1

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

2

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

3

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

4

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.

5

� 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.

6

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.

7

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 end-

user 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.

8

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.

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

9

� 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

10

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

11

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,

12

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 (2007-

12) scenarios, co-terminus with tenth and eleventh five-year plan. Below we enumerate the

strategic goals under the two scenarios:

Scenario Terminal

Year

Input Variables Output Indicators

VoP VoP

CAGR

Export

Weight

Export

Value

Export

CAGR

RCA

Index

Baseline 2001 20 - 5% 1 - 0.2

Medium

Term

2007 31.7 8% 20% 6.35 36.2 0.91

Long

Term

2011 51.1 12% 30% 15.33 19.3 1.51

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 supply-

constrained 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

13

� 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 e-

commerce 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.

14

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

15

• 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 energy-

related/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.

16

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.

17

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.

18

7.ANALYSIS

7.1COMPARATIVE ANALYSIS

7.1.2 L & T

Comparative Balance sheet

2003 2004 2005 2006 2007 CAGR (%)

Liabilities & Capital

Current Liabilities 210.79 296.20 487.65 601.23 1137.66 52.42

Yoyo % change 40.52 64.64 23.29 89.22

Long term liabilities 4700.71 2769.19 3453.70 3497.08 6431.78 8.15

YoY % change -41.09 24.72 1.26 83.92

Share Capital 248.71 24.88 25.98 27.48 56.65 -30.92

YoY % change -90.00 4.42 5.77 106.15

Reserves 2967.89 2622.44 3289.95 4937.00 6864.90 23.32

YoY % change -11.64 25.45 50.06 39.05

Total 8128.10 5712.71 7257.28 9062.79 14490.99

Assets

Current Assets 18877.74 12929.76 15443.58 19459.23 30496.10 12.74

YoY % change 31.90 43.00 5.97 82.80

Net Fixed Assets 5539.05 2140.1 2214.98 2973.46 5453.86 -0.39

YoY % change -61.36 3.50 34.24 83.42

Other Assets 13338.69 10819.12 13182.1 16445.55 24876.02 16.86

YoY % change -18.89 21.84 24.76 51.26

Total 37755.48 25888.98 30840.66 38878.24 60825.98

Comparative Income Statement

2003 2004 2005 2006 2007

CAGR

(%)

Sales 10691.14 10979.10 14524.89 16657.75 20678.81 17.15

% change 2.69 32.30 14.68 24.14

COGS 304.27 336.51 468.07 682.09 786.52 23.65

% change 10.60 39.10 45.72 15.31

Gross Profit 469.33 1068.07 1405.23 1737.46 3004.24 29.50

% change 127.57 31.57 23.64 72.91

Total

expenses 10750.62 11424.41 14337.77 16087.77 19955.76 14.96

19

% change 6.27 25.50 12.21 24.04

PAT 374.02 771.06 1127.69 1306.12 2271.52 31.01

% change 106.15 46.25 15.82 73.91

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

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.

2003 2004 2005 2006 2007

YoY % change 40.52 64.64 23.29 89.22

0

20

40

60

80

100

YoY % change Current Liabilities

20

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.

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%.

2003 2004 2005 2006 2007

YoY % change -41.09 24.72 1.26 83.92

-80

-60

-40

-20

0

20

40

60

80

100

YoY % change long term liabilities

2003 2004 2005 2006 2007

YoY % change -90.00 4.42 5.77 106.15

-200

-150

-100

-50

0

50

100

150

YoY % change Share Capital

21

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.

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

2003 2004 2005 2006 2007

YoY % change -11.64 25.45 50.06 39.05

-30

-20

-10

0

10

20

30

40

50

60

YoY % change Reserves

2003 2004 2005 2006 2007

YoY % change 31.90 43.00 5.97 82.80

0

10

20

30

40

50

60

70

80

90

YoY % change Current Asset

22

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

Rs 5453 Cr.

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.

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%.

2003 2004 2005 2006 2007

YoY % change -61.36 3.50 34.24 83.42

-150

-100

-50

0

50

100

YoY % change Assets

2003 2004 2005 2006 2007

YoY % change -18.89 21.84 24.76 51.26

-40

-20

0

20

40

60

YoY % change other Assets

23

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.

2003 2004 2005 2006 2007

% change 2.69 32.30 14.68 24.14

0

5

10

15

20

25

30

35

% change Sales

2003 2004 2005 2006 2007

% change 10.60 39.10 45.72 15.31

0

5

10

15

20

25

30

35

40

45

50

% change COGS

24

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.

PAT

2003 2004 2005 2006 2007

% change 127.57 31.57 23.64 72.91

0

20

40

60

80

100

120

140

% change Gross Profit

2003 2004 2005 2006 2007

% change 6.27 25.50 12.21 24.04

0

5

10

15

20

25

30

% change total Expenses

25

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.

7.1.2 Thermax

items 2002 2003 2004 2005 2006 2007

current liabilities 201.75 210.79 296.2 487.65 601.23 1137.66

% change 4.4807931 40.519 64.635381 23.291295 89.222095

long term

liabilities 14.88 1.25 9 6.64 7 2.17

% change

-

91.599462 620

-

26.222222 5.4216867 -69

reserve 339.96 363.6 344.14 384.97 435.57 566.12

% change 6.9537593 -5.3520352 11.864358 13.143881 29.97222

sh . Cap 23.83 23.83 71.49 71.49 23.83 23.83

% change 0 200 0 -66.6667 0

total liabilities 614.67 632.44 755.9 968.83 1087.25 1749.9

% change 2.890982 19.52122 28.16907 12.22299 60.94734

2003 2004 2005 2006 2007

% change 106.15 46.25 15.82 73.91

0

20

40

60

80

100

120

% change PAT

26

items 2002 2003 2004 2005 2006 2007

net fixed assets 110.43 101.99 102.38 134.97 144.42 189.74

% change -7.64285 0.38239 31.83239 7.001556 31.3807

Investments 170.37 242.21 286.53 318.43 396.97 574.12

% change 42.167048 18.298171 11.133215 24.664761 44.625538

Current assets 546.59 492.525 601.8 872.845 979.95 1609.585

% change

-

9.8913262 22.186691 45.03905 12.270793 64.251748

Total assets 614.67 632.44 755.9 968.83 1087.25 1749.9

% change 2.890982 19.52122 28.16907 12.22299 60.94734

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 .

1 2 3 4 5

Series1 4.48079306 40.5189999 64.6353815 23.2912949 89.2220947

0

10

20

30

40

50

60

70

80

90

100

Ax

is T

itle

% change in current liabilities

27

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 .

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 .

1 2 3 4 5

Series1 -91.599462 620 -26.222222 5.42168674 -69

-200

-100

0

100

200

300

400

500

600

700A

xis

Tit

le% change in long term liabilites

1 2 3 4 5

Series1 6.95375926 -5.3520352 11.8643575 13.1438813 29.9722203

-10

-5

0

5

10

15

20

25

30

35

Ax

is T

itle

% change in reserve

28

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.

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.

1 2 3 4 5

Series1 0 200 0 -66.66666 0

-100

-50

0

50

100

150

200

250A

xis

Tit

le

% change in share capital

1 2 3 4 5

Series1 2.89098215 19.5212194 28.1690699 12.2229906 60.9473442

0

10

20

30

40

50

60

70

Ax

is T

itle

% change in total assets

29

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.

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.

1 2 3 4 5

Series1 2.89098215 19.5212194 28.1690699 12.2229906 60.9473442

0

10

20

30

40

50

60

70A

xis

Tit

le

% change in total liabilities

1 2 3 4 5

Series1 42.1670481 18.2981710 11.1332146 24.6647614 44.6255384

0

5

10

15

20

25

30

35

40

45

50

Ax

is T

itle

% change in investment

30

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.

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.

1 2 3 4 5

Series1 -9.8913262 22.1866910 45.0390495 12.2707926 64.2517475

-20

-10

0

10

20

30

40

50

60

70A

xis

Tit

le

% change in current asset

1 2 3 4 5

Series1 -7.6428506 0.38239043 31.8323891 7.00155590 31.3806951

-10

-5

0

5

10

15

20

25

30

35

Ax

is T

itle

% change in fixed assets

31

Comparative Income Statement

items 2002 2003 2004 2005 2006 2007

Sales 618.35 734.51 818.28 1312 1700.3 2246.91

% change 18.79 11.40 60.34 29.60 32.15

COGS 272.64 304.27 336.51 468.07 682.09 786.52

% change 11.60 10.60 39.10 45.72 15.31

Gross Profit 345.71 430.24 481.77 843.93 1018.21 1460.39

% change 24.45 11.98 75.17 20.65 43.43

Total

expenses 625.93 713.92 798.82 1274.65 1634.90 2121.62

% change 14.06 11.89 59.57 28.26 29.77

PAT 27.51 58.56 65.46 67.20 102.53 187.80

% change 112.87 11.78 2.66 52.57 83.17

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.

1 2 3 4 5

Series1 18.79 11.40 60.34 29.60 32.15

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

Ax

is T

itle

% change in sales

32

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.

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.

1 2 3 4 5

Series1 11.60 10.60 39.10 45.72 15.31

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00A

xis

Tit

le

% change in cogs

1 2 3 4 5

Series1 24.45 11.98 75.17 20.65 43.43

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

Ax

is T

itle

% change in gross profit

33

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 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

1 2 3 4 5

Series1 14.06 11.89 59.57 28.26 29.77

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00A

xis

Tit

le

% change in total expenses

1 2 3 4 5

Series1 112.87 11.78 2.66 52.57 83.17

0.00

20.00

40.00

60.00

80.00

100.00

120.00

Ax

is T

itle

% change in pat

34

Total income:

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:

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

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%

0.00

20.00

40.00

60.00

80.00

100.00

120.00

Ax

is T

itle

TOTAL INCOME

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%

0.00

20.00

40.00

60.00

80.00

100.00

120.00

Ax

is T

itle

TOTAL EXPENSES

35

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:

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:

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

2004-03 2005-04 2006-05 2007-06 CAGR

% INCREASE YEAR ON YEAR

PAT 183.09 38.40 121.07 23.48 80.84%

0.00

50.00

100.00

150.00

200.00

Axi

s T

itle

PAT

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%

-20.00

0.00

20.00

40.00

60.00

80.00

100.00

120.00

Ax

is T

itle

TOTAL ASSETS

36

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 2006

%

increase

inventories 177.75 595.89 235.24

receivables 604.75 1316.11 117.63

Investments:

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

2004-03 2005-04 2006-05 2007-06 CAGR

% INCREASE YEAR ON YEAR

INVESTMENTS 23.9091933 8.79677754 -22.262032 -0.9678906 0.93%

-30

-20

-10

0

10

20

30

Ax

is T

itle

INVESTMENTS

37

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:

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.

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%

-20.00

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

Ax

is T

itle

CURRENT ASSETS

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%

-40.00

-20.00

0.00

20.00

40.00

60.00

80.00

100.00

Ax

is T

itle

NET WORTH

38

Total borrowings

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:

The increase of 163 % in the year 2006 can be attributed to the increase in sundry

creditors, provision & deposits & advances from employees.

2004-

03

2005-

04

2006-

05

2007-

06CAGR

% INCREASE YEAR ON YEAR

TOTAL BORROWINGS -26.45 -7.16 34.22 114.24 18.37%

-40.00

-20.00

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

Ax

is T

itle

TOTAL BORROWINGS

2004-

03

2005-

04

2006-

05

2007-

06CAGR

% INCREASE YEAR ON YEAR

CURRENT LIABILITIES 13.23 -10.49 163.00 44.41 40.07%

-20.000.00

20.0040.0060.0080.00

100.00120.00140.00160.00180.00

Ax

is T

itle

CURRENT LIABILITIES

39

7.1.3.BHEL

items 2002 2003 2004 2005 2006 2007

current liabilities 5288.13 5401.42 7429.42 9978.9 13463.41 18653.82

% change 2.1423452 37.545682 34.316003 34.918779 38.551972

long term liabilities 14.88 1.25 9 6.64 7 2.17

% change

-

91.599462 620

-

26.222222 5.4216867 -69

reserve 4224.85 4558.91 5051.18 5782.14 7056.62 8543.5

% change 7.9070263 10.797976 14.471074 22.041666 21.070711

sh . Cap 244.76 244.76 244.76 244.76 244.76 244.76

% change 0 0 0 0 0

total liabilities 10580.82 10881.44 13405.47 16668.84 21417.5 27587.49

% change 2.841179 23.19574 24.34357 28.48825 28.80817

items 2002 2003 2004 2005 2006 2007

net fixed assets 1239.03 1236.57 1203.26 1141.91 1173.11 1294.88

% change -0.19854 -2.69374 -5.09865 2.732264 10.3801

Investments 10.34 10.38 28.98 8.95 8.29 8.29

% change 0.3868472 179.19075

-

69.116632 -7.3743017 0

Current assets 8588.66 8963.68 11412.73 14779.12 19436.06 25268.27

% change 4.3664553 27.321926 29.496799 31.510266 30.007162

Total assets 10580.82 10881.44 13405.47 16668.84 21417.5 27587.49

% change 2.841179 23.19574 24.34357 28.48825 28.80817

40

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.

1 2 3 4 5

Series1 2.14234521 37.5456824 34.3160031 34.9187786 38.5519716

0

5

10

15

20

25

30

35

40

45

50

Ax

is T

itle

% change in current liabilities

1 2 3 4 5

Series1 7.90702628 10.7979758 14.4710740 22.0416662 21.0707109

0

5

10

15

20

25

Axi

s T

itle

% change in reserve

41

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 .

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.

1 2 3 4 5

Series1 2.84117866 23.1957351 24.3435702 28.4882451 28.8081708

0

5

10

15

20

25

30

35

Ax

is T

itle

% change in total assets

1 2 3 4 5

Series1 2.84117866 23.1957351 24.3435702 28.4882451 28.8081708

0

5

10

15

20

25

30

35

Ax

is T

itle

% change in total liabilities

42

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.

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.

1 2 3 4 5

Series1 0.38684719 179.190751 -69.116632 -7.3743016 0

-100

-50

0

50

100

150

200

Ax

is T

itle

% change in investment

1 2 3 4 5

Series1 4.36645530 27.3219258 29.4967987 31.5102658 30.0071619

0

5

10

15

20

25

30

35

40

Ax

is T

itle

% change in current asset

43

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.

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 2002 2003 2004 2005 2006 2007

Sales 7551.52 7735.73 8906.71 10696.37 14772.21 19067.02

% change 2.44 15.14 20.09 38.10 29.07

COGS 3481.81 3334.68 3807.84 5299.1 7292.04 8792.13

% change -4.23 14.19 39.16 37.61 20.57

Gross Profit 4069.71 4401.05 5098.87 5397.3 7480.17 10274.89

% change 8.14 15.86 5.85 38.59 37.36

Total expenses 7613.13 7881.68 9012.63 10925.74 14148.01 17862.11

1 2 3 4 5

Series1 -0.1985424 -2.6937415 -5.0986486 2.73226436 10.3801007

-6

-4

-2

0

2

4

6

8

10

12

Ax

is T

itle

% change in fixed assets

44

% change 3.53 14.35 21.23 29.49 26.25

PAT 467.95 444.51 658.15 953.4 1679.16 2414.7

% change -5.01 48.06 44.86 76.12 43.80

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.

1 2 3 4 5

Series1 2.44 15.14 20.09 38.10 29.07

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

Ax

is T

itle

% change in sales

45

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.

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.

1 2 3 4 5

Series1 -4.23 14.19 39.16 37.61 20.57

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00A

xis

Tit

le

% change in cogs

1 2 3 4 5

Series1 8.14 15.86 5.85 38.59 37.36

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

Ax

is T

itle

% change in gross profit

46

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.

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.

1 2 3 4 5

Series1 3.53 14.35 21.23 29.49 26.25

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00A

xis

Tit

le

% change in total expenses

1 2 3 4 5

Series1 -5.01 48.06 44.86 76.12 43.80

-10.00

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

Ax

is T

itle

% change in pat

47

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.

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

-3000

-2000

-1000

0

1000

2000

3000

Rs

In C

rore

s

Cash Flow

48

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.

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.

2003 2004 2005 2006 2007

Cash flow -closing balance 457.81 537.2 990.36 815.99 1718.02

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Rs

In C

rore

s

Cash flow -closing balance

49

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

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

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

-300

-200

-100

0

100

200

300

400

CASH FLOW ANALYSIS

50

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

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

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 activities14.6 -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

-800

-600

-400

-200

0

200

400

600

Ax

is T

itle

Cash Flow Analysis

51

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.

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

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

-2000-1000

01000200030004000500060007000

Rs

Cro

re

Cash Flow Analysis

52

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

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.

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

84.00

86.00

88.00

90.00

92.00

94.00

96.00

98.00

100.00

102.00

%

of

S

ale

s

Industrial Sales as % of Sales

53

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.

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

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

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

%

of

S

ale

s

Raw Material Expenses as % of Sales

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

0.00

5.00

10.00

15.00

20.00

25.00

%

of

S

ale

s

Compensation to Employees as % of

Sales

54

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.

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.

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

0.001.002.003.004.005.006.007.008.00

%

of

S

ale

s

Selling and Distribution Expenses as

% of Sales

55

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

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

0.00

5.00

10.00

15.00

20.00

25.00

%

of

S

ale

s

PBDITA as % of Sales

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

0.00

5.00

10.00

15.00

20.00

25.00

%

of

S

ale

s

EBIT as % of Sales

56

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.

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.

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

0.000.501.001.502.002.503.003.504.004.50

%

of

S

ale

s

Depreciation as % of Sales

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

0.002.004.006.008.00

10.0012.0014.00

%

of

S

ale

s

PAT as % of Sales

57

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

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.

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

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

% o

f T

ota

l a

sse

ts

Depreciation as % of Total Assets

58

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.

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

0.005.00

10.0015.0020.0025.0030.0035.0040.0045.00

% o

f T

ota

l a

sse

ts

Net Fixed Assets as % of Total Assets

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

0.0010.0020.0030.0040.0050.0060.0070.0080.0090.00

100.00

% o

f T

ota

l a

sse

ts

Current Assets as % Total Assets

59

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.

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.

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

0.005.00

10.0015.0020.0025.00

% o

f T

ota

l a

sse

ts

Cash and bank balance as % of Total

Assets

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

0.00

5.00

10.00

15.00

20.00

25.00

% o

f T

ota

l a

sse

ts

Inventories as % of Total Assets

60

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.

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.

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

0.005.00

10.0015.0020.0025.0030.0035.0040.0045.0050.00

% o

f T

ota

l a

sse

ts

Receivables as % of Total Assets

61

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.

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

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

% o

f T

ota

l Li

bil

itie

s

Reserves and Surplus as % of Total

Liabilities

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

0.0010.0020.0030.0040.0050.0060.0070.00

% o

f T

ota

l Li

bil

itie

s

Net Worth as % of Total Liabilities

62

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.

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.

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

0.005.00

10.0015.0020.0025.0030.0035.0040.00

% o

f T

ota

l Li

bil

itie

s

Total Borrowings as % of Total

Liabilities

63

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.

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

0.005.00

10.0015.0020.0025.0030.0035.0040.0045.00

% o

f T

ota

l Li

bil

itie

sSundry Creditors as % of Total

Liabilities

64

7.4 .CAGR ANALYSIS

Balance Sheet

Bhel Larsen & toubro Crompton

greaves

thermax

Current Liabilities 36.32 52.42 40.1 54.10

Long term

liabilities -36.59 8.15

18.37 -38.20

Share Capital ---- -30.92 8.77 ----

Reserves 17 23.32 22.34 13.60

Current Assets 29.56 12.74 35.55 31

Net Fixed Assets 1.16 -0.39 27.95 14.5

Other Assets -5.46 16.86 .93 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.

65

Cagr Analysis Of Income Statement

Bhel Larsen & toubro Crompton

greaves

thermax

Sales 25.30 17.15 36.35 32.25

COGS 27.42 23.65 30.91 26.80

Gross Profit 23.6 29.5 37.36 35.73

Total expenses 22.70 14.96 35.28 31.3

PAT 52.67 31.01 80.84 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

66

7.5DUPONT ANALYSIS

7.1.Larsen and toubro

2003 2004 2005 2006 2007

A. Sales/NA Turn Over 0.80 1.01 1.10 1.01 0.83

B.GP/ sales Gross Margin 0.04 0.10 0.10 0.10 0.15

C.EBIT/GP

Operating

Leverage 3.24 2.64 1.33 1.25 1.30

D.EBIT/NA(AxBxC) RONA 0.11 0.26 0.14 0.13 0.16

E. PAT/EBIT

Financial

leverage 0.30 0.54 0.62 0.58 0.62

F. NA/NW

Financial

leverage 4.15 4.09 3.98 3.31 3.59

D.PAT/NW

(DxExF) ROE 0.12 0.29 0.34 0.26 0.33

H. RE/PAT Retention 1.52 1.24 1.29 1.18 1.27

I. RE/NW (GxH) Equity Growth 0.18 0.36 0.44 0.31 0.42

J. EBIT/Sales profit margin 0.14 0.26 0.13 0.13 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.

67

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

9.5.2.Crompton greaves

2003 2004 2005 2006 2007

A. sales/NA turnover 1.193399 1.346846 1.666038 1.564805 1.428264

B GP/sales gross margin 0.37 0.35 0.35 0.37 0.32

C. EBIT/GP

operating

leverage 0.24 0.28 0.25 0.24 0.31

D EBIT/NA

(A*B*C) rona 0.105974 0.131991 0.145778 0.138955 0.141684

E. PAT/EBIT

financial

leverage 0.17 0.39 0.53 0.59 0.48

F. NA/NW

financial

leverage 3.32 4.11 3.18 3.58 4.32

G. PAT/NW

(D*E*F) roe 0.059812 0.211568 0.245695 0.2935 0.293796

H. RE/PAT retention 1 0.27 0.83 0.9 0.5

I. RE/NW(G*H)

equity

growth 0.059812 0.057123 0.203927 0.26415 0.146898

68

7.5.3.BHEL

2003 2004 2005 2006 2007

A. Sales/NA Turn Over

0.72 0.73 0.71 0.78

0.78

B.GP/ sales Gross Margin

16.03 19.04 7.65 10.99

14.80

C.EBIT/GP

Operating

Leverage 0.57 0.60 0.61 0.66 0.65

D.EBIT/NA(AxBxC) RONA 6.52 8.33 3.3 5.62 7.49

E. PAT/EBIT

Financial

leverage 0.53 0.57 0.58 0.64 0.64

F. NA/NW

Financial

leverage 2.27 2.53 2.77 2.93 3.14

G.PAT/NW

(DxExF) ROE 9.25 12.43 15.82 23.00 27.48

H. RE/PAT Retention 0.78 0.71 0.81 0.72 0.83

I. RE/NW (GxH) Equity Growth 7.21 8.79 12.83 16.51 22.87

J. EBIT/Sales profit margin 0.09 0.11 0.05 0.07 0.10

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.

69

DuPont Chart: BHEL’s Financial performance, 2007

70

7.6. SUSTAINABLE GROWTH RATE MODEL

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.

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

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

in t

erm

s o

f %

return on equity

71

Financial Leverage

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

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

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

Financial Leverage

72

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 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

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

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

in t

erm

s o

f %

return on assets

73

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 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.

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

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

in t

erm

s o

f %

net profit margin

74

2. Dividend pay-out ratio

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.

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

Thermax 0.02 0.04 0.03 0.02 0.00

0

5

10

15

20

25

30

35

Ax

is T

itle

Dividend Payout

75

Tax Rate

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.

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

Thermax 25.57 26.20 35.20 40.67 35.36

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00

Ax

is T

itle

Tax Rate

76

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.

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

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

Quick Ratio

77

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.

78

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.

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.

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

0.00

0.10

0.20

0.30

0.40

0.50

0.60

Ax

is T

itle

Chart Title

79

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.

80

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.

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

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

D/E Ratio

81

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

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

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

Ax

is T

itle

Chart Title

82

1. DEBTORS TURNOVER RATIO: It indicates the number of times the turnover of

debtors take place in a year.

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.

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

AVG 2.7675 2.9325 3.1675 3.13 3.035 3.0065

0

1

2

3

4

5

6

Ax

is T

itle

Chart Title

83

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.

84

WORKING CAPITAL TURNOVER:

This ratio indicates the efficiency with which it generates sales using its working

capital.

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.

% INCREASE YEAR ON YEAR

2004-03 2005-04 2006-05 2007-06

SALES 15.1373 20.0934 38.1049 29.0736

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

-40.00

-20.00

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

Ax

is T

itle

Chart Title

85

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.

% INCREASE YEAR ON YEAR

2004-03 2005-04 2006-05 2007-06

sundry creditors 16.79807 86.47286 -20.1747 88.46363

% INCREASE YEAR ON YEAR

2004-03 2005-04 2006-05 2007-06

CURRENT

LIABILITIES 40.519 64.63538 23.29129 89.22209

CURRENT ASSETS 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.

86

Earning Per Share (EPS)

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)

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

Thermax 2.45740663 2.746957616 2.819974822 8.608732158 15.76826196

0

20

40

60

80

100

120

Ax

is T

itle

EPS

87

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.

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

0

5

10

15

20

25

30

35

40

45

Ax

is T

itle

Price Earning Ratio

88

Market Value to Book Value Ratio

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

ratio.

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

0.00

10.00

20.00

30.00

40.00

50.00

60.00

Ax

is T

itle

Market Value to Book Value Ratio

89

Profitability Ratios

Dividend Yield Ratio

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

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

Thermax 0.018518856 0.018124491 0.012018464 0.009704015 0.020236969

0

1

2

3

4

5

6

7

8

Axi

s T

itle

Dividend Yield

90

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

91

8. FINDINGS & CONCLUSION

Findings from DU-PONT analysis

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

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

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

in t

erm

s o

f %

return on equity

92

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

93

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.

94

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.

L & T Bhel Crompton greaves Thermax

Cash flow analysis 1 2 3 4

Common size analysis 2 1 4 3

Cagr 4 2 1 3

Du pont ----- ------ ----- ----

Sustainable growth rate model 1 2 3 4

Benchmark ratios 2 4 3 1

Other imp. ratios 3 4 2 1

95

9. REFERENCES

1.