40340906 Hamdard University 1

8/6/2019 40340906 Hamdard University 1

http://slidepdf.com/reader/full/40340906-hamdard-university-1 1/71

1

HAMDARD UNIVERSITY

PREFACE

MBA program requires a student to undergo 6 weeks summer training in an organization so

as to give student an exposure to practical management and to make them familiar with

various activities taking place in corporate world.

I must say that being an MBA student, aspiring to take specialization in the field of Finance, I

was quite familiar with the business environment theory after completing one year of my

studies. But my summer training had enabled me to get an in depth knowledge of the realities

of corporate world.

There is no doubt that theoretical knowledge acquired by a student during the pursuance of

his MBA lays down a foundation with the help of which the student, in consideration, can

expect to have the widest exposure of the reality show of the corporate world. But, one

should not take it for granted that the so-called theoretical concepts can be applied to the

business environment in totality. This is to say that, there actually is a difference between the

theoretical and practical environment in totality.

One Part of the story is that one has to take into consideration, the feasibility of a specific

theoretical concept before one is to apply the same in the typical/complex business situation.

Decisions taken out of thin air, in an ad-hoc manner, may spell a disaster for the organization

as a whole. Another part of the story is that if one has applied a theoretical concept, in the

light of its feasibility and after effective consideration of the Cost and Benefit Analysis, the

same can prove to be very fruitful for the organization.

This report is about the practical training done at M/s Bharat Heavy Electricals Limited,

Corporate Office, New Delhi as per the curriculum of MBA of Hamdard University, New

Delhi.



2

HAMDARD UNIVERSITY

ACKNOWLEDGEMENT

I wish to express my heart full gratitude to Shri Sumit Salhotra (Sr. Mgr. Finance)for allowing me to do my summer training at BHEL and Shri S. M. Arora (Sr. DGM

Finance) and Mrs. Anita Bahri (DGM Finance) for extending his help during the completion

of my project. I would like to thank Shri Deepak Kumar (Manager Finance) for being

always readily available for all sorts of guidance, under whose gratitude I undertook this

project. I would like to thank all these people for extending their advice and direction that is

required to carry on a study of this nature and for helping me with the intricate details of the

project at every step. Their continued cooperation and encouragement have made it possiblefor me to complete this report. They encouraged me and challenged me throughout summer

process, never accepting less than my best efforts.

I would like to thank all the other people at BHEL who always helped me in completion of

my project. I wish to thank my college supervisor, Shri P. S. Raychaudhuri at Hamdard

University for their constant motivation and help.

BHUPINDER PAL SINGH

MBA (GENERAL)

BATCH 2009-11

HAMDARD UNIVERSITY

GUIDED BY:

SHRI DEEPAK KUMAR

MANAGER (FINANCE)



3

HAMDARD UNIVERSITY

EXECUTIVE SUMMARY

This Project work gives an overview of the various sections of corporate finance at BHEL. It

showcases the financial analysis of the most well known PSU Bharat Heavy Electricals

Limited. Various aspects about the awareness of financial area have been made clear through

this project report.

This project focuses on different functions of corporate finance at BHEL. However, the main

focus is on financial analysis of BHEL, Debtors Management, Provident fund and capital

budgeting.

The financial analysis gives a comparative ratio analysis of BHEL for last 5 years. This part

also focuses on working capital and its associated ratios.

The debtor’s part of the project shows the system followed and project work undertaken for

finding out status of power sector projects for non liquidation of debtors.

The Capital budgeting part of the project analyses the various aspects that are considered

while checking the financial feasibility of a project. It analyses the various techniques and

tools that are used to see whether a project is worth investments and provides suggestions for

the betterment of this process.

The Provident fund part of the project shows the various policies followed by PF department

for investment.

The project will help in exploring those dimensions which were not known to many but study

of this project will bring those to the light. The basic purpose of preparing this project was tomake a detailed study and understand its various concepts and outcomes.

While working on this project various topics and concepts came to my knowledge which was

unheard and unknown to me before.



4

HAMDARD UNIVERSITY

Table of Contents

EXECUTIVE SUMMARY ...................................................................................................................3

Table of Contents ..................................................................................................................................4

COMPANY OVERVIEW: BHEL .........................................................................................................6

SWOT ANALYSIS ...............................................................................................................................7

I. BUSINESS SECTORS ......................................................................................... 8

(A) POWER SECTOR ......................................................................................... 9

(B) INDUSTRY ................................................................................................. 10

(C) INTERNATIONAL BUSINESS ...................................................................... 11

..................................................................................................................... 11

II. RESEARCH AND DEVELOPMENT .................................................................... 12

III. QUALITY ASSURANCE ................................................................................... 12

IV. JOINT VENTURES .......................................................................................... 13

BHEL - The continuing growth momentum: .......................................................................................13

Strategic business initiatives in year 2009-2010 ..............................................14

Future Dimension ............................................................................................. 14

Corporate social responsibility in BHEL ............................................................ 15

MOU signed by BHEL ........................................................................................ 17

CAPACITY EXPANSION ....................................................................................... 17

GLOBAL FORAYS ............................................................................................... 18

WORKING CAPITAL ........................................................................................................................18

The dangers of excessive working capital: ....................................................... 19

The dangers of inadequate working capital: .....................................................19

............................................................................................................................................................. 20

FINANCIAL PERFORMANCE .........................................................................................................21

CHALLENGES: ..................................................................................................................................21

BALANCE SHEET .............................................................................................................................22

PROFIT & LOSS ACCOUNT ............................................................................................................24

FINANCIAL RATIOS ........................................................................................................................25

COMPARISON OF BALANCS SHEETS ..........................................................................................37

OVERVIEW OF THE BHEL CORPORATE FINANCE DEPARTMENT ........................................38

CASH MANAGEMENT ......................................................................................... 39

CORPORATE BOOKS .......................................................................................... 39ESTABLISHMENT ............................................................................................... 39



5

HAMDARD UNIVERSITY

INTERNAL AUDIT ............................................................................................... 40

FINANCIAL SERVICES DEPARTMENT .................................................................. 40

TAXATION ......................................................................................................... 40

PROVIDENT FUND TRUST .................................................................................. 41

DEBTORS .......................................................................................................... 45

CAPITAL BUDGETING ....................................................................................................................51

Techniques of capital budgeting ...................................................................... 55

CAPITAL BUDGETING AT BHEL ...................................................................................................59

Objective of the investment proposal: .............................................................. 59

BEGINNING OF THE CAPITAL BUDGETING PROCEDURE ....................................62

Five year plan ................................................................................................ 62

Annual plan: .................................................................................................. 62EVALUATION OF AN EXISTING PROJECT ............................................................ 66

CONCLUSION ...................................................................................................................................69

REFERENCES ....................................................................................................................................70



6

HAMDARD UNIVERSITY

COMPANY OVERVIEW: BHEL

Established in the late 50’s

BHARAT heavy electrical limited

(BHEL) is a name which is

recognized across the industrial

world. It is largest manufacturing

enterprise in India and one of the

leading international companies in

the field of power equipment

manufacturer.

BHEL offers a wide spectrum of

products and services to core sectors of the Indian economy, viz., power, transportation, oil &

gas, renewable energy, defence.etc.

A dynamic 45000 strong team embodies the BHEL philosophy of professional excellence to

take up future challenges.

With corporate headquarters at New Delhi, 14 manufacturing units, one subsidiary, a

widespread regional services network and project sites all over India and abroad, BHEL is

India’s industrial ambassador to the world with an export presence in more than 70 countries.

BHEL has a consistent track record of growth, performance and profitability. The world bank

in its report on the Indian public sector, has described BHEL “one of the most efficient

enterprise in the industrial sector at par with international standards of efficiency” BHEL has

already obtained ISO-9000 certification for quality management and all major units/divisions

of the company including the corporate office have been upgraded to the latest ISO-9000:

2000 VERSION.BHEL has secured iso-14001 certification for environmental management

system and OHSAS-18001 certification for occupational health & safety management

systems, for all its major units.



7

HAMDARD UNIVERSITY

VALUES

SWOT

ANALYSIS

Strengths

VISION

A

world

class

engineering

enterp

rise

comm

itted

toEnhan

cing

Stakeholder

Value

M

ISSION

To

b

ean

Indian

multin

ational

engineering

enterp

rise

provid

ing

total

business

so

lutions

throug

h

quality

products,

systems

andservices

inthe

fields

of

energy,

industry,

transp

ortation,

infrastructure

and

other

potential

areas.

● ● ●

• Zeal to excel and zest for change.

• Integrity and fairness in all matters.

• Respect for dignity and potential of individuals.

• Strict adherence to commitments.

• Ensure speed of response.

• Foster learning, creativity and team work.



8

HAMDARD UNIVERSITY

➢ Good corporate image➢ Complete range of products for transmission and distribution➢ Established Brand Name

➢ Considered to be having design ability

Weakness

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

Opportunities

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

circles also.

Threats

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

and being anti-people

I. BUSINESS SECTORS

BHEL’s operations are organized around three business sectors, namely Power, industry-

including Transportation, Transmission, Telecommunication & Renewable Energy and

Overseas Business. The major business (approx 80%) is from power sector.



9

HAMDARD UNIVERSITY

(A) POWER SECTOR

BHEL manufactures a wide range of products and systems for thermal, nuclear, gas and

hydro based utility power plants to meet customer requirements for power generation and

transmission. Its capability ranges from supplying individual equipment to setting up

complete power plants on turnkey basis, packed by reliable after sale-services. BHEL turnkey

capabilities have been proved in a number of projects in India and abroad.

BHEL –built power generation sets account for nearly two-third of the overall installed

capacity and three-fourth of the power generated in India. The company has proven expertise

in plant performance improvement through renovation, modernization and upgrading of a

variety of power plant equipment, besides specialized know how of residual life assessment

(RLA), Health diagnostics and Life Extension Program (LEP) of plants.

o Thermal

BHEL supplies steam turbines, generators, boilers and matching auxiliaries up to 800 MW

rating including supercritical sets of 660/800 MW.

o Nuclear

BHEL has manufactured and supplied steam turbines and generators for 220 MWe, 235

MWe and 540 MWe ratings

.

o Hydro

BHEL engineers and manufactures custom-built hydro power equipment. Its range covers

turbines of Francis, pelton and Kaplan type. Pump turbines, bulb turbines.



10

HAMDARD UNIVERSITY

(B) INDUSTRY

BHEL manufactures and supplies major capital equipment and systems like captive power

plants, centrifugal compressors, drive turbines, industrial boilers & auxiliaries, waste heat

recovery boilers, gas turbines, pumps, heat exchangers, electric machines, valves, heavy

castings and forgings, to a number of industries other than power utilities, like metallurgical,

mining, cement, paper, fertilizers, refineries and petro-chemicals. BHEL has also emerged as

a major supplier of controls and instrumentation systems especially distributed digital control

systems for industries, and simulators for various applications. BHEL is supplying X'mas tree

valves and well heads up to a rating of 10,000 psi to ONGC and Oil India. It can also supply

on-shore drilling rigs, sub-sea well heads, super deep drilling rigs, desert rigs and heli-rigs.

o Transportation

Today over 70% of the Indian Railways .one of the largest railway networks in the world is

equipped with traction equipment built with bhel .Most of the trains of the Indian Railwaysare equipped with BHEL?s traction and traction control equipment. India's first underground

metro at Calcutta runs on drives and controls supplied by BHEL. The Company has

developed and supplied broad gauge 3900 HP AC locomotives, 5000/4600 HP AC/DC

locomotives, diesel shunting locomotives of up to 2600 HP, battery powered road vehicles,

including electrics & control electronics. BHEL has acquired the technology for 6000 HP 3-

phase AC Locos and started manufacturing the electrics & controls as well as those for 3-

phase AC EMUs, Diesel EMUs and OHE cars.

o Transmission

BHEL today is the leader in the field of power transmission in India with a wide range of

transmission systems and products. BHEL supplies a wide range of transmission products

and systems of up to 400 kV class. Those include: high-voltage power and distribution



11

HAMDARD UNIVERSITY

transformers, instrument transformers, dry-type transformers, SF6 switchgear, capacitors and

ceramic insulators. Equipment for high-voltage direct current (HVDC) systems is also

supplied, for economic transmission of bulk power over long distances. Series and shunt

compensation systems are also manufactured to minimize transmission losses. BHEL has

developed and commercialized the country’s first indigenous 36 kV Gas Insulated Substation.

o Gas

BHEL is the only Indian company capable of manufacturing large size gas based power plant

equipment, comprising advance-class gas turbine up to 289 MW (ISO) rating for open and

combined cycle operations. BHEL is the largest supplier of well heads, X-MAS trees and oil

rigs to ONGC and oil

(C) INTERNATIONAL BUSINESS

BHEL has, over the years established its reference in more than 70 countries across all

inhabited countries of the world. These references encompass almost the entire range of

BHEL products and services, covering Thermal, Hydro and gas based turnkey power projects

,substation projects, rehabilitation projects, besides a wide variety of products like

transformers, compressors, valves and oil field equipment, electrostatic precipitators,

photovoltaic equipment, Insulators, Heat exchangers, Switch gears etc.

The company has been successful in meeting demanding requirements of international

markets in terms of complexity of works as well as technological ,quality and

Other requirements viz HSE requirements, financing packages and associated O&M services,

to name a few.

BHEL has proved its capability to undertake projects on fast track basis. BHEL has also

established its versatility to successfully meet the other varying needs of various sectors, be it

captive power, utility power generation or for the oil sector. Besides undertaking turnkey



12

HAMDARD UNIVERSITY

projects on its own, BHEL also possesses the requisite flexibility to interface and compliment

other international companies for large projects and has also exhibited adaptability by

manufacturing and supplying intermediate products.

II. RESEARCH AND DEVELOPMENT

BHEL’s engineering and R&D efforts are focused on improving the quality of its products,

upgrading existing technologies, accelerating indigenization and developing new products for

diversification, reducing time-cycle and costs. A highly qualified and experienced team of

engineers and scientists are engaged in R&D activities at BHEL’s corporate R&D division,

Hyderabad, as well as at all the manufacturing units and they have close interaction with

other national research laboratories and academic institutions. R&D efforts have already

yielded several significant results in terms of better products and improved technologies.

A few among the many R&D accomplishments are: atmospheric bubbling fluidized bed

combustion(AFBC) boiler(up to 165t/h);ceramic honeycombs for catalytic convertors;

surface coating for erosion; renewable energy systems, including wide electric generators;

solar photovoltaic and solar water heating systems.

Recently, centers of excellence for simulators, computational fluid dynamics (CFD), and a

centre for development of permanent magnet machines, have been established.

III. QUALITY ASSURANCE



13

HAMDARD UNIVERSITY

Quality of BHEL products is evidenced through state of-the-art design and technology

adopted from world renowned collaboration. BHEL gives emphasis to the highest standards

of quality at every stage of operation through implementation of quality management system

and procedures in line with international standards and practices.

BHEL, where quality systems as per ISO-9001 have taken deep roots, has now made

significant achievements in Total Quality Management by adopting CII/EFQM model for

business excellence.

BHEL shares the growing global concern on issues related to environment & occupational

health & safety. The units of BHEL have been accredited to ISO-14001 Environmental

Management System.

IV. JOINT VENTURES

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

b) NTPC-BHEL POWER PROJECTS PVT. LTD. (NBPPPL)

c) UDANGUDI POWER CORPORATION LTD.

d) BARAK POWER PVT. LTD.

e) Power plant performance improvement ltd.

f) HEC & BHEL Joint Venture for Foundry Forge Company

BHEL - The continuing growth momentum:



14

HAMDARD UNIVERSITY

Strategic business initiatives in year 2009-2010

• BHEL and Toshiba Corporation, Japan have signed a MoU to explore the possibility

of establishing a Joint Venture Company to address transmission and distribution

(t&d) business in India and other mutually agreed countries.

• MoUs have been signed with Alstom for participating in the tender for setting up a

factory for electric loco companies at Dankuni, West Bengal and with GE for

participating in the tender for setting up a Diesel loco factory at Marhowar, Bihar.

• BHEL has been nominated as the nodal agency for serial production of marine gas

turbines named Sagar Shakti Engine for propulsion of Indian Naval Ships, with rated

power of 12MW.

• BHEL and Maharashtra State Power Generation Company Limited have signed a

MoU for setting up a JV company to builddown and operate a 1500-1600 MW Power

plant at Latur in Maharashtra.

• BHEL and Madhya Pradesh power Generation Company limited have formed a JV

company to build, own and operate a 2*800 MW Thermal Power Plant with super

critical parameters at Khandwa in Madhya Pradesh.

Future Dimension

• The power sector is poised to remain in a growth trajectory even during XII and XIII

plan periods as the Govt. shifts gears on infrastructure’s a part of the plan to shift to

energy-saving technology and lower emissions, the share of thermal projects based

on supercritical technology will rise, going forward.

• To maintain a balanced growth, BHEL will focus efforts on Transportation and

Transmission sectors.

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



15

HAMDARD UNIVERSITY

• The new paradigm of competitiveness calls for a strategic shift that that will require

enhancement of capabilities. With capacity expansion to 20,000 MW by March 2012,

we are building new foundation for BHEL by ensuring that investments are timely,

well planned, scalable and competitive.

• Engineering and technology have been BHEL’s core capabilities. Greater

standardization of components and subsystems that will drive competitiveness and

faster delivery is being pursued.

• The company is on track to become a $10-11 billion turnover company by 2011-12 in

line with its strategic plan. BHEL’s performance in the year gone by was made

possible by the confidence reposed by its stake holders including the government of

India.

Considering need of the country to transmit bulk power over long distance, BHEL

would continue its development of 1200 KV products such as transformer and CVT

which are slated to field trial at 1200 KV Bina Test State

Corporate social responsibility in BHEL

• As part of its corporate social responsibility, during the year BHEL undertook

socio-economic and community development programs to promote education,

improvement of living conditions and hygiene in villages and communities

located in the vicinity of its manufacturing plants &project sites spread across

the country.

• During the year, nine social & welfare projects were completed by various

units of BHEL. These include construction of community facilities in villages,

up gradation of schools, scholarship schemes for underprivileged children,

providing water facilities, organizing eye camps, and creation of self

employment opportunities for unemployed women from the downtrodden

community.



16

HAMDARD UNIVERSITY

• Reaching out to the distressed victims in the flood ravaged areas of Andhra

Pradesh and Karnataka, BHEL has made a humble contribution to help

alleviate their suffering.

• As part of social commitment, 3626 act apprentices were trained in the

company. In addition, 70`` students/trainees from various professional

institutions underwent vocational training.

AWARDS AND PRIZES

Shri C.S Verma, Director

(Finance), BHEL Receiving

ICWAI National Award for

Excellence in Cost Management

from Shri Anurag Goel,

Secretary, Minister of Corporate

Affairs, GOI

CMD, Shri Ravi Kumar

receiving the prestigious

‘ENERTIA’ Individual

Contribution Awards in Thermal

Power Sector’ from Shri R V

Shahi, Former secretary –Power,

GOI

Shri B.P.Rao, Director (IS&P),

BHEL receiving the DSIJ Most

Investor Friendly PSU Awards2009 from Hon’ble Chief Minister

of Delhi, Smt. Sheila Dikshit



17

HAMDARD UNIVERSITY

MOU signed by BHEL

• BHEL signs MoU with Ministry of Heavy Industries & Public Enterprises

The Memorandum of Understanding (MoU) for the year 2010-11 between BHARAT

Heavy Electrical Limited (BHEL) and the Ministry of Heavy Industries & Public

Enterprises was signed by B. Prasada Rao, CMD (BHEL) and Dr. Satyanarayana

Dash, Secretary (Department of Heavy Industry, Ministry of Heavy Industries &

Public Enterprises) in the presence of Functional Directors on the board of BHEL and

other senior officials of the Ministry.

• A MOU has been signed in between BHEL and Nuclear Power Corporation of India

Ltd. To form a joint venture to carry out EPC activities for power plants based on

atomic energy both within the country and outside.

CAPACITY EXPANSION

• Capability to deliver 15,000 MW of power equipment per annum established and further

augmentation to 20,000 MW per annum by March 2012



18

HAMDARD UNIVERSITY

• State-of-the-art manufacturing facilities established for supercritical equipment.

• Contemporary manufacturing facility set up for high-rating transformers.

• 31 new cranes procured to increase erection capability at various sites.

GLOBAL FORAYS

• Physical export orders of Rs 3571 crore

• Foray into a new market-Belarus

• Order for largest ever Hydro Project-1,200 MW Punatsangchhu Hydro electric projects,

Bhutan.

• 734 MW commissioned overseas – a new record.

WORKING CAPITAL

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





20

HAMDARD UNIVERSITY

CALCULATION OF WORKING CAPITAL OF BHEL

2010 2009 2008 2007 2006 2005

Total Current Assets429348 369010.7 279061.8 210629.7 163307.8 133429.79

Total Current Liabilities324417 283329 200223 144201.1 103200.2 99213.58

NET W/CAPITAL ( CA - CL)

104931 85681.7 78838.8 66428.6 60107.634216.21

0

100000

200000

300000

400000

500000

600000

700000

800000

900000

1000000

2005 2006 2007 2008 2009 2010

NET W/CAPITAL ( CA - CL )

Total Current Liabilities

Total Current Assets



21

HAMDARD UNIVERSITY

FINANCIAL PERFORMANCE

2008-2009 2009-2010 PERCENTAGE

CHANGE

Turnover

(Rs. Crore)28033 34154 22

Profit Before

Tax

(Rs. crore)

4849 6590 36

Net profit

(Rs. crore)

3138 4310 37

Net worth

(Rs. crore)12939 15721 22

Earnings Per

Share

(Rs.)

64.11 88 37

Value added per

employee

(Rs. Lakh)

21.67 27.70 28

Capital

Investment

(Rs. Crore)

1082 1767 63

CHALLENGES:

o Technology Transition – As BHEL moves to supercritical business need to have a

strong vendor base to support also existing vendors require technology upgrade as

present setup is not sufficient to support this.

o Increased international competition.

o Increased domestic competition like, L&T JV with Mitsubishi.



22

HAMDARD UNIVERSITY

BALANCE SHEETfor the year ended 31st March, 2009

Schedule For the year ended For the year ended

31.03.2009 31.03.2008

SOURCES OF FUNDS

Shareholder' Fund

Share Capital 1 489.52 489.52

Reserves & Surplus 2 12449.29 12938.81

10284.69

10774.21

Loan Funds

Secured Loans 3 0.00 0.00

Unsecured Loans 4 149.37 149.37

95.18

95.18

13088.18 10869.39

APPLICATION OF FUNDS

Fixed Assets

Gross Block 5 5224.87 4443.47

Less: Depreciation/Amortisation to-date 3713.25 3403.08

1511.62 1040.39

Less: Lease Adjustment Account 41.22 59.13

Net Block 1470.4 981.26

Capital Work -in-Progress 6 1156.97 2627.37

658.03

1639.29

Investments 7 52.34 8.29

Deferred Tax Assets Net 1840.30 1337.93

(Refer note no.20 of Schedule 19)

Current Assets, Loans& Advances

Current Assets 8

Inventories 7837.02 5736.40

Sundry Debtors 15975.50 11974.87

Cash & Bank Balance 10314.67 8386.02

Other Current assets 350.21 421.09

Loans and Advances 2423.67 1387.80

36901.07 27906.18

Less:

Current Liabilities & Provisions

Current Liabilities

1

0 23357.32 16576.45

Provisions

1

1 4975.58 3445.85

28332.90 20022.30

Net current assets 8568.17 7883.8813088.18 10869.39



23

HAMDARD UNIVERSITY



24

HAMDARD UNIVERSITYPROFIT & LOSS

ACCOUNTfor the year ended 31st March, 2009

Schedule For the year ended For the year ended

31.03.2009 31.03.2008

EARNINGS

Turnover (Gross) 12 28033.19 21401.01Less: Excise duty & Service Tax 1820.86 2096.37

Turnover (Net) 26212.33 19304.64

Other Income 12A 1497.36 1444.76Accretion/Decretion to Work-in-

progress & 131151.54 827.26

Finished Goods

28861.23 21576.66

OUTGOINGS

Consumption of Material, Erection

and EngineeringExpenses 14 17620.05 11820.87

Employees' remuneration & benefits 15 2983.68 2607.69

Other expenses of Manufacture, 16 1835.77 1644.23

Administration, selling and Distribution

Provisions (net) 17 1280.97 778.25

Interest & other borrowing costs 18 30.71 35.42

Depreciation and amortisation 5 334.27 297.21

Less: Cost of jobs done for internal use 61.18 38.32

24024.27 17145.35

Profit before prior period items 4836.96 4431.31Add/(Less): Prior period items (Net) 18A 11.89 -0.92

Profit before tax 4848.85 4430.39

Less: Provision for taxation

For Current Year

:- Current tax 2250.17 1934.95

(incl. wealth tax Rs. 0.17 crore

(Previous year Rs. 0.07 crore)

:- Fringe Benefit Tax 40.00 27.1:- Deferred Tax -502.37 -402.77

1787.80 1559.28For earlier years

:- Tax -77.72 11.77

(includes Income Tax abroad Rs. 8.48

crore):- Fringe Benefit Tax 0.56 0.00

1710.64 1571.05

Profit after tax 3138.21 2859.34

Add: Balance of profit brought 429.69 442.72

forward from last year

Foreign Project Reserves written back 1.17 1.02

Profit available for appropriation 3569.07 3303.08

Less: Appropriation-

:- General Reserve 2000.00 2000.00

:- Dividend (incl interim dividend of 832.18 746.52



25

HAMDARD UNIVERSITY

FINANCIAL RATIOS

1. CURRENT RATIO

CURRENT RATIO = CURRENT ASSETS /CURRENT LIABILITY

YEARS 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

CURRENT

RATIO

1.58 1.46 1.40 1.30 1.32



26

HAMDARD UNIVERSITY

Liquidity and debt-equity ratios are widely used financial ratios. Liquidity ratio, also

called the 'short-term solvency' ratio shows the adequacy. It is calculated as current

assets/current liabilities. An ideal current ratio would be 2, indicating that even if the

current assets are to be reduced by half, the creditors will be able to able to get their

money in full.

2. QUICK RATIO

QUICK RATIO = LIQUID ASSETS / CURRENT LIABILITY

YEARS 2005 – 2006 2006 - 2007 2007 - 2008 2008 - 2009 2009 – 2010

QUICK

RATIO

1.21 1.16 1.11 1.10 1.52



27

HAMDARD UNIVERSITY

Quick ratio (or "acid test"): Quick Assets (cash, marketable securities, and receivables) /

Current Liabilities—provide a stricter definition of the company's ability to make

payments on current obligations. Ideally, this ratio should be 1:1. If it is higher, the

company may keep too much cash on hand or have a poor collection program for

accounts receivable. If it is lower, it may indicate that the company relies too heavily on

inventory to meet its obligations.

3. DEBTOR TURNOVER RATIO

DEBTOR TURNOVER = GROSS SALES / TOTAL DEBTORS

YEARS 2005 - 2006 2006 - 2007 2007 - 2008 2008 - 2009 2009 – 2010

DEBTOR

TURNOVER

RATIO

2.02 1.93 1.79 1.75 1.65



28

HAMDARD UNIVERSITY

This is also called Debtors Velocity or Average Collection Period or Period of Credit

given.

(Average Debtors/Sales) x 365 for days

(52 for weeks & 12 for months)

4. PROFIT MARGIN

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

YEARS 2005 - 2006 2006 - 2007 2007 - 2008 2008 - 2009 2009 – 2010

PROFIT

MARGIN(%)

12.5% 14.00% 14.60% 12.00% 12.8%



29

HAMDARD UNIVERSITY

The two basic components of the net profit ratio are the net profit and sales. The net

profits are obtained after deducting income-tax and, generally, non-operating expenses

and incomes are excluded from the net profits for calculating this ratio. Thus, incomes

such as interest on investments outside the business, profit on sales of fixed assets and

losses on sales of fixed assets, etc are excluded.

5. EARNING PER SHARE

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

YEARS 2005 - 2006 2006 - 2007 2007 - 2008 2008 - 2009 2009 – 2010

EARNING

PER SHARE

68.60 98.70 58.00 64.10 88.05



30

HAMDARD UNIVERSITY

Earnings per share is generally considered to be the single most important variable in

determining a share's price. It is also a major component used to calculate the price-to-

earnings valuation ratio.

6. AVERAGE DEBT COLLECTION PERIOD

AVERAGE DEBT COLLECTION PERIOD (DAYS) =

TOTAL DEBTORS * 360 / GROSS SALES

YEARS 2005 – 2006 2006 - 2007 2007 - 2008 2008 - 2009 2009 – 2010

AVG DEBT

COLLECTION

PERIOD(DAYS)

178 186 201 205 218





32

HAMDARD UNIVERSITY

A ratio showing how many times a company's inventory is sold and replaced over a

period. The days in the period can then be divided by the inventory turnover formula to

calculate the days it takes to sell the inventory on hand or "inventory turnover days".

8. DEBT EQUITY RATIO

DEBT EQUITY RATIO = TOTAL DEBT / TOTAL EQUITY

YEARS 2005 - 2006 2006 - 2007 2007 - 2008 2008 - 2009 2009 – 2010

DEBT

EQUITY

RATIO

0.07 0.01 0.01 0.01 0.01



33

HAMDARD UNIVERSITY

Debt/equity ratio is equal to long-term debt divided by common shareholders. Typically

the data from the prior fiscal year is used in the calculation. Investing in

a company with a higher debt/equity ratio may be riskier, especially in times of

rising interest rates, due to the additional interest that has to be paid out for the debt.

9. PRICE EARNING RATIO

PRICE EARNING RATIO =

MARKET PRICE PER EQUITY SHARE / EARNING PER SHARE

YEARS 2005 - 2006 2006 - 2007 2007 - 2008 2008 - 2009 2009 – 2010

PRICE

EARNINGRATIO

20.20 23.29 44.24 21.25 27.32

http://www.investorwords.com/2888/long_term_debt.html

http://www.businessdictionary.com/definition/data.html

http://www.investorwords.com/1984/fiscal_year.html

http://www.investorwords.com/5906/investing.html

http://www.investorwords.com/992/company.html

http://www.businessdictionary.com/definition/time.html

http://www.investorwords.com/2539/interest_rate.html

http://www.investorwords.com/2531/interest.html

http://www.investorwords.com/3569/paid.html

http://www.investorwords.com/1313/debt.html

http://www.investorwords.com/2888/long_term_debt.html

http://www.businessdictionary.com/definition/data.html

http://www.investorwords.com/1984/fiscal_year.html

http://www.investorwords.com/5906/investing.html

http://www.investorwords.com/992/company.html

http://www.businessdictionary.com/definition/time.html

http://www.investorwords.com/2539/interest_rate.html

http://www.investorwords.com/2531/interest.html

http://www.investorwords.com/3569/paid.html

http://www.investorwords.com/1313/debt.html





35

HAMDARD UNIVERSITY

A ratio used to determine how easily a company can pay interest on outstanding

debt. The interest coverage ratio is calculated by dividing a company's earnings

before interest and taxes (EBIT) of one period by the company's interest expenses of

the same period.

COMPARISON OF CURRENT AND QUICK RATIO



36

HAMDARD UNIVERSITY

Particulars Mar 2010 Mar 2009 Mar 2008 Mar 2007 Mar 2006 Mar 2005

SOURCES OF FUNDS

Share Capital 4895.00 4895.2 4895.2 2447.6 2447.6 2447.60

Share warrants & Outstanding 0.00 0.00 0.00 0.00 0.00 0.00

Total Reserve 154278.00 124492.90 102846.90 85435.00 70566.2 57821.34

Shareholder's Funds 159173.00 129388.10 107742.10 87882.60 73013.38 60268.94

Secured Loans 0 0 0 0 5000.00 5000.00

Unsecured Loans 1278.00 1493.70 951.80 893.30 582.40 369.82

Total Debts 1278.00 1493.70 951.80 893.30 5582.40 5369.82

Total Liabilities 160451.00 130881.80 108693.90 887759.00 78596.2 65638.76

APPLICATION OF FUNDS :

Gross Block 52248.70 44434.70 41350.50 38220.6 36289.37

Less: Accumulated Depreciation 37132.50 34030.80 31170.50 28527.6 26193.47

Less: Impairment of Assets 0.00 0 0 0 0 0

Net Block 15116.20 9812.6 10180.00 9693.00 10095.90

Lease Adjustment A/c -412.20 -591.30 -292.60 129.80 346.51

Capital Work in Progress 11569.70 6580.03 3025.40 1845.72 953.18

Pre-operative Expenses pending 0.00 0 0 0 0 0

Assets in transit 0.00 0 0 0 0 0

Investments 798.00 523.40 82.90 82.90 82.93 89.52

Current Assets, Loans & Advances

Inventories 92355.00 78370.20 57364.00 42176.70 37443.7 29161.07

Sundry Debtors 206887.00 159755.00 119748.70 96958.2 71680.7 59721.42

Cash and Bank 97901.00 103146.70 83860.20 58089.10 41339.7 31778.62

Other Current Assets 4068.00 3502.1 4210.9 1997.00 845.00 471.76

Loans and Advances 28137.00 24236.7 13878.00 11408.7 11998.7 12296.92

Total Current Assets 429348.00 369010.7 279061.8 210629.7 163307.8 133429.79

Less : Current Liabilities& Provisions

Current Liabilities 280237.00 233573.20 165764.50 118978.7 88077.4 71204.46

Provisions 44180.00 49755.8 34458.5 25222.4 15122.8 13254.47

Total Current Liabilities 324417.00 283329 200223.00 144201.1 103200.2 99213.58

Net Current Assets 104931.00 85681.70 78838.80 66428.6 60107.6 48970.85

Miscellaneous Expenses not written off 0.00 0 0 0 0 0

Deferred Tax Assets / Liabilities 15272.00 18403.00 13379.30 9351.60 6737.20 5182.79

Total Assets 160451.00 130881.80 108693.90 88775.9 78596.2 65638.76



37

HAMDARD UNIVERSITY

COMPARISON OF BALANCS SHEETSNOTE: the data for the year 2009-10 is provisional.



38

HAMDARD UNIVERSITY

OVERVIEW OF THE BHEL CORPORATE

FINANCE DEPARTMENT

Basically the whole set up of the finance department is made so as to cover all the aspects

involved in the financial decisions. BHEL is a debt free company and has its own accounting

policies. While to get a project, BHEL presents its quote like other participants and the whole

procedure is carried on.

Firstly, we will analyze the various departments of finance at BHEL. These can be depicted

as follows:

• Cash management

• Corporate books

• Internal audit

• Establishment and payroll

• Financial services department

• Taxation (direct and indirect)

• Provident fund trust

• Debtors

• Budgeting

• Administration and insurance





40

HAMDARD UNIVERSITY

• Conveyance bills

INTERNAL AUDIT

o Information of audit observation of all the divisions under the unit.

o Finalization of audit report after scrutiny of replies submitted by the various divisions

against the audit observations.

o Collection with various divisions under the unit for the collection of replies for annual

submission to government auditor.

FINANCIAL SERVICES DEPARTMENT

This department deals with financial services and therefore it has to invest as well as borrow

funds from different companies. BHEL borrows funds from different financial

institutions/banks and invest in different securities. The functions of financial services

department are listed below:

o Placement of short term funds

o Arrangement of funds

o For-Ex risk management

o Lease financing

o Funds management.

TAXATION

The direct tax department of BHEL works as per the income tax act. The tax payment is

made in advance as per the income tax rules. Since the total income of BHEL is greater than

40 lakh rupees, an audit u/s 44AB known as Tax audit is done by the external auditors after

the statutory audit. Usually the statutory auditors are the ones who undertake the tax audit.



41

HAMDARD UNIVERSITY

The company prepares all the documents for the audit. The documents contain details which

are more or less the same as prepared for the statutory audit except for certain changes that

are made as per the Income Tax Act. For instance, depreciation as per the companies act for

P&M is say 25%, but as per IT Act it is 15%. So the changes are accommodated for.

An important concept to be followed in direct taxes is TDS i.e. Tax Deducted at Source.

During the financial year 2010-11, tax to be deducted at source at the following rates.

PROVIDENT FUND TRUST

Provident fund:

A fund built by a contribution made by the employee during his working life and an equal

contribution by his employer @ 12% of his salary at present and is payable back to him all together

with interest on exit from employment. Originally set up to provide monetary security to employees

after retirement, it has, over the years developed into a broad plan for social security which covers the

retirement, buying house, medical/marriage/education expenses etc.

Types of provident fund:

1) Statutory provident fund: all industries and establishments whose number of regular

employees exceeds 20 or more people are bound to contribute towards these funds. Such

provident fund is compulsory for employees drawing salaries (basic +DA) of up to Rs.6500/-

p.m.

2) Voluntary provident fund: in VPF scheme the employee contributes more towards the PF

over and above the 12% as mandated by the government. This additional voluntary

contribution enjoys all the benefits of PF, except that the company does not contribute an

equal amount. But still, the interest rate is equal to the rate of interest for PF and the

withdrawal on retirement is tax free. The benefit of such PF is voluntary and the benefit of

provident fund can be extended by setting up a private PF trust and by getting the same

recognized under Income tax act, 1961 or by getting the establishment/employees covered

under the EPF scheme, 1952 on voluntary basis.



42

HAMDARD UNIVERSITY

Besides these two categories there are various types of provident funds listed as under:

1) Public Provident Fund: this kind of provident fund is designed for self employed people like

doctors, lawyers, businessmen etc.

2) Exempted provident funds: an establishment covered under the EPF&MP Act 1952 is

required to comply with the statutory provisions of the schemes framed under the act.

However, the act provides for grant of exemption from the operation of EPF scheme, 1952 to

the establishment, if it fulfills the 31 conditions prescribed in the said act.

3) Unrecognized Provident Funds: it is the provident fund which is not recognized by the

commissioner of income-tax. The employee and the employer both contribute towards this

fund. The employee’s contribution to URPF is not treated as deductible expenditure.

BHEL employee’s provident fund

Formation and constitution of PF trust:

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



43

HAMDARD UNIVERSITY

The chairman of the trust is usually the head of the finance function and there is a separate secretary

for each trust.

BHEL, New Delhi Employees Provident Fund was formed on 1-10-1981, for the benefit of employees

of the company. Employees of Delhi/Noida based units and their branches/sites, IVP Goindwal,

EMRP Mumbai are members of the fund.

The board of trustees consists of

1) 4 representatives of the management

2) 4 representatives of the employees

Management trustees are appointed with approval of CMD and employee’s trustees are nominated by

elected trade unions. The term of office of trustees is five years.

BHEL, New Delhi Employees Provident Fund has been granted relaxation from the provisions of the

Employees Provident Fund Scheme, 1952 and is recognized under fourth schedule to IT act, 1961.

The group is mainly responsible for matters relating to:

• Provident Fund managed by the trust.

• Pension under employee’s pension scheme, 1995, being managed by EPFO.

Particul

ars

New Delhi Hardwar Bhopal Hyderaba

d

Trichy Ranipet Bangalor

e

Jhansi Chennai

Name of

the trust

BHEL EPF

trust,Delhi

BHEL EPF

trust,Hardwar

BHEL

EPFtrust,

Bhopal

BHEL EPF

trust,Hyderabad

BHEL

EPFtrust,

Trichy

BHEL

EPFtrust,

Ranipet

BHEL

EPF trust,Bangalore

BHEL

EPFtrust,

Jhansi

BHEL

EPF trust,Chennai

Units

covered

Delhi based

Divisions,RO

Ds,PS-NR

HEEP,

CFFP, IP-

Jagdish,

HERP-

Varan,

CFP-

Rudra.

Bhopal Hyderabad,

R&D-Hyd.

Trichy,

piping

centre-

Chenna

i

Ranipet EDN-

Bang,

EPD-

Bang,

ISG-Bang

Jhansi PS-SR,

PS-WR,

PS-ER



44

HAMDARD UNIVERSITY

Provident fund responsibilities:

The responsibilities with respect to PF mainly include:

Management of Funds

o Managing of monthly PF contribution from the participating Units/Divisions.

o Monitoring timely collection of interest/maturity proceeds of securities.

o Timely processing of refundable/ non-refundable withdrawals of members.

o Final settlements/transfer-out in respect of persons who cease to be member of the fund.

o Attending to the queries of members either in person or in writing.

o Ensuring the transfer of PF accumulations of new members/transferee

from previous trust/EPFO to avoid problem at later stage.

Investment of surplus funds:

o Effective portfolio management of surplus funds on monthly basis ensuring the full

compliance of guidelines/investment pattern issued by the Ministry of Labour.

o Bids are called from the empanelled arrangers and funds are placed with the H1 bidder. All

the investments are duly approved by the Board of Trustees.

o At present the corpus of the fund is Rs.400 crores.

Interest to members:

o Interest on member’s funds is credited to members a/c annually at the statutory rate declared

by EPFO and approved by board of trustees.

o Till date the trust has managed to pay interest to its members from its own resources.

Accounts and audit:

o Maintenance of accounts of provident fund.







47

HAMDARD UNIVERSITY



48

HAMDARD UNIVERSITY

The debtors in BHEL are classified as follows:

1) Collectible debtors:

2) Deferred debtors: Debts which are collectible on the basis of certain punch points are

known as deferred debts. Certain punch points are given below:-

a) MRC (material receipt certificate): Debts which are to be paid within three months

from the month of issuing the certificate of material receipt.

b) Milestone: part of debtors certain on some events or time as mentioned in the

contract. E.g. trial operation, boiler lifting etc.

c) Final payment: Due after conducting say the performance guarantee test (PG test)

i.e. after the customer checks the performance of the product, a time period is

specified in the contract in which the debtors must be paid.

3) Accrued revenue: debtors under this section are classified into two parts:

a) GDPB i.e. goods dispatched pending billing which are to be ideally paid within 6

months after billing.

b) PVC i.e. Price Variation Clause which are the debtors that are a result of certain

impacts. There may be a variation or increase in price that need to be accounted

for accordingly as per the contracting rules.

Scope of debtor’s management:

• Collectible Debtors project/sector/account code wise



49

HAMDARD UNIVERSITY

• Ageing and verification/collection plan for unverified and verified amount with respect to

each project

• Project wise Withheld and age-wise analysis.

• Deferred Payments category-wise/account code wise and their ageing

• Status and liquidation plan for accrued revenue (GDPB and PVC)

• Opening and closing balance of valuation adjustment and other debts

• Status of all contractual provisions. (CO/LD/BD/SS) along with the ageing

Submission of data by units/regions:

The debtor’s data from each unit is required in the form of eight files:

Reports:

Top management is likely to assess the status and movement of sundry debtors from time to

time. This web based system enables retrieving different types of reports for information at

the end of each reporting month. Generally, customer wise, project wise, business sector

wise, unit/region wise, account code wise etc. debtors analysis with verification and

liquidation plan are required for review.

The report modules in the web based debtors management system provide the facility to

generate the above mentioned reports. The reports can be generated using various selection

criteria.

PROJECT WORK DONE AT DEBTORS MANAGEMENT

OJECTIVE

There are projects for power sector at BHEL some of them have pending debtors of

more than 50 crore and above. The status report of these projects has to be made so that

reasons for non-liquidation of debtors could be found and problem areas could be rectified.

TARGET PROJECTS



50

HAMDARD UNIVERSITY

SECTOR : POWER SECTOR ONLY

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

PROCEDURE

1. Collecting the project wise breakup of debtors as on 31st march, 2010 from web

based debtor’s management system

2. Power Sector (Marketing) to collect the information like zero date of the project,

date for trial operation, date for PG test, reason for delay in liquidation (if any).

CONCLUION

SHORTFALL IN PG

TEST7%

DOCUMENTATION

INCOPLETNESS

5%

PENDING SUPPLY

8%

NO DELAY

30%

WITHHELD AGAINST

LD

50%



51

HAMDARD UNIVERSITY

CAPITAL BUDGETING

The most important function of financial management is not only the procurement of external

funds for the business but also to make efficient and wise allocation of these funds. The

allocation of funds means the investment of funds in various assets and other activities. It is

also known as investment decision, because a choice is to be made regarding the assets in

which the funds will be invested. The assets which can be acquired fall into two broad

categories;

i) Short term or current assets

ii) Long term or fixed assets

Accordingly, two types of investment decisions are to be taken. First type of investment

decision related to short term assets are called short term investment decisions or current

assets management. This is termed as working capital management. Second type of

investment decision related to long term assets are called long term investment decisions.

These are known as Capital budgeting or Capital expenditure decisions.

Meaning of Capital budgeting:

Capital budgeting is the technique of making decisions for investment in long term assets. It

is a process of deciding whether or not to invest the funds in a particular asset, the benefit of

which will be available over a period of time longer than one year.

Capital budgeting consists in planning the deployment of available capital for the purpose of

maximizing the long term profitability of the firm.

Thus, a capital budgeting decision is a firm’s decision to invest its funds in long term assets

in anticipation of an expected flow of benefits over the lifetime of the asset. These benefits

may be either in the form of increased sales or reduced costs. Capital expenditure decisions

generally include decisions regarding expansion, acquisition, modernization and replacement

of long term assets.



52

HAMDARD UNIVERSITY

Features of Capital Budgeting:

1. Funds are invested in long term assets.

2. Funds are invested in present times in anticipation of future profits.

3. The future profits will occur to the firms over a series of years.

4. Capital budgeting decisions involve a high degree of risk because future benefits are

not certain.

Importance of Capital budgeting:

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

the long term profitability of a firm because of the fact that they relate to fixed assets.

The fixed assets, in a sense, reflect the true earning capacity of a firm. They enable a

firm to produce finished goods which is ultimately sold for profit. Hence a correct

investment decision can yield spectacular profits, whereas, an ill-advised and

incorrect decision can endanger the very survival of the firm.

2. Long time periods: the effect of capital budgeting decision will be felt by the firm

over a long time span, and thus, affects the future cost structure of the firm. To

illustrate, if a company purchases a new plant to manufacture a new product, the

company will have to incur a sizable amount of fixed costs, in terms of labor,

supervisor’s salary, insurance, rent of building etc. If in future, the product turns out

to be unsuccessful or if it yields less profit than anticipated, the company will have to

bear the burden of heavy fixed costs. Hence, the future costs, sales and profits will be

determined by the capital budgeting decisions.

3. Irreversible decisions: Capital budgeting decisions once taken are not easily

reversible without heavy financial loss to the form. This is because it is very difficult

to second hand plant.

4. Involvement of Large Amount of Funds: Capital budgeting decisions require large

amount of funds and most of the firms have limited financial resources. Hence, it is

absolutely necessary to take thoughtful and correct investment decisions because anincorrect decision will not only result in losses but also prevent the firm from earning



53

HAMDARD UNIVERSITY

profits from the alternative investments which had to be dropped because of the

paucity of funds.

5. Risk: Investment in fixed assets may change the risk complexion of the firm. This is

because different capital investment proposals have different degrees of risk. If the

adoption of an investment proposal increases average gain, but causes frequent

fluctuations in the profits of the firm, the firm will become more risky. As such,

investment decisions shape the basic character of a firm.

6. Most difficult to make: these decisions are among the most difficult decisions o be

taken by a firm. This is, because they require an assessment of future events which are

uncertain and difficult to predict. For example, estimating the future cash inflows and

life of the project is really a complex problem.

Kinds of Capital Budgeting Decisions:

A firm may have various investment proposals for its consideration. It may select all of them,

one of them, or some of them depending upon the various types of proposals.

i. Accept-reject decisions: this is a fundamental decision in capital budgeting.

If a proposal (or project) is accepted, the firm would invest in it and if the

proposal is rejected, the firm would not invest in it. In general, all those

proposals, or projects which yield a rate of return higher than a certain

required rate of return are accepted and the rest are rejected. By applying this

criterion, all independent proposals are either accepted or rejected.

Independent proposals are those which do not compete with other proposals

and all proposals can be accepted simultaneously. Hence, all the proposals

which satisfy the minimum investment criterion should be implemented.

ii. Mutually competitive decisions: these are related to the proposals which

compete with other projects in such a way that the acceptance of one will

automatically result in the rejection of others. For example, a company is

considering two sites X and Y for the construction its plant. If site X isselected, site Y will be automatically rejected.



54

HAMDARD UNIVERSITY

iii. Priority order Decisions: In case a firm has unlimited funds, all those

independent projects are accepted which yield a higher rate of return as against

some predetermined rate. However, in actual practice most of the firms have

limited funds. The firm, therefore, must fix a priority order for investing these

funds. The firm allocates funds to various projects in a manner that the long

term profits are maximized. The priority of the projects will be determined in

the basis of predetermined criterion such as the rate of return. In this way, the

projects yielding maximum return will be selected and all other projects will

be rejected.

Techniques of Capital Budgeting

There are two criteria’s for capital expenditure decisions

1. Accounting profit criteria

2. Cash flow criteria

Under accounting profit criteria there is only one method for making capitalexpenditure decision. This method is known as Average Rate of Return method.

Under cash flow criteria, several methods are included. These are as under:

I. Pay back method

II. Methods based on discounted cash flows

(i) Discounted pay back method

(ii) Net present value method

(iii) Internal rate of return method

(iv)Profitability index method

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



55

HAMDARD UNIVERSITY

and cash outflows include cash invested in a project. Cash flow criteria are preferred as

compared to accounting profit criteria for the following reasons:

1. In case of cash flow criteria it is possible to consider the time value of money.

2. Cash flow criteria are based in cash flows rather than accounting profit,

therefore, it avoids accounting uncertainties.

Techniques of capital budgeting

Average rate of return method (ARR):

This method is also known as accounting rate of return method. It is based upon accounting

information rather than cash flows. It is calculated as follows:

ARR = Average annual profit after taxes * 100/ investment

Accounting profit criteria Cash flow criteria

NON-DISCOUNTING TECHNIQUE

1. PAY BACK PERIOD

DISCOUNTING TECHNIQUES

1. DISCOUNTED

PAYBACK PERIOD

2. NET PRESENT VALUE

3. PROFITABLITITY

INDEX

4. INTERNAL RATE OF

RETURN

Accounting Rate of Return



56

HAMDARD UNIVERSITY

Average annual profits after taxes = Total of after tax profits of all the years/number of years

Here profit after tax means profit after depreciation and taxes.

The average rate of return calculated is compared with a predetermined rate of return. A

project is accepted if the actual ARR is higher than the predetermined rate. Otherwise, it is

liable to be rejected.

Pay back method:

The payback method is the simplest and most widely applied traditional method for

appraising capital investment decisions. This method calculates the number of years required

to pay back the original investment in a project. In other words, payback period is the period

which is required to recover original investment in a project.

Actual payback period calculated according to this method is compared

with the pre-determined payback period fixed by the management in terms of maximum

period during which the original investment must be recouped. If the actual payback period is

less than the pre determined payback period, the project will be accepted, if not, it will be

rejected. Alternatively, when many projects are under consideration, they should be ranked

according to the length of the payback period.

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

When the project generates unequal cash inflows every year, the payback period is

calculated by adding up the cash inflows till the time they become equal to the original

investment.

Discounted payback method:



57

HAMDARD UNIVERSITY

An investment decision rule in which cash flows are discounted at an interest rate and then

one determines how long it takes for the sum of the discounted cash flows to equal the initial

investment. In investment decisions, the number of years it takes for an investment to recover

its initial cost after accounting for inflation, interest, and other matters affected by the time

value of money, in order to be worthwhile to the investor. It differs slightly from the payback

rule, which only accounts for cash flows resulting from an investment and does not take into

account the time value of money. Each investor determines his own discounted payback

period rule, and as such, it is a highly subjective rule. In general, however, short term

investors use a short number of years for their discounted payback period rules, while long

term investors measure their rules in years, or even decades.

Net present value method:

Under this method, present value of cash outflows and cash inflows is calculated and the

present value of cash outflow is subtracted from the present value of cash inflows. This

difference is called net present value or NPV.

Thus, NPV = PV of Inflow – PV of outflow

NPV can thus be calculated using the following formulae:

NPV = [ cash inflow in 1 st year*1/(1+r)1] + [ cash inflow in 2nd year*1/(1+r)2] + [ cash inflow

In 3rd year*1/(1+r)3] + …………………………………. + [ cash inflow in n th year*1/(1+r)n] –

[initial cost outflow * 1/(1+r)0]

Here r= rate of interest (i.e., cost of capital)

n= expected life of the proposal

If there is some salvage value of the project, it is added in cash inflows in last year. Similarly,

if some working capital is needed, it will be added to the initial cost of project. Similarly, if

some working capital is needed, it will be added to the initial cost of the project and also to

the cash inflows in last year.

If NPV is positive, the project may be accepted. If NPV is negative, the project may not be

accepted. If NPV is zero, the project may be accepted only if non-financial benefits are there.To choose one out of various investment proposals, the project with highest NPV is preferred.





59

HAMDARD UNIVERSITY

PI can be calculated as follows:

PI = present value of cash inflows / present value of cash outlay (or outflows)

If PI is more than one, the project is accepted. If PI is less than one, the project will be

rejected. If PI is equal to one, the project may be accepted only on the basis of non financial

considerations.

CAPITAL BUDGETING AT BHEL

Capital budgeting process is the most important tool to evaluate the financial feasibility of a

proposal or to select one among various proposals. As such different organizations may

follow different capital budgeting procedures to evaluate their projects. To understand the

capital budgeting procedure followed at BHEL an insight of the following is essential:

1. How are the proposals identified?

2. How are the proposals screened?

3. How are the proposals short listed for further consideration?

4. What information is collected for the purpose of evaluating proposals?

5. What methods of evaluation are used?

6. How are the decisions reviewed?

BHEL units come up with proposals for investment with an objective that is in line with thecompany objectives and policies. As such, an investment scheme is formulated with a holistic

approach considering the overall requirement. For instance BHEL has a current capacity of

15000 MW of power equipment and is going for a capacity augmentation to 20000 MW. As

such considering this capacity BHEL units formulate proposals as per unit requirements.

Objective of the investment proposal:



60

HAMDARD UNIVERSITY

The proposals by various units for investment have one of the following objectives:

• Capacity expansion

•

Modernization and rationalization

• Investment for new product

• Science and technology

• Quality

• Township and staff welfare

• Enabling works/tools and plant (power sector)

However, according to the nature of the project and amount involved, different guidelines

have been laid for approval of capital expenditure proposals. The information on processing

and competent approval authorities’ category wise is described below:

Financial limits

• Major capital items

Major capital investments mainly of more than Rs. 5 crore rupees are are approved by the

concerned authorities and all these proposals are supported by a feasibility report.

• Minor capital items

For minor capital items, an annual lump sum provision of Rs 20 lakhs to Rs 5 crores is made

for various units/divisions. For such expenditures a brief justification is given to the

divisional head and approval is obtained from the same. However this provision is to be

obtained subject to the following conditions viz:

1. Provision is to be utilized for production related/ technology

development/emergency requirement etc.

2. The provision should not be utilized for vehicles, welfare related items.



61

HAMDARD UNIVERSITY

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

procured under minor capital.

• Excess over sanctioned cost

The cumulative expenditure on the capital projects is periodically reviewed with reference to

the total sanctioned cost; taking into account expenditure already incurred and anticipated

expenditure. If it is found during the review that the sanctioned cost is likely to exceed, the

anticipated excess is worked out and such excess is regularized by obtaining sanction of the

competent authority prior to expenditure.

The proposal for cost revision explicitly brings out all the changes made with respect to the

original proposal. The cost difference between the revised and original (approved) estimates

is explained in detail especially whether they are due to fiscal or other reasons. Fiscal and non

fiscal reasons are defined as:

Fiscal

i. Price escalation (inflation or increase by supplier)

ii. Statutory reasons (customs duty & excise)

iii. Exchange rate variation

Non-fiscal

i. Change of scope

ii. Change of technical design, specification of main equipment

iii. Under estimation

Capital investment in Rs. crore



62

HAMDARD UNIVERSITY

BEGINNING OF THE CAPITAL BUDGETING

PROCEDURE

Five year plan

BHEL formulates a five year plan that should be in line with the government policies and

objectives which is followed by the formation of an annual plan.

Funding:

The present trend indicates an emphasis on utilization of more internal resources for capital

funding. This necessitates a rigorous and critical budget formulation exercise.

Annual plan:

The capital budget process begins with the formulation of Annual plan in the month of

September / October every year. The annual plan comprises yearly capital investment funds

budget of the company. It reviews capital budget for the current year and consolidates

proposals for the next. Annual plan exercise enables consolidation of all capital items with

cash flows during a particular year.

However expenditure on capital equipment like cranes, material handling equipment etc,

which are required at project sites for erection and commissioning are considered as non plan

capital expenditure and is, classified under three categories:







65

HAMDARD UNIVERSITY

DISCOUNTED CASH FLOWS

Financial analysis

Investment = 47495

year cash inflow

capitalexpenditure

material

directlabor

overheads

income tax

total cashoutflows

net cashinflow IRR

2011-12 4018 4018 -4018

2012-13 40885 40885 -40885

2013-14 28680 2593 19796 888 4278 4000 31555 -2875

2014-15 51715 0 26403 949 5897 9525 42773 8942

2015-16 63567 0 24819 1044 6053 8659 40574 22993

23.65%

2016-17 63784 0 23906 1148 7105 12031 44190 19594

2017-18 52689 0 13065 1263 5506 3555 23389 29300

2018-19 34500 0 11542 1389 5888 4116 22935 11565

2019-20 34500 0 12225 1528 6308 4054 24115 10385

2020-21 34500 0 12225 1681 6771 3955 24632 9868

2021-22 34500 0 12225 1849 7279 3821 25174 9326

2022-23 31050 0 12225 2034 7839 3651 25749 5301

Pay Backperiod is 5.81years.

ROI is 22.68%



66

HAMDARD UNIVERSITY

EVALUATION OF AN EXISTING PROJECT





68

HAMDARD UNIVERSITY

The discounting factor is taken to be 14% which is BHEL’s cost of capital. The

discounted payback period comes out to be 8.006 years which is 2.15 years

more than the payback period of the project. This can give a better picture of the

years taken to get the investment back.

The calculations of NPV and the profitability index are given as follows. The PV

factor is 14% .

Net present value

Yearnet cashinflow

PVF @14%

Discountedcash flows

2011-12 -4018 -4018

2012-13 -40885 0.877 -358562013-14 -2875 0.769 -2211

2014-15 8942 0.674 6027

2015-16 22993 0.592 13612

2016-17 19594 0.519 10169

2017-18 29300 0.455 13332

2018-19 11565 0.399 4614

2019-20 10385 0.351 3645

2020-21 9868 0.308 2987

2021-22 9326 0.27 2518

2022-23 5301 0.237 1256

Net present value =present value of cash inflows-presentvalue of cash outflow

58160-42085 = 16075

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

project is feasible.

Profitability Indexyear net cash PVF @ 14% Discounted cash



69

HAMDARD UNIVERSITY

inflow flows

2011-12 -4018 -4018

2012-13 -40885 0.877 -35856

2013-14 -2875 0.769 -2211

2014-15 8942 0.674 6027

2015-16 22993 0.592 13612

2016-17 19594 0.519 10169

2017-18 29300 0.455 13332

2018-19 11565 0.399 4614

2019-20 10385 0.351 3645

2020-21 9868 0.308 2987

2021-22 9326 0.27 2518

2022-23 5301 0.237 1256

Profitability index = PV of cash inflow/PV of cash outflow 58160/42085

P.I. = 1.38, Which is Positive

CONCLUSION

BHARAT HEAVY ELECTRICALS LIMITED (BHEL) is a public sector giant of

‘NAVRATNA’ status. It is the largest engineering and manufacturingenterprise in India in the energy related infrastructure sector. Today BHEL

caters to the core sectors of Indian economy viz. power generation and

transmission, industry, transportation, telecommunication, renewable

energy, defense, etc.

My summer training at BHEL has been a truly learning experience. The

wide exposure has really helped me to understand BHEL in a better

perspective especially regarding its financial performance. I understood

the workings of various sections of BHEL corporate finance. My study was

mainly inclined to Working capital, debtor’s management, overall financial

analysis and capital budgeting procedure as followed in BHEL. The study

reveals that BHEL has a strong system relating to implementation of the

Company Policy and procedure. . These techniques followed are well

planned and structured and same are reflected in the Company Manuals.

The department of corporate finance is divided into various sections that

handle different areas. Capital Budgeting is one of the sections of

corporate finance which deals with capital investment decisions in long

term assets to meet its long terms targets.



70

HAMDARD UNIVERSITY

Capital projects, which are approved in order to achieve targets keeping

in mind the company’s objectives and policies as well as the growth of the

economy. The whole system works as per the government parameters

special focus with five year plan.

The debtor’s management is another department of corporate finance

that deals in debtors and report generation that is discussed in

management committee meeting.

The basic purpose of preparing this project report was to make a detailed

study of various procedures and concepts that are implemented in the

industry with special focus to BHEL.

The summer training at BHEL gave me a better understanding and

overview of the industry. The on job training gave a practical bend to my

theoretical concepts of finance.

It was great to experience the work culture and environment in BHEL. My

association with BHEL taught me the values and ethics that are adopted in

such a large Public Sector Undertaking.

REFERENCES

• BHEL annual reports 2008-09

• Capital Budgeting manual of BHEL

• Flash Results 2009-10

• BHEL – The Industrial Giant

• Chairman address 42nd general meeting

WEBSITES:

http.//www.bhel.co.in

http://www.wikipedia.com

http://www.wikipedia.com/

http://www.wikipedia.com/



71

HAMDARD UNIVERSITY

http://finance.indiamart.com/

http://www.moneycontrol.com/

www.valueresearchonline.com/



http://www.valueresearchonline.com/



http://www.valueresearchonline.com/

Documents

40340906 Hamdard University 1