil India. It can also supply on-shore drilling rigs, sub-sea well heads, super deep drilling rigs, desert rigs and heli-rigs.

o Transportation Today over 70% of the Indian Railways .one of the largest railway networks in the world is equipped with traction equipment built with bhel .Most of the trains of the Indian Railways are equipped with BHEL?s traction and traction control equipment. India's first underground metro at Calcutta runs on drives and controls supplied by BHEL. The Company has developed and supplied broad gauge 3900 HP AC locomotives, 5000/4600 HP AC/DC locomotives, diesel shunting locomotives of up to 2600 HP, battery powered road vehicles, including electrics & control electronics. BHEL has acquired the technology for 6000 HP 3phase AC Locos and started manufacturing the electrics & controls as well as those for 3phase AC EMUs, Diesel EMUs and OHE cars.

o Transmission BHEL today is the leader in the field of power transmission in India with a wide range of transmission systems and products. BHEL supplies a wide range of transmission products and systems of up to 400 kV class. Those include: high-voltage power and distribution

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transformers, instrument transformers, dry-type transformers, SF6 switchgear, capacitors and ceramic insulators. Equipment for high-voltage direct current (HVDC) systems is also supplied, for economic transmission of bulk power over long distances. Series and shunt compensation systems are also manufactured to minimize transmission losses. BHEL has developed and commercialized the countrys first indigenous 36 kV Gas Insulated Substation.

o Gas BHEL is the only Indian company capable of manufacturing large size gas based power plant equipment, comprising advance-class gas turbine up to 289 MW (ISO) rating for open and combined cycle operations. BHEL is the largest supplier of well heads, X-MAS trees and oil rigs to ONGC and oil

(C) INTERNATIONAL BUSINESS

BHEL has, over the years established its reference in more than 70 countries across all inhabited countries of the world. These references encompass almost the entire range of BHEL products and services, covering Thermal, Hydro and gas based turnkey power projects ,substation projects, rehabilitation projects, besides a wide variety of products like transformers, compressors, valves and oil field equipment, electrostatic precipitators, photovoltaic equipment, Insulators, Heat exchangers, Switch gears etc. The company has been successful in meeting demanding requirements of international markets in terms of complexity of works as well as technological ,quality and Other requirements viz HSE requirements, financing packages and associated O&M services, to name a few. BHEL has proved its capability to undertake projects on fast track basis. BHEL has also established its versatility to successfully meet the other varying needs of various sectors, be it captive power, utility power generation or for the oil sector. Besides undertaking turnkey

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projects on its own, BHEL also possesses the requisite flexibility to interface and compliment other international companies for large projects and has also exhibited adaptability by manufacturing and supplying intermediate products.

II. RESEARCH AND DEVELOPMENT

BHELs engineering and R&D efforts are focused on improving the quality of its products, upgrading existing technologies, accelerating indigenization and developing new products for diversification, reducing time-cycle and costs. A highly qualified and experienced team of engineers and scientists are engaged in R&D activities at BHELs corporate R&D division, Hyderabad, as well as at all the manufacturing units and they have close interaction with other national research laboratories and academic institutions. R&D efforts have already yielded several significant results in terms of better products and improved technologies. A few among the many R&D accomplishments are: atmospheric bubbling fluidized bed combustion(AFBC) boiler(up to 165t/h);ceramic honeycombs for catalytic convertors; surface coating for erosion; renewable energy systems, including wide electric generators; solar photovoltaic and solar water heating systems. Recently, centers of excellence for simulators, computational fluid dynamics (CFD), and a centre for development of permanent magnet machines, have been established.

III. QUALITY ASSURANCE

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Quality of BHEL products is evidenced through state of-the-art design and technology adopted from world renowned collaboration. BHEL gives emphasis to the highest standards of quality at every stage of operation through implementation of quality management system and procedures in line with international standards and practices. BHEL, where quality systems as per ISO-9001 have taken deep roots, has now made significant achievements in Total Quality Management by adopting CII/EFQM model for business excellence. BHEL shares the growing global concern on issues related to environment & occupational health & safety. The units of BHEL have been accredited to ISO-14001 Environmental Management System.

IV. JOINT VENTURES

a) BHEL-GE gas turbine services private limited (B

b) NTPC-BHEL POWER PROJECTS PVT. LTD. (NBPPPL) c) UDANGUDI POWER CORPORATION LTD. d) BARAK POWER PVT. LTD. e) Power plant performance improvement ltd. f) HEC & BHEL Joint Venture for Foundry Forge Company

BHEL - The continuing growth momentum:

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Strategic business initiatives in year 2009-2010

BHEL and Toshiba Corporation, Japan have signed a MoU to explore the possibility of establishing a Joint Venture Company to address transmission and distribution (t&d) business in India and other mutually agreed countries.

MoUs have been signed with Alstom for participating in the tender for setting up a factory for electric loco companies at Dankuni, West Bengal and with GE for participating in the tender for setting up a Diesel loco factory at Marhowar, Bihar.

BHEL has been nominated as the nodal agency for serial production of marine gas turbines named Sagar Shakti Engine for propulsion of Indian Naval Ships, with rated power of 12MW.

BHEL and Maharashtra State Power Generation Company Limited have signed a MoU for setting up a JV company to builddown and operate a 1500-1600 MW Power plant at Latur in Maharashtra.

BHEL and Madhya Pradesh power Generation Company limited have formed a JV company to build, own and operate a 2*800 MW Thermal Power Plant with super critical parameters at Khandwa in Madhya Pradesh.

Future Dimension

The power sector is poised to remain in a growth trajectory even during XII and XIII plan periods as the Govt. shifts gears on infrastructures a part of the plan to shift to energy-saving technology and lower emissions, the share of thermal projects based on supercritical technology will rise, going forward.

To maintain a balanced growth, BHEL will focus efforts on Transportation and Transmission sectors.

To achieve time cycle reduction, BHEL is implementing companywide ERP covering technical, commercial and manpower areas.

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The new paradigm of competitiveness calls for a strategic shift that that will require enhancement of capabilities. With capacity expansion to 20,000 MW by March 2012, we are building new foundation for BHEL by ensuring that investments are timely, well planned, scalable and competitive.

Engineering and technology have been BHELs core capabilities. Greater standardization of components and subsystems that will drive competitiveness and faster delivery is being pursued.

The company is on track to become a $10-11 billion turnover company by 2011-12 in line with its strategic plan. BHELs performance in the year gone by was made possible by the confidence reposed by its stake holders including the government of India. Considering need of the country to transmit bulk power over long distance, BHEL would continue its development of 1200 KV products such as transformer and CVT which are slated to field trial at 1200 KV Bina Test State

Corporate social responsibility in BHEL

As part of its corporate social responsibility, during the year BHEL undertook socio-economic and community development programs to promote education, improvement of living conditions and hygiene in villages and communities located in the vicinity of its manufacturing plants &project sites spread across the country.

During the year, nine social & welfare projects were completed by various units of BHEL. These include construction of community facilities in villages, up gradation of schools, scholarship schemes for underprivileged children, providing water facilities, organizing eye camps, and creation of self employment opportunities for unemployed women from the downtrodden community.

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Reaching out to the distressed victims in the flood ravaged areas of Andhra Pradesh and Karnataka, BHEL has made a humble contribution to help alleviate their suffering.

As part of social commitment, 3626 act apprentices were trained in the company. In addition, 70`` students/trainees from various professional institutions underwent vocational training.

AWARDS AND PRIZES

Shri C.S Verma, Director (Finance), BHEL Receiving ICWAI National Award for Excellence in Cost Management from Shri Anurag Goel, Secretary, Minister of Corporate Affairs, GOI

Shri B.P.Rao, Director (IS&P), BHEL receiving the DSIJ Most Investor Friendly PSU Awards 2009 from Honble Chief Minister of Delhi, Smt. Sheila Dikshit

CMD, Shri Ravi Kumar receiving the prestigious ENERTIA Individual Contribution Awards in Thermal Power Sector from Shri R V Shahi, Former secretary Power, GOI

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MOU signed by BHEL

BHEL signs MoU with Ministry of Heavy Industries & Public Enterprises The Memorandum of Understanding (MoU) for the year 2010-11 between BHARAT Heavy Electrical Limited (BHEL) and the Ministry of Heavy Industries & Public Enterprises was signed by B. Prasada Rao, CMD (BHEL) and Dr. Satyanarayana Dash, Secretary (Department of Heavy Industry, Ministry of Heavy Industries & Public Enterprises) in the presence of Functional Directors on the board of BHEL and other senior officials of the Ministry.

A MOU has been signed in between BHEL and Nuclear Power Corporation of India Ltd. To form a joint venture to carry out EPC activities for power plants based on atomic energy both within the country and outside.

CAPACITY EXPANSION
Capability to deliver 15,000 MW of power equipment per annum established and further augmentation to 20,000 MW per annum by March 2012

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18 State-of-the-art manufacturing facilities established for supercritical equipment. Contemporary manufacturing facility set up for high-rating transformers. 31 new cranes procured to increase erection capability at various sites.

GLOBAL FORAYS
Physical export orders of Rs 3571 crore Foray into a new market-Belarus Order for largest ever Hydro Project-1,200 MW Punatsangchhu Hydro electric projects, Bhutan. 734 MW commissioned overseas a new record.

WORKING CAPITAL
Working Capital Management is the process of planning and controlling the level and mix of current assets of the firm as well as financing these assets. Specifically, Working Capital

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Management requires financial managers to decide what quantities of cash, other liquid assets, accounts receivables and inventories the firm will hold at any point of time.

The dangers of excessive working capital:

1. It results in unnecessary accumulation of inventories. Thus the chances of inventory mishandling, waste, theft and losses increase 2. It is an indication of defective credit policy and slack collection period. Consequently higher incidences of bad debts occurs which adversely affects the profits. 3. It makes the management complacent which degenerates into managerial inefficiency 4. Tendencies of accumulating inventories to make speculative profits grow. This may tend to make the dividend policy liberal and difficult to copes within future when the firm is unable to make speculative profits.

The dangers of inadequate working capital:

1. It stagnates growth .It becomes difficult for the firms to undertake profitable projects for non-availability of the WC funds. 2. It becomes difficult to implement operating plans and achieve the firms profit targets 3. Operating inefficiencies creep in when it becomes difficult even to meet day-to-day commitments. 4. Fixed assets are not efficiently utilized. 5. It renders the firm unable to avail attractive credit opportunities etc. 6. The firm loses its reputation when it is not in position to honor its shortterm obligations. As a result the firm faces a tight credit terms

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CALCULATION OF WORKING CAPITAL OF BHEL

2010
Total Current Assets Total Current Liabilities 429348 324417

2009
369010.7 283329

2008
279061.8 200223

2007
210629.7 144201.1

2006
163307.8 103200.2

2005
133429.79 99213.58

NET W/CAPITAL ( CA - CL )

104931

85681.7

78838.8

66428.6

60107.6

34216.2 1

1000000 900000 800000 700000 600000 500000 400000 300000 200000 100000 0 2005 2006 2007 2008 2009 2010

NET W/CAPITAL ( CA - CL ) Total Current Liabilities Total Current Assets

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FINANCIAL PERFORMANCE
2008-2009 2009-2010 PERCENTAGE CHANGE

Tr oe unvr
(Rs. Crore) 28033 34154 22

P o B fo e r fit e r Tx a
(Rs. crore) 4849 6590 36

Ntp o e r fit
(Rs. crore) 3138 4310 37

Ntw r e o th
(Rs. crore) 12939 15721 22

E r in s P r an g e S ae hr
(Rs.) 64.11 88 37

V lu a d dp r a e de e e p ye m lo e
(Rs. Lakh) 21.67 27.70 28

Cp l a ita In e e t v stmn
(Rs. Crore) 1082 1767 63

CHALLENGES:
o Technology Transition As BHEL moves to supercritical business need to have a strong vendor base to support also existing vendors require technology upgrade as present setup is not sufficient to support this. o Increased international competition.
o Increased domestic competition like, L&T JV with Mitsubishi.

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BALANCE SHEET
for the year ended 31st March, 2009

Schedule

For the year ended 31.03.2009

For the year ended 31.03.2008

SOURCES OF FUNDS Shareholder' Fund Share Capital Reserves & Surplus Loan Funds Secured Loans Unsecured Loans APPLICATION OF FUNDS Fixed Assets Gross Block Less: Depreciation/Amortisation to-date Less: Lease Adjustment Account Net Block Capital Work -in-Progress Investments Deferred Tax Assets Net (Refer note no.20 of Schedule 19) Current Assets, Loans& Advances Current Assets Inventories Sundry Debtors Cash & Bank Balance Other Current assets Loans and Advances Less: Current Liabilities & Provisions Current Liabilities Provisions Net current assets

1 2 3 4

489.52 12449.29 0.00 149.37 13088.18 149.37 12938.81

489.52 10284.69 10774.21 0.00 95.18 95.18 10869.39

5224.87 3713.25 1511.62 41.22 1470.4 1156.97 52.34 1840.30 2627.37

6 7

4443.47 3403.08 1040.39 59.13 981.26 658.03 1639.29 8.29 1337.93

8
7837.02 15975.50 10314.67 350.21 2423.67 36901.07 5736.40 11974.87 8386.02 421.09 1387.80 27906.18

1 0 1 1

23357.32 4975.58 28332.90 8568.17 13088.18

16576.45 3445.85 20022.30 7883.88 10869.39

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PROFIT & ACCOUNT

LOSS

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for the year ended 31st March, 2009 Schedule EARNINGS Turnover (Gross) Less: Excise duty & Service Tax Turnover (Net) Other Income Accretion/Decretion to Work-inprogress & Finished Goods OUTGOINGS Consumption of Material, Erection and Engineering Expenses Employees' remuneration & benefits Other expenses of Manufacture, Administration, selling and Distribution Provisions (net) Interest & other borrowing costs Depreciation and amortisation Less: Cost of jobs done for internal use Profit before prior period items Add/(Less): Prior period items (Net) Profit before tax Less: Provision for taxation For Current Year :- Current tax (incl. wealth tax Rs. 0.17 crore (Previous year Rs. 0.07 crore) :- Fringe Benefit Tax :- Deferred Tax For earlier years :- Tax (includes Income Tax abroad Rs. 8.48 crore) :- Fringe Benefit Tax For the year ended 31.03.2009 28033.19 1820.86 26212.33 1497.36 1151.54 28861.23 For the year ended 31.03.2008 21401.01 2096.37 19304.64 1444.76 827.26 21576.66

12

12A 13

14 15 16 17 18 5

17620.05 2983.68 1835.77 1280.97 30.71 334.27 61.18 24024.27 4836.96 11.89 4848.85

11820.87 2607.69 1644.23 778.25 35.42 297.21 38.32 17145.35 4431.31 -0.92 4430.39

18A

2250.17

1934.95

40.00 -502.37 1787.80 -77.72

27.1 -402.77 1559.28 11.77

0.56 1710.64

0.00 1571.05

Profit after tax Add: Balance of profit brought forward from last year Foreign Project Reserves written back Profit available for appropriation Less: Appropriation:- General Reserve :- Dividend (incl interim dividend of

3138.21 429.69 1.17 3569.07 2000.00 832.18

2859.34 442.72 1.02 3303.08 2000.00 746.52

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FINANCIAL RATIOS
1. CURRENT RATIO
CURRENT RATIO = CURRENT ASSETS CURRENT LIABILITY

YEARS CURRENT RATIO

2005-2006 1.58

2006-2007 1.46

2007-2008 1.40

2008-2009 1.30

2009-2010 1.32

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Liquidity and debt-equity ratios are widely used financial ratios. Liquidity ratio, also called the 'short-term solvency' ratio shows the adequacy. It is calculated as current assets/current liabilities. An ideal current ratio would be 2, indicating that even if the current assets are to be reduced by half, the creditors will be able to able to get their money in full.

2. QUICK RATIO

QUICK RATIO = LIQUID ASSETS / CURRENT LIABILITY

YEARS QUICK RATIO

2005 2006 1.21

2006 - 2007 1.16

2007 - 2008 1.11

2008 - 2009 1.10

2009 2010 1.52

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Quick ratio (or "acid test"): Quick Assets (cash, marketable securities, and receivables) / Current Liabilitiesprovide a stricter definition of the company's ability to make payments on current obligations. Ideally, this ratio should be 1:1. If it is higher, the company may keep too much cash on hand or have a poor collection program for accounts receivable. If it is lower, it may indicate that the company relies too heavily on inventory to meet its obligations.

3. DEBTOR TURNOVER RATIO

DEBTOR TURNOVER = GROSS SALES / TOTAL DEBTORS

YEARS

2005 - 2006

2006 - 2007 1.93

2007 - 2008 1.79

2008 - 2009 1.75

2009 2010 1.65

DEBTOR 2.02 TURNOVER RATIO

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This is also called Debtors Velocity or Average Collection Period or Period of Credit given. (Average Debtors/Sales) x 365 for days (52 for weeks & 12 for months)

4. PROFIT MARGIN

PROFIT MARGIN (%) = PROFIT AFTER TAX / NET SALES

YEARS

2005 - 2006

2006 - 2007 14.00%

2007 - 2008 14.60%

2008 - 2009 12.00%

2009 2010 12.8%

PROFIT 12.5% MARGIN(%)

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The two basic components of the net profit ratio are the net profit and sales. The net profits are obtained after deducting income-tax and, generally, non-operating expenses and incomes are excluded from the net profits for calculating this ratio. Thus, incomes such as interest on investments outside the business, profit on sales of fixed assets and losses on sales of fixed assets, etc are excluded.

5. EARNING PER SHARE

EARNING PER SHARE = PROFIT AFTER TAX / NUMBER OF EQUITY SHARES

YEARS EARNING PER SHARE

2005 - 2006 68.60

2006 - 2007 98.70

2007 - 2008 58.00

2008 - 2009 64.10

2009 2010 88.05

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Earnings per share is generally considered to be the single most important variable in determining a share's price. It is also a major component used to calculate the price-toearnings valuation ratio.

6. AVERAGE DEBT COLLECTION PERIOD

AVERAGE DEBT COLLECTION PERIOD (DAYS) = TOTAL DEBTORS * 360 / GROSS SALES

YEARS

2005 2006

2006 - 2007 186

2007 - 2008 201

2008 - 2009 205

2009 2010 218

AVG DEBT 178 COLLECTION PERIOD(DAYS)

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The approximate time it takes for a business to receive payments owed, in terms of receivables, from its customers and clients.

7. INVENTORY TURNOVER RATIO

INVENTORY TURNOVER RATIO = GROSS TURNOVER / INVENTORIES

YEARS

2005 - 2006

2006 - 2007 4.44

2007 - 2008 3.73

2008 - 2009 3.57

2009 2010 3.70

INVENTORY 3.87 TURNOVER RATIO

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A ratio showing how many times a company's inventory is sold and replaced over a period. The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or "inventory turnover days".

8. DEBT EQUITY RATIO

DEBT EQUITY RATIO = TOTAL DEBT / TOTAL EQUITY

YEARS DEBT EQUITY RATIO

2005 - 2006 0.07

2006 - 2007 0.01

2007 - 2008 0.01

2008 - 2009 0.01

2009 2010 0.01

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Debt/equity ratio is equal to long-term debt divided by common shareholders. Typically the data from the prior fiscal year is used in the calculation. Investing in a company with a higher debt/equity ratio may be riskier, especially in times of rising interest rates, due to the additional interest that has to be paid out for the debt.

9. PRICE EARNING RATIO

PRICE EARNING RATIO = MARKET PRICE PER EQUITY SHARE / EARNING PER SHARE

YEARS PRICE EARNING RATIO

2005 - 2006 20.20

2006 - 2007 23.29

2007 - 2008 44.24

2008 - 2009 21.25

2009 2010 27.32

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A valuation ratio of a company's current share price compared to its per-share earnings. Also sometimes known as "price multiple" or "earnings multiple".

10. INTEREST COVERAGE RATIO

INTEREST COVERAGE RATIO = PROFIT BEFORE INTEREST & TAX / INTEREST EXPENSES

YEARS INTEREST COVERAGE RATIO

2005 - 2006 43.65

2006 - 2007 86.22

2007 - 2008 125.08

2008 - 2009 120.60

2009 2010 197.73

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A ratio used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) of one period by the company's interest expenses of the same period.

COMPARISON OF CURRENT AND QUICK RATIO

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Particulars SOURCES OF FUNDS Share Capital Share warrants & Outstanding Total Reserve Shareholder's Funds Secured Loans Unsecured Loans Total Debts Total Liabilities APPLICATION OF FUNDS : Gross Block Less: Accumulated Depreciation Less: Impairment of Assets Net Block Lease Adjustment A/c Capital Work in Progress Pre-operative Expenses pending Assets in transit Investments Current Assets, Loans & Advances Inventories Sundry Debtors Cash and Bank Other Current Assets Loans and Advances Total Current Assets Less : Current Liabilities& Provisions Current Liabilities Provisions Total Current Liabilities Net Current Assets Miscellaneous Expenses not written off Deferred Tax Assets / Liabilities Total Assets

Mar 2010

Mar 2009

Mar 2008

Mar 2007

Mar 2006

Mar 2005

4895.00 0.00 154278.00 159173.00 0 1278.00 1278.00 160451.00

4895.2 0.00 124492.90 129388.10 0 1493.70 1493.70 130881.80

4895.2 0.00 102846.90 107742.10 0 951.80 951.80 108693.90

2447.6 0.00 85435.00 87882.60 0 893.30 893.30 887759.00

2447.6 0.00 70566.2 73013.38 5000.00 582.40 5582.40 78596.2

2447.60 0.00 57821.34 60268.94 5000.00 369.82 5369.82 65638.76

52248.70 37132.50 0.00 0 15116.20 -412.20 11569.70 0.00 0.00 798.00 0 0 523.40

44434.70 34030.80 0 9812.6 -591.30 6580.03 0 0 82.90

41350.50 31170.50 0 10180.00 -292.60 3025.40 0 0 82.90

38220.6 28527.6 0 9693.00 129.80 1845.72 0 0 82.93

36289.37 26193.47 0 10095.90 346.51 953.18 0 0 89.52

92355.00 206887.00 97901.00 4068.00 28137.00 429348.00

78370.20 159755.00 103146.70 3502.1 24236.7 369010.7

57364.00 119748.70 83860.20 4210.9 13878.00 279061.8

42176.70 96958.2 58089.10 1997.00 11408.7 210629.7

37443.7 71680.7 41339.7 845.00 11998.7 163307.8

29161.07 59721.42 31778.62 471.76 12296.92 133429.79

280237.00 44180.00 324417.00 104931.00 0.00 15272.00 160451.00

233573.20 49755.8 283329 85681.70 0 18403.00 130881.80

165764.50 34458.5 200223.00 78838.80 0 13379.30 108693.90

118978.7 25222.4 144201.1 66428.6 0 9351.60 88775.9

88077.4 15122.8 103200.2 60107.6 0 6737.20 78596.2

71204.46 13254.47 99213.58 48970.85 0 5182.79 65638.76

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COMPARISON OF BALANCS SHEETS

NOTE: the data for the year 2009-10 is provisional.

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OVERVIEW OF THE BHEL CORPORATE FINANCE DEPARTMENT

Basically the whole set up of the finance department is made so as to cover all the aspects involved in the financial decisions. BHEL is a debt free company and has its own accounting policies. While to get a project, BHEL presents its quote like other participants and the whole procedure is carried on. Firstly, we will analyze the various departments of finance at BHEL. These can be depicted as follows: Cash management Corporate books Internal audit Establishment and payroll Financial services department Taxation (direct and indirect) Provident fund trust Debtors Budgeting Administration and insurance

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CASH MANAGEMENT

o Collections and disbursements are made to the units on the basis of their needs and allocations. o Management of inflow and outflow of cash. o Banking arrangement, cash credit limit, working capital requirements. o Informing other departments about the deficit or surplus of funds. o Making daily, weekly and yearly reports on the basis of data collected from different manufacturing units.

CORPORATE BOOKS

o Finalization of accounts of corporate finance. o Reconciliation of balance sheets of various accounts with the units. o Preparation of Annual Report of BHEL as a whole after collecting annual reports of various units, duly certified by chartered accountant. o Government audit of balance sheet

ESTABLISHMENT

o Preparation of payroll and pay slips. o Check and pass

Medical bills Entertainment bills & Telephone bills

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Conveyance bills INTERNAL AUDIT

o Information of audit observation of all the divisions under the unit. o Finalization of audit report after scrutiny of replies submitted by the various divisions against the audit observations. o Collection with various divisions under the unit for the collection of replies for annual submission to government auditor.

FINANCIAL SERVICES DEPARTMENT

This department deals with financial services and therefore it has to invest as well as borrow funds from different companies. BHEL borrows funds from different financial institutions/banks and invest in different securities. The functions of financial services department are listed below: o Placement of short term funds o Arrangement of funds
o For-Ex risk management

o Lease financing o Funds management.

TAXATION The direct tax department of BHEL works as per the income tax act. The tax payment is made in advance as per the income tax rules. Since the total income of BHEL is greater than 40 lakh rupees, an audit u/s 44AB known as Tax audit is done by the external auditors after the statutory audit. Usually the statutory auditors are the ones who undertake the tax audit.

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The company prepares all the documents for the audit. The documents contain details which are more or less the same as prepared for the statutory audit except for certain changes that are made as per the Income Tax Act. For instance, depreciation as per the companies act for P&M is say 25%, but as per IT Act it is 15%. So the changes are accommodated for. An important concept to be followed in direct taxes is TDS i.e. Tax Deducted at Source. During the financial year 2010-11, tax to be deducted at source at the following rates.

PROVIDENT FUND TRUST Provident fund:

A fund built by a contribution made by the employee during his working life and an equal contribution by his employer @ 12% of his salary at present and is payable back to him all together with interest on exit from employment. Originally set up to provide monetary security to employees after retirement, it has, over the years developed into a broad plan for social security which covers the retirement, buying house, medical/marriage/education expenses etc.

Types of provident fund: 1) Statutory provident fund: all industries and establishments whose number of regular employees exceeds 20 or more people are bound to contribute towards these funds. Such provident fund is compulsory for employees drawing salaries (basic +DA) of up to Rs.6500/p.m. 2) Voluntary provident fund: in VPF scheme the employee contributes more towards the PF over and above the 12% as mandated by the government. This additional voluntary contribution enjoys all the benefits of PF, except that the company does not contribute an equal amount. But still, the interest rate is equal to the rate of interest for PF and the withdrawal on retirement is tax free. The benefit of such PF is voluntary and the benefit of provident fund can be extended by setting up a private PF trust and by getting the same recognized under Income tax act, 1961 or by getting the establishment/employees covered under the EPF scheme, 1952 on voluntary basis.

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42 Besides these two categories there are various types of provident funds listed as under: 1) Public Provident Fund: this kind of provident fund is designed for self employed people like doctors, lawyers, businessmen etc. 2) Exempted provident funds: an establishment covered under the EPF&MP Act 1952 is required to comply with the statutory provisions of the schemes framed under the act. However, the act provides for grant of exemption from the operation of EPF scheme, 1952 to the establishment, if it fulfills the 31 conditions prescribed in the said act. 3) Unrecognized Provident Funds: it is the provident fund which is not recognized by the commissioner of income-tax. The employee and the employer both contribute towards this fund. The employees contribution to URPF is not treated as deductible expenditure.

BHEL employees provident fund

Formation and constitution of PF trust: BHEL has a total of nine PF trusts. Information regarding BHEL EPF trusts is given below:

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43 Particul New Delhi Hardwar Bhopal Hyderaba Trichy Ranipet BHEL EPF trust, Ranipet Ranipet Bangalor e BHEL EPF trust, Bangalore EDNBang, EPDBang, ISG-Bang Jhansi BHEL EPF trust, Jhansi Jhansi Chennai BHEL EPF trust, Chennai PS-SR, PS-WR, PS-ER

ars Name of BHEL the trust trust, Delhi Units covered Delhi

EPF BHEL EPF BHEL trust, Hardwar based HEEP, CFFP, IPJagdish, HERPVaran, CFPRudra. EPF trust, Bhopal Bhopal

d BHEL EPF BHEL trust, Hyderabad Hyderabad, R&D-Hyd. EPF trust, Trichy Trichy, piping centreChenna i

Divisions,RO Ds,PS-NR

The chairman of the trust is usually the head of the finance function and there is a separate secretary for each trust. BHEL, New Delhi Employees Provident Fund was formed on 1-10-1981, for the benefit of employees of the company. Employees of Delhi/Noida based units and their branches/sites, IVP Goindwal, EMRP Mumbai are members of the fund. The board of trustees consists of 1) 4 representatives of the management 2) 4 representatives of the employees Management trustees are appointed with approval of CMD and employees trustees are nominated by elected trade unions. The term of office of trustees is five years. BHEL, New Delhi Employees Provident Fund has been granted relaxation from the provisions of the Employees Provident Fund Scheme, 1952 and is recognized under fourth schedule to IT act, 1961. The group is mainly responsible for matters relating to: Provident Fund managed by the trust. Pension under employees pension scheme, 1995, being managed by EPFO.

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Provident fund responsibilities:

The responsibilities with respect to PF mainly include:

Management of Funds
o o o o o o Managing of monthly PF contribution from the participating Units/Divisions. Monitoring timely collection of interest/maturity proceeds of securities. Timely processing of refundable/ non-refundable withdrawals of members. Final settlements/transfer-out in respect of persons who cease to be member of the fund. Attending to the queries of members either in person or in writing. Ensuring the transfer of PF accumulations of new members/transferee from previous trust/EPFO to avoid problem at later stage.

Investment of surplus funds:

o Effective portfolio management of surplus funds on monthly basis ensuring the full compliance of guidelines/investment pattern issued by the Ministry of Labour. o Bids are called from the empanelled arrangers and funds are placed with the H1 bidder. All the investments are duly approved by the Board of Trustees. o At present the corpus of the fund is Rs.400 crores.

Interest to members:
o Interest on members funds is credited to members a/c annually at the statutory rate declared by EPFO and approved by board of trustees. o Till date the trust has managed to pay interest to its members from its own resources.

Accounts and audit:

o Maintenance of accounts of provident fund.

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45 o Preparation of annual accounts statements viz. receipt and payment a/c, income and expenditure a/c and balance sheet of the fund. o o Issue of Annual PF statements to members. Annual audit of PF accounts by statutory auditors.

Compliance of statutory provisions:

o o o o o Compliance of statutory provisions like returns (monthly/annual) under EPF & MP acts 1952. Deduction/deposit of TDS, filing of e-TDS return quarterly and issue of TDS certificates. Timely payment of statutory dues like monthly inspection & EDLI charges to EPFO account. Submission of audited annual accounts to EPFO Inspection of PF records by enforcement officers of EPFO and reply of queries raised by them. Meetings of PF trust: o o o o Agenda items for meeting of board of trustees are prepared. Meeting of board of trustees as per the statutory provisions is held. Minutes and other related work is recorded. Meeting of all PF trust is held to discuss the common issues to bring uniformity in handling of these issues.

DEBTORS
Debtors Management System:
At present, in BHEL business organization, a web based system is in operation for debtors management at the corporate level encompassing storage, analysis and follow up of debtors which is wholly based on Excel. As a requirement of top management information sharing,

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consolidated project level data for audit, exchange of information with units, business sectors project wise outstanding along with the provisions, to start with, at the end of each quarter and the end of the year to enable the auditor to check whether units/regions have created the provisions in line with sector advice and adequacy of the provisions with reference to total outstanding amount. As the existing system was not able to cater these needs, BHEL introduced an oracle based system with the help of CIT. The following requirements are fulfilled by the system:

Sector wise outstanding along with provisions. Account code wise outstanding. Generation of standard MIRs through system. Generation of customized reports. Reports for company as a whole as well as for units also. Unit-wise and customer/project wise provisions with outstanding. Provisions counter checked with sectors advice. Accurate reporting through standard formats to management committee (MCM) Strengthening the business sectors efforts in cash collection. Ultimate liquidation of customer outstanding. Faster liquidation of withheld amount.

A diagrammatical model of the web based debtors management system indicating the mechanics of information flow is given below.

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The debtors in BHEL are classified as follows: 1) Collectible debtors: 2) Deferred debtors: Debts which are collectible on the basis of certain punch points are known as deferred debts. Certain punch points are given below:a) MRC (material receipt certificate): Debts which are to be paid within three months

from the month of issuing the certificate of material receipt. b) Milestone: part of debtors certain on some events or time as mentioned in the contract. E.g. trial operation, boiler lifting etc. c) Final payment: Due after conducting say the performance guarantee test (PG test) i.e. after the customer checks the performance of the product, a time period is specified in the contract in which the debtors must be paid. 3) Accrued revenue: debtors under this section are classified into two parts: a) GDPB i.e. goods dispatched pending billing which are to be ideally paid within 6 months after billing. b) PVC i.e. Price Variation Clause which are the debtors that are a result of certain impacts. There may be a variation or increase in price that need to be accounted for accordingly as per the contracting rules.

Scope of debtors management:

Collectible Debtors project/sector/account code wise

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Ageing and verification/collection plan for unverified and verified amount with respect to each project Project wise Withheld and age-wise analysis. Deferred Payments category-wise/account code wise and their ageing Status and liquidation plan for accrued revenue (GDPB and PVC) Opening and closing balance of valuation adjustment and other debts Status of all contractual provisions. (CO/LD/BD/SS) along with the ageing

Submission of data by units/regions: The debtors data from each unit is required in the form of eight files: Reports: Top management is likely to assess the status and movement of sundry debtors from time to time. This web based system enables retrieving different types of reports for information at the end of each reporting month. Generally, customer wise, project wise, business sector wise, unit/region wise, account code wise etc. debtors analysis with verification and liquidation plan are required for review. The report modules in the web based debtors management system provide the facility to generate the above mentioned reports. The reports can be generated using various selection criteria.

PROJECT WORK DONE AT DEBTORS MANAGEMENT

OJECTIVE There are projects for power sector at BHEL some of them have pending debtors of more than 50 crore and above. The status report of these projects has to be made so that reasons for non-liquidation of debtors could be found and problem areas could be rectified.

TARGET PROJECTS

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SECTOR: POWER SECTOR ONLY AMOUNT OF DEBTORS: 50 CRORE AND ABOVE AS ON 31ST MARCH, 2010

PROCEDURE 1. Collecting the project wise breakup of debtors as on 31st march, 2010 from web based debtors management system 2. Power Sector (Marketing) to collect the information like zero date of the project, date for trial operation, date for PG test, reason for delay in liquidation (if any).

CONCLUION

DOCUMENTATION INCOPLETNESS 5% SHORTFALL IN PG TEST 7%

PENDING SUPPLY 8%

NO DELAY 30%

WITHHELD AGAINST LD 50%

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CAPITAL BUDGETING
The most important function of financial management is not only the procurement of external funds for the business but also to make efficient and wise allocation of these funds. The allocation of funds means the investment of funds in various assets and other activities. It is also known as investment decision, because a choice is to be made regarding the assets in which the funds will be invested. The assets which can be acquired fall into two broad categories; i) Short term or current assets ii) Long term or fixed assets Accordingly, two types of investment decisions are to be taken. First type of investment decision related to short term assets are called short term investment decisions or current assets management. This is termed as working capital management. Second type of investment decision related to long term assets are called long term investment decisions. These are known as Capital budgeting or Capital expenditure decisions.

Meaning of Capital budgeting: Capital budgeting is the technique of making decisions for investment in long term assets. It is a process of deciding whether or not to invest the funds in a particular asset, the benefit of which will be available over a period of time longer than one year. Capital budgeting consists in planning the deployment of available capital for the purpose of maximizing the long term profitability of the firm. Thus, a capital budgeting decision is a firms decision to invest its funds in long term assets in anticipation of an expected flow of benefits over the lifetime of the asset. These benefits may be either in the form of increased sales or reduced costs. Capital expenditure decisions generally include decisions regarding expansion, acquisition, modernization and replacement of long term assets.

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Features of Capital Budgeting: 1. Funds are invested in long term assets. 2. Funds are invested in present times in anticipation of future profits. 3. The future profits will occur to the firms over a series of years. 4. Capital budgeting decisions involve a high degree of risk because future benefits are not certain.

Importance of Capital budgeting:

1. Such decisions affect the profitability of a firm: capital budgeting decisions affect

the long term profitability of a firm because of the fact that they relate to fixed assets. The fixed assets, in a sense, reflect the true earning capacity of a firm. They enable a firm to produce finished goods which is ultimately sold for profit. Hence a correct investment decision can yield spectacular profits, whereas, an ill-advised and incorrect decision can endanger the very survival of the firm.
2. Long time periods: the effect of capital budgeting decision will be felt by the firm

over a long time span, and thus, affects the future cost structure of the firm. To illustrate, if a company purchases a new plant to manufacture a new product, the company will have to incur a sizable amount of fixed costs, in terms of labor, supervisors salary, insurance, rent of building etc. If in future, the product turns out to be unsuccessful or if it yields less profit than anticipated, the company will have to bear the burden of heavy fixed costs. Hence, the future costs, sales and profits will be determined by the capital budgeting decisions.
3. Irreversible decisions: Capital budgeting decisions once taken are not easily

reversible without heavy financial loss to the form. This is because it is very difficult to second hand plant.
4. Involvement of Large Amount of Funds: Capital budgeting decisions require large

amount of funds and most of the firms have limited financial resources. Hence, it is absolutely necessary to take thoughtful and correct investment decisions because an incorrect decision will not only result in losses but also prevent the firm from earning

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profits from the alternative investments which had to be dropped because of the paucity of funds.
5. Risk: Investment in fixed assets may change the risk complexion of the firm. This is

because different capital investment proposals have different degrees of risk. If the adoption of an investment proposal increases average gain, but causes frequent fluctuations in the profits of the firm, the firm will become more risky. As such, investment decisions shape the basic character of a firm.
6. Most difficult to make: these decisions are among the most difficult decisions o be

taken by a firm. This is, because they require an assessment of future events which are uncertain and difficult to predict. For example, estimating the future cash inflows and life of the project is really a complex problem.

Kinds of Capital Budgeting Decisions: A firm may have various investment proposals for its consideration. It may select all of them, one of them, or some of them depending upon the various types of proposals.
i.

Accept-reject decisions: this is a fundamental decision in capital budgeting. If a proposal (or project) is accepted, the firm would invest in it and if the proposal is rejected, the firm would not invest in it. In general, all those proposals, or projects which yield a rate of return higher than a certain required rate of return are accepted and the rest are rejected. By applying this criterion, all independent proposals are either accepted or rejected. Independent proposals are those which do not compete with other proposals and all proposals can be accepted simultaneously. Hence, all the proposals which satisfy the minimum investment criterion should be implemented.

ii.

Mutually competitive decisions: these are related to the proposals which compete with other projects in such a way that the acceptance of one will automatically result in the rejection of others. For example, a company is considering two sites X and Y for the construction its plant. If site X is selected, site Y will be automatically rejected.

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Priority order Decisions: In case a firm has unlimited funds, all those independent projects are accepted which yield a higher rate of return as against some predetermined rate. However, in actual practice most of the firms have limited funds. The firm, therefore, must fix a priority order for investing these funds. The firm allocates funds to various projects in a manner that the long term profits are maximized. The priority of the projects will be determined in the basis of predetermined criterion such as the rate of return. In this way, the projects yielding maximum return will be selected and all other projects will be rejected.

Techniques of Capital Budgeting

There are two criterias for capital expenditure decisions 1. Accounting profit criteria 2. Cash flow criteria Under accounting profit criteria there is only one method for making capital expenditure decision. This method is known as Average Rate of Return method. Under cash flow criteria, several methods are included. These are as under: I. Pay back method

II.

Methods based on discounted cash flows (i) Discounted pay back method (ii) Net present value method (iii) Internal rate of return method

(iv)Profitability index method In case of cash flow criteria cash inflows and cash outflows of the proposal are considered for making the capital expenditure decisions. Cash inflows include cash coming in from a project

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and cash outflows include cash invested in a project. Cash flow criteria are preferred as compared to accounting profit criteria for the following reasons: 1. In case of cash flow criteria it is possible to consider the time value of money.
2. Cash flow criteria are based in cash flows rather than accounting profit, therefore, it avoids accounting uncertainties.

Techniques of capital budgeting

Accounting profit criteria

Cash flow criteria

Accounting Rate of Return

NON-DISCOUNTING TECHNIQUE 1. PAY BACK PERIOD

DISCOUNTING TECHNIQUES 1. DISCOUNTED PAYBACK PERIOD NET PRESENT VALUE PROFITABLITITY INDEX INTERNAL RATE OF RETURN

2. 3.

4.

Average rate of return method (ARR): This method is also known as accounting rate of return method. It is based upon accounting information rather than cash flows. It is calculated as follows: ARR = Average annual profit after taxes * 100/ investment

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Average annual profits after taxes = Total of after tax profits of all the years/number of years Here profit after tax means profit after depreciation and taxes.

The average rate of return calculated is compared with a predetermined rate of return. A project is accepted if the actual ARR is higher than the predetermined rate. Otherwise, it is liable to be rejected.

Pay back method: The payback method is the simplest and most widely applied traditional method for appraising capital investment decisions. This method calculates the number of years required to pay back the original investment in a project. In other words, payback period is the period which is required to recover original investment in a project. Actual payback period calculated according to this method is compared with the pre-determined payback period fixed by the management in terms of maximum period during which the original investment must be recouped. If the actual payback period is less than the pre determined payback period, the project will be accepted, if not, it will be rejected. Alternatively, when many projects are under consideration, they should be ranked according to the length of the payback period.

Payback period (PB) = investment/constant annual cash flow

When the project generates unequal cash inflows every year, the payback period is calculated by adding up the cash inflows till the time they become equal to the original investment.

Discounted payback method:

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An investment decision rule in which cash flows are discounted at an interest rate and then one determines how long it takes for the sum of the discounted cash flows to equal the initial investment. In investment decisions, the number of years it takes for an investment to recover its initial cost after accounting for inflation, interest, and other matters affected by the time value of money, in order to be worthwhile to the investor. It differs slightly from the payback rule, which only accounts for cash flows resulting from an investment and does not take into account the time value of money. Each investor determines his own discounted payback period rule, and as such, it is a highly subjective rule. In general, however, short term investors use a short number of years for their discounted payback period rules, while long term investors measure their rules in years, or even decades. Net present value method: Under this method, present value of cash outflows and cash inflows is calculated and the present value of cash outflow is subtracted from the present value of cash inflows. This difference is called net present value or NPV. Thus, NPV = PV of Inflow PV of outflow NPV can thus be calculated using the following formulae: NPV = [ cash inflow in 1st year*1/(1+r)1] + [ cash inflow in 2nd year*1/(1+r)2] + [ cash inflow In 3rd year*1/(1+r)3] + . + [ cash inflow in nth year*1/(1+r)n] [initial cost outflow * 1/(1+r)0] Here r= rate of interest (i.e., cost of capital) n= expected life of the proposal If there is some salvage value of the project, it is added in cash inflows in last year. Similarly, if some working capital is needed, it will be added to the initial cost of project. Similarly, if some working capital is needed, it will be added to the initial cost of the project and also to the cash inflows in last year.

If NPV is positive, the project may be accepted. If NPV is negative, the project may not be accepted. If NPV is zero, the project may be accepted only if non-financial benefits are there. To choose one out of various investment proposals, the project with highest NPV is preferred.

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Internal rate of return method: The internal rate of return on an investment or potential investment is the annualized effective compounded return rate that can be earned on the invested capital. In more familiar terms, the IRR of an investment is the interest rate at which the costs of the investment lead to the benefits of the investment. This means that all gains from the investment are inherent to the time value of money and that the investment has a zero net present value at this interest rate. Because the internal rate of return is a rate quantity, it is an indicator of the efficiency, quality, or yield of an investment. This is in contrast with the net present value, which is an indicator of the value or magnitude of an investment. Given, (n, Cn) where n is a positive integer, the total number of periods N, and the net present value NPV, the internal rate of return is given by r in:

An investment is considered acceptable if its internal rate of return is greater than an established minimum acceptable rate of return or cost of capital. In a scenario where an investment is considered by a firm that has equity holders, this minimum rate is the cost of capital of the investment (which may be determined by the risk-adjusted cost of capital of alternative investments). This ensures that the investment is supported by equity holders since, in general, an investment for which IRR exceeds its cost of capital adds value for the company. Profitability index: Profitability index method is very similar to the NPV approach. It measures the present value of returns per rupee invested. A major drawback of the NPV method is that it does not give satisfactory results while evaluating the projects requiring different initial investment. PI method provides solution to this problem. NPV method is therefore, considered good when the initial investment in various projects is the same, whereas, PI method is adopted when the initial cost of different projects are different.

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PI can be calculated as follows: PI = present value of cash inflows / present value of cash outlay (or outflows) If PI is more than one, the project is accepted. If PI is less than one, the project will be rejected. If PI is equal to one, the project may be accepted only on the basis of non financial considerations.

CAPITAL BUDGETING AT BHEL

Capital budgeting process is the most important tool to evaluate the financial feasibility of a proposal or to select one among various proposals. As such different organizations may follow different capital budgeting procedures to evaluate their projects. To understand the capital budgeting procedure followed at BHEL an insight of the following is essential: 1. How are the proposals identified? 2. How are the proposals screened?
3. How are the proposals short listed for further consideration?

4. What information is collected for the purpose of evaluating proposals? 5. What methods of evaluation are used? 6. How are the decisions reviewed? BHEL units come up with proposals for investment with an objective that is in line with the company objectives and policies. As such, an investment scheme is formulated with a holistic approach considering the overall requirement. For instance BHEL has a current capacity of 15000 MW of power equipment and is going for a capacity augmentation to 20000 MW. As such considering this capacity BHEL units formulate proposals as per unit requirements.

Objective of the investment proposal:

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The proposals by various units for investment have one of the following objectives: Capacity expansion Modernization and rationalization Investment for new product Science and technology Quality Township and staff welfare Enabling works/tools and plant (power sector)

However, according to the nature of the project and amount involved, different guidelines have been laid for approval of capital expenditure proposals. The information on processing and competent approval authorities category wise is described below:

Financial limits Major capital items

Major capital investments mainly of more than Rs. 5 crore rupees are are approved by the concerned authorities and all these proposals are supported by a feasibility report. Minor capital items

For minor capital items, an annual lump sum provision of Rs 20 lakhs to Rs 5 crores is made for various units/divisions. For such expenditures a brief justification is given to the divisional head and approval is obtained from the same. However this provision is to be obtained subject to the following conditions viz: 1. Provision is to be utilized for production related/ technology

development/emergency requirement etc. 2. The provision should not be utilized for vehicles, welfare related items.

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3. Rs 5 lakhs to Rs 20 lakhs is the limit for cost of the individual item that can be procured under minor capital.

Excess over sanctioned cost

The cumulative expenditure on the capital projects is periodically reviewed with reference to the total sanctioned cost; taking into account expenditure already incurred and anticipated expenditure. If it is found during the review that the sanctioned cost is likely to exceed, the anticipated excess is worked out and such excess is regularized by obtaining sanction of the competent authority prior to expenditure. The proposal for cost revision explicitly brings out all the changes made with respect to the original proposal. The cost difference between the revised and original (approved) estimates is explained in detail especially whether they are due to fiscal or other reasons. Fiscal and non fiscal reasons are defined as: Fiscal i. ii. iii. Price escalation (inflation or increase by supplier) Statutory reasons (customs duty & excise) Exchange rate variation

Non-fiscal i. ii.
iii.

Change of scope Change of technical design, specification of main equipment

Under estimation

Capital investment in Rs. crore

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BEGINNING OF THE CAPITAL BUDGETING PROCEDURE

Five year plan
BHEL formulates a five year plan that should be in line with the government policies and objectives which is followed by the formation of an annual plan.

Funding:
The present trend indicates an emphasis on utilization of more internal resources for capital funding. This necessitates a rigorous and critical budget formulation exercise.

Annual plan:
The capital budget process begins with the formulation of Annual plan in the month of September / October every year. The annual plan comprises yearly capital investment funds budget of the company. It reviews capital budget for the current year and consolidates proposals for the next. Annual plan exercise enables consolidation of all capital items with cash flows during a particular year. However expenditure on capital equipment like cranes, material handling equipment etc, which are required at project sites for erection and commissioning are considered as non plan capital expenditure and is, classified under three categories:

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I. II. III.

Tools and plants which are used for more than one project. Tools and plants unlikely to be available for more than one project. Tools and plants supplied by subcontractor.

All such equipments are required to execute the erection and commissioning commitments under various types of contracts of the company with customer and such expenditures are charged off to the customer contracts for which these equipments are used as per the accounting policies of the company. Such expenditures are normally required to be made primarily by the services divisions like ISG, TPG projects etc. for erection and commissioning. The budget for all such non plan capital expenditures is submitted by the concerned divisions along with the capital budget. Although approval in principle is obtained for the total non plan budget from the board of directors along with the capital funds budget, it is still necessary for the division to obtain separate approval for each individual item from the director (Finance) and chairman of the company. Complete details of all the items are submitted by the division to corporate office through proper channel for making the necessary budgetary provision. The unit that comes up with a proposal needs to present it to the Directors and the corporate team comprising the CMT&IP, Finance, HR, Quality, Business sectors etc. The presentation must also include details of the cash flow of the ongoing schemes and about schemes to be formulated. In short, the unit heads need to give a synopsis of the proposal/scheme to the concerned authority. After the proposal obtains approval from the Directors and the corporate team, the units formulate individual investment proposals on the basis of which the proposals are screened and short listed.

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Annual plan process

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DISCOUNTED CASH FLOWS Financial analysis Investment = 47495 year 2011 -12 2012 -13 2013 -14 2014 -15 2015 -16 2016 -17 2017 -18 2018 -19 2019 -20 2020 -21 2021 -22 2022 -23 cash inflow capital expenditu re 4018 40885 28680 51715 63567 63784 52689 34500 34500 34500 34500 31050 Pay Back period is 5.81 years. ROI is 22.68% 2593 0 0 0 0 0 0 0 0 0 19796 26403 24819 23906 13065 11542 12225 12225 12225 12225 888 949 1044 1148 1263 1389 1528 1681 1849 2034 4278 5897 6053 7105 5506 5888 6308 6771 7279 7839 4000 9525 8659 12031 3555 4116 4054 3955 3821 3651 materia l direct labor overhea ds incom e tax total cash outflows 4018 40885 31555 42773 40574 44190 23389 22935 24115 24632 25174 25749 net cash inflow -4018 -40885 -2875 8942 22993 19594 29300 11565 10385 9868 9326 5301 23.65 % IRR

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EVALUATION OF AN EXISTING PROJECT

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The above given table gives the cash flow analysis of a project with an initial investment of Rs. 47495. The ROI and IRR as calculated are 23.65% and 22.68% respectively. The profit after tax is taken to be equal to 107738. The payback period for the project is 5.81 years.

Now the calculations for the discounted payback period are as follows.
Discounted pay back period year 2011 -12 2012 -13 2013 -14 2014 -15 2015 -16 2016 -17 2017 -18 2018 -19 2019 -20 2020 -21 2021 -22 2022 -23 net cash inflow -4018 -40885 -2875 8942 22993 19594 29300 11565 10385 9868 9326 5301 Discounted payback period = 8.006 years 0.877 0.769 0.674 0.592 0.519 0.455 0.399 0.351 0.308 0.27 0.237 6027 13612 10169 13332 4614 3645 2987 2518 1256 6027 19639 29808 43140 47754 51399 54386 56904 58160 PVF @ 14% Discounted cash inflows Cumulativ e DCF

HAMDARD UNIVERSITY
68 The discounting factor is taken to be 14% which is BHELs cost of capital. The discounted payback period comes out to be 8.006 years which is 2.15 years more than the payback period of the project. This can give a better picture of the years taken to get the investment back.

The calculations of NPV and the profitability index are given as follows. The PV factor is 14% .
Net present value Year 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 Net present value = present value of cash inflows-present value of cash outflow 58160-42085 = 16075 net cash inflow -4018 -40885 -2875 8942 22993 19594 29300 11565 10385 9868 9326 5301 PVF @ 14% 0.877 0.769 0.674 0.592 0.519 0.455 0.399 0.351 0.308 0.27 0.237 Discounted cash flows -4018 -35856 -2211 6027 13612 10169 13332 4614 3645 2987 2518 1256

The net present value of the project is Rs 16075 which is positive. Therefore the project is feasible.

year

Profitability Index net cash PVF @ 14% Discounted

cash

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69 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 inflow -4018 -40885 -2875 8942 22993 19594 29300 11565 10385 9868 9326 5301 flows -4018 -35856 -2211 6027 13612 10169 13332 4614 3645 2987 2518 1256

0.877 0.769 0.674 0.592 0.519 0.455 0.399 0.351 0.308 0.27 0.237

Profitability index = PV of cash inflow/PV of cash outflow 58160/42085 P.I. = 1.38, Which is Positive

CONCLUSION
BHARAT HEAVY ELECTRICALS LIMITED (BHEL) is a public sector giant of NAVRATNA status. It is the largest engineering and manufacturing enterprise in India in the energy related infrastructure sector. Today BHEL caters to the core sectors of Indian economy viz. power generation and transmission, industry, transportation, telecommunication, renewable energy, defense, etc. My summer training at BHEL has been a truly learning experience. The wide exposure has really helped me to understand BHEL in a better perspective especially regarding its financial performance. I understood the workings of various sections of BHEL corporate finance. My study was mainly inclined to Working capital, debtors management, overall financial analysis and capital budgeting procedure as followed in BHEL. The study reveals that BHEL has a strong system relating to implementation of the Company Policy and procedure. . These techniques followed are well planned and structured and same are reflected in the Company Manuals. The department of corporate finance is divided into various sections that handle different areas. Capital Budgeting is one of the sections of corporate finance which deals with capital investment decisions in long term assets to meet its long terms targets.

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Capital projects, which are approved in order to achieve targets keeping in mind the companys objectives and policies as well as the growth of the economy. The whole system works as per the government parameters special focus with five year plan. The debtors management is another department of corporate finance that deals in debtors and report generation that is discussed in management committee meeting. The basic purpose of preparing this project report was to make a detailed study of various procedures and concepts that are implemented in the industry with special focus to BHEL. The summer training at BHEL gave me a better understanding and overview of the industry. The on job training gave a practical bend to my theoretical concepts of finance. It was great to experience the work culture and environment in BHEL. My association with BHEL taught me the values and ethics that are adopted in such a large Public Sector Undertaking.

REFERENCES
BHEL annual reports 2008-09 Capital Budgeting manual of BHEL Flash Results 2009-10 BHEL The Industrial Giant Chairman address 42nd general meeting

WEBSITES: http.//www.bhel.co.in http://www.wikipedia.com

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71 http://finance.indiamart.com/ http://www.moneycontrol.com/

www.valueresearchonline.com/