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CAPITAL GOODS SECTOR ANALYSIS
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FINANCIAL STATEMENT ANALYSISof
CAPITAL GOODS INDUSTRYSection- B Group-11
Contents
Objective
Methodology
Economy Analysis
Industry Analysis
Company Analysis Using Different Methods
Findings
Ratings
Conclusion
ObjectiveAnalyzing Capital goods Industry on following parameters
ProfitabilityLiquidityCapital structure ActivityCash FlowsGrowth rate
Companies TakenL & T
BHEL
Crompton & Greaves
Thermax
MethodologyEconomy analysis
Industry analysis
Company line of business
Comparative statement analysis
Ratio analysis
Common size analysis
CAGR analysis
Du-Pont analysis
Cash flow analysis
INDUSTRY ANALYSIS
Overview of the Capital Goods Sector
Competitive Analysis of Indian Capital Goods Sector
Business Environment Competitive Issues
Firm Level Competitive Issues
STRATEGIC GOALS OF THE SECTOR
Firm-level Strategies
Trade Policy Measures
Industrial Policy Measures
Export Promotion Measures
LARSEN & TOUBRO LIMITED (L&T)
India's largest engineering and construction conglomerate
Premiere brand image
Rising international presence
Comprehensive distribution network
THERMAX
Sustainable solutions in Energy and Environment
process productivity improvement
energy generation
alliances with world technology majors
CROMPTON GREAVES LTD.
India's largest private sector enterprise.
customer-centric in its focus
Power Systems, Industrial Systems, Consumer Products.
BHARAT HEAVY ELECTRICALS LTD.
Power Generation & Transmission, Industry
Transportation, Telecommunication
Renewable Energy
committed to enhancing stakeholder value
Common Size Analysis – P&L
BHEL outsmarts all the other players as its COGS to sales % and selling and distribution expenses as a % of sales stands very low in comparison to other companies.
Mar 2003 Mar 2004 Mar 2005 Mar 2006 Mar 2007
BHEL 5.74619331336539 7.38937273134525 8.91330423311836 11.3670195590235 12.664275801882
L&T 3.49841083364355 7.02298002568517 10.9847713674046 7.84091488946581 10.9847713674046
CROMP-TON GREAVES
1.4922380228264 3.91325211684027 4.71791829047381 5.27333718176571 4.7900327193509
THERMAX 7.97266204680672 7.99970670186245 5.12195121951219 6.03011233311769 8.07210390562828
1.003.005.007.009.00
11.0013.00
PAT as % of Sales%
of
Sa
les
BHEL is again the best in terms of EBITDA as % of sales.
Mar 2003 Mar 2004 Mar 2005 Mar 2006 Mar 2007
BHEL 13.2782555751041 15.2275082493985 17.4821925569139 19.3975715211197 21.1782963462565
L&T 11.5968923800455 12.9153573608037 17.6579793518099 13.5582536657111 17.6579793518099
CROMP-TON GREAVES
8.65654016899777 9.92193103305934 8.79755114149702 8.88646972995832 9.89137576761734
THERMAX 12.4158554266777 11.8271856342852 8.7260125945523 10.989219709571 12.9729181046734
2.50
7.50
12.50
17.50
22.50
PBDITA as % of Sales
%
of
Sale
s
BHEL’s operating expenses has been well managed over the years and hence its EBIT is better than others, closely followed by L&T.
Mar 2003 Mar 2004 Mar 2005 Mar 2006 Mar 2007
BHEL 10.9193314658087 13.0044651728865 15.43598435731 17.7327563038977 19.7466620373816
L&T 7.40716144396201 11.034146696906 16.002564944501 12.0963515480782 16.002564944501
CROMP-TON GREAVES
5.82357167922725 7.00917942446716 6.33655622530577 7.16785680195267 8.26309902577589
THERMAX 10.8099277069067 10.903358263675 7.97865853658537 10.25877786273 12.4960935384001
2.50
7.50
12.50
17.50
22.50
EBIT as % of Sales
%
of
Sale
s
Common Size Analysis – BS
BHEL’s fixed asset has been the lowest which shows less money is tied in fixed asset as compared to others.
Mar 2003 Mar 2004 Mar 2005 Mar 2006 Mar 2007
BHEL 11.3640290255701 8.97588820086138 6.85056668610413 5.47734329403525 4.69372168327021
L&T 41.5261918524233 19.7807215374261 16.8029373165125 18.0806357950935 21.9241663256421
CROMPTON GREAVES
25.8135367200275 26.9704523548376 26.6216798476656 26.6653186852688 19.2144785180075
THERMAX 16.1264309657833 13.5441195925387 13.9312366462641 13.2830535755346 10.8429053088748
2.50
12.50
22.50
32.50
42.50
Net Fixed Assets as % of Total Assets%
of T
otal
ass
ets
C&G inventory has increased in the last year as compared to the other players and this can be a matter of concern for the company.
Mar 2003 Mar 2004 Mar 2005 Mar 2006 Mar 2007
BHEL 18.3895697628255 15.6942651022305 17.6633167035017 17.6464106455002 15.4185465948515
L&T 13.0341885147642 18.1828096924703 18.4659500383095 15.0639534706957 14.7788110799075
CROMP-TON GREAVES
11.0772535555462 13.1365706118922 12.435542830139 13.311316303835 21.1917962651455
THERMAX 9.66573904243882 10.8427040613838 13.5049492687056 11.7958151299149 14.9968569632551
2.50
7.50
12.50
17.50
22.50
Inventories as % of Total Assets
% o
f Tot
al a
sset
s
Thermax and BHEL’s net worth has decreased over the years due to use of more and more of their reserves and surplus to fund their capital requirement.
Mar 2003 Mar 2004 Mar 2005 Mar 2006 Mar 2007
BHEL 44.1455358849567 39.5058136715833 36.1566851682539 34.0907202054395 31.8559607996233
L&T 24.1148118743295 24.4689032009995 25.1547932423513 30.1873759162813 27.824185701732
CROMP-TON GREAVES
26.1671302805214 30.0488583108986 24.2831528764227 31.3750159136693 27.9310357090782
THERMAX 61.2595661248498 54.9847863474004 47.1145608620707 42.2533915842722 33.7133550488603
5.00
15.00
25.00
35.00
45.00
55.00
65.00
Net Worth as % of Total Liabilities
% o
f Tot
al L
ibili
ties
BHEL and Thermax are using internal sources of financing to fund their capital requirement and so their total borrowings is less whereas L&T and C&G are using debt to use financial leverage.
Mar 2003 Mar 2004 Mar 2005 Mar 2006 Mar 2007
BHEL 4.88685321060448 4.00858753926566 3.20658186172525 2.59283296369791 0.311590507146536
L&T 35.241166861213 25.5953349255762 26.1999226223439 21.2645974138901 25.8553418111096
CROMPTON GREAVES
33.5147561954298 30.623192741051 23.5458045505718 23.5552260489916 15.0144564687808
THERMAX 0.19764720764025 1.19063368170393 0.685362757140056 0.643826166934928 0.124007086119207
2.50
7.50
12.50
17.50
22.50
27.50
32.50
37.50
Total Borrowings as % of Total Liabilities
% o
f Tot
al L
ibili
ties
SUSTAINABLE GROWTH RATE MODEL
BHEL’s ROE has been better than other players over the years but finally all are on the same platform.
2003 2004 2005 2006 2007
l&t 11.6278057576323 29.1260595621232 34.0082571103733 26.3093012762666 32.8180826548965
bhel 9.25354988997998 12.4274444196876 15.8190778011913 22.997844243143 27.4764287811238
thermax 15.1149885140542 15.7495849673989 14.7219909740174 22.3182411841532 32.71463683363
crompton greaves
5.92646668436424 21.7045389502604 25.0525109795684 29.5432842282178 29.5711410435052
industry 10.4807027115077 19.7519069748675 22.4004592162876 25.2921677329451 30.6450723282889
2.50
7.50
12.50
17.50
22.50
27.50
32.50
37.50
return on equity
in t
erm
s of
%
Thermax has bettered all other companies due to smaller asset base and greater revenues from its operations.
2003 2004 2005 2006 2007
l&t 2.80402348356548 7.12682732052144 8.55470676144165 7.94208767721359 9.13136426164635
bhel 4.14224783410508 5.4197919784773 6.34029508906439 8.81764958250127 9.85491477500557
thermax 9.39131271499707 9.42996672284887 7.79252404724218 9.9733473405704 13.6035242290749
crompton greaves
1.7808355768272 5.2705463744145 7.86022930661335 8.251745267418 6.84143161433907
industry 4.52960490237371 6.81178309906553 7.63693880109039 8.7462074669258 9.85780872001647
1.00
3.00
5.00
7.00
9.00
11.00
13.00
15.00
return on assets
in t
erm
s of
%
At the end, it is BHEL which has outsmarted others due to less COGS and S&G expenses as compared.
2003 2004 2005 2006 2007
l&t 3.49841083364355 7.02298002568517 7.76384537163448 7.84091488946584 10.9847713674046
bhel 5.74619331336539 7.38937273134525 8.91330423311836 11.3670195590234 12.664275801882
thermax 7.97266204680672 7.99970670186245 5.12195121951219 6.03011233311769 8.69761153672826
crompton greaves
1.4922380228264 3.91325211684029 4.71791829047381 5.27333718176571 4.7900327193509
industry 4.67737605416051 6.5813278939333 6.62925477868471 7.62784599084315 9.28417285634144
1.00
3.00
5.00
7.00
9.00
11.00
13.00
net profit margin
in t
erm
s of
%
BENCHMARKING RATIOS
C&G has managed its current ratio near to the industry average over the years which shows its ability to manage its current assets and liabilities better. Besides that, other players have also maintained better current ratio.
31.03.2003 31.03.2004 31.3.2005 31.3.2006 31.3.2007
L & T 1.56273204173567 1.47141776074762 1.55698262758052 1.45971531005945 1.52621650605672
Cromton Greaves
1.50130049091379 1.28866543955459 1.44358717264585 1.36909646611829 1.31681887945731
Thermax 1.25347502253428 1.17660364618501 1.02198297959603 0.878432546612777
0.848619095336041
Bhel 1.56273204173567 1.47141776074762 1.55698262758052 1.45971531005945 1.52621650605672
Industry 1.47005989922985 1.35202615180871 1.39488385185073 1.29173990821249 1.30446774672669
0.10
0.30
0.50
0.70
0.90
1.10
1.30
1.50
1.70
Current ratios
The smaller players, Thermax and C&G have been managing their inventory efficiently and it is above the industry average.
INVENTORY TURNOVER RA-
TIO 2003
INVENTORY TURNOVER RA-
TIO 2004
INVENTORY TURNOVER RA-
TIO 2005
INVENTORY TURNOVER RA-
TIO 2006
INVENTORY TURNOVER RA-
TIO 2007
INVENTORY TURNOVER RA-
TIO AVG
L & T 2.71 3.12 3.27 3.56 3.56 3.244
BHEL 1.67 1.86 2.1 2.17 2.19 1.99800000000001
THER-MAX
7.28 6.73 7.93 7.86 7.48 7.456
CROMPTON GREAVES LTD
5.75053132274061
7.06 8.18 4.65 4.42 6.01210626454812
AVG 4.35263283068514
4.6925 5.37 4.56 4.4125 4.67752656613696
0.5
2.5
4.5
6.5
8.5
INVENTORY TURNOVER RATIOS
Axis Title
Average receivables period is very high for BHEL and L&T, but they have one respite that their payables period is also very high. Thermax has been doing well in this case.
AVERAGE RE-CEIVABLES PE-
RIOD 2003
AVERAGE RE-CEIVABLES PE-
RIOD 2004
AVERAGE RE-CEIVABLES PE-
RIOD 2005
AVERAGE RE-CEIVABLES PE-
RIOD 2006
AVERAGE RE-CEIVABLES PE-
RIOD 2007
AVERAGE RE-CEIVABLES PE-
RIOD AVG
L & T 153.242292215797
158.878596606279
148.428442487346
169.130140625235
187.792063469802
163.494307080892
BHEL 245.83 217.243336765202
217.832047227238
204.67518908816
204.67518908816
218.051152433752
THER-MAX
82.93 79.96 73.56 68.23 71.54 75.2440000000002
CROMPTON GREAVES LTD
123.935742971888
109.386617100372
98.0145867098865
107.701309328969
107.568934376881
109.321438097598
AVER-AGE
151.484508796921
141.367137617965
134.458769106117
137.434159760591
142.894046733711
141.527724403061
25.00
125.00
225.00
AVERAGE RECEIVABLES PERIOD
Axis Title
BHEL seems to be not managing its inventory properly as its average payables period is less than the average receivables period and other players are having both things to be almost equal.
AVERAGE PAYABLE PE-RIOD 2003
AVERAGE PAYABLE PE-RIOD 2004
AVERAGE PAYABLE PE-RIOD 2005
AVERAGE PAYABLE PE-RIOD 2006
AVERAGE PAYABLE PE-RIOD 2007
AVERAGE PAYABLE PE-
RIOD AVG
L & T 129.77467067252
141.059845135994
159.639367602755
184.015765032472
208.540568337858
164.60604335632
BHEL 187.198389350703
158.225233990924
132.168188311578
122.728074036894
131.663749284871
146.396726994995
THER-MAX
77.19 77.06 67.89 65.86 59.63 69.526
CROMPTON GREAVES LTD
164.718325971032
164.952501583281
127.68075272367
117.083010197272
103.769866968554
135.640891488762
AVER-AGE
139.720346498565
135.32439517755
121.844577159501
122.421712316659
125.901046147821
129.042415460019
25.00
125.00
225.00
AVERAGE PAYABLE PERIOD
Axis Title
OTHER IMPORTANT RATIOS
Thermax might have some liquidity problem as its quick ratio is way below the industry average. Other players are more or less comfortable in this field.
31.03.2003 31.03.2004 31.3.2005 31.3.2006 31.3.2007
L & T 1.16006160758746 1.07758465363779 1.15435534479366 1.1344932201365 1.17946311598721
Cromton Greaves
1.16089914736026 1.01639867958684 1.14151215947522 0.984052623756936 0.907115146254044
Thermax 0.963470752882015 0.685651586765699 0.546601045832052 0.665119837666122 0.617943849656314
Bhel 1.16006160758746 1.07758465363779 1.15435534479366 1.1344932201365 1.17946311598721
Industry 1.1111232788543 0.964304893407032 0.999205973723641 0.979539725424016 0.970996306971194
0.100.300.500.700.901.101.30
Quick Ratio
BHEL and Thermax are having almost zero debt and this shows that they are not using leverage to maximize their profit. L&T seems to be optimally leveraged.
31.03.2003 31.03.2004 31.3.2005 31.3.2006 31.3.2007
L & T 0.68427960882505 0.955990740974798 0.960109447838552 1.41960721516236 1.07614843791299
Cromton Greaves
1.01911335280064 0.969635395798752 0.750763796066451 0.537554590712894 0.933560406667699
Thermax 0.00322638928322537 0.0216538748406035 0.0145467291767077 0.0152372659991293 0.00367827782015425
Bhel 0.110698694956148 0.101468294580377 0.0886857256632768 0.0760568550054921 0.00978123086936436
Industry 0.454329511466265 0.512187076548633 0.453526424686246 0.512113981719965 0.505792088317551
0.100.500.901.30
D/E Ratio
It shows that Thermax and C&G are having good demand for their products. BHEL needs to manage its debtors a bit more efficiently as it is way below the industry average.
DEBTORS TURNOVER RA-
TIO 2003
DEBTORS TURNOVER RA-
TIO 2004
DEBTORS TURNOVER RA-
TIO 2005
DEBTORS TURNOVER RA-
TIO 2006
DEBTORS TURNOVER RA-
TIO 2007
DEBTORS TURNOVER RA-
TIO AVG
L & T 2.34 2.26 2.42 2.12 1.91 2.21
BHEL 1.48 1.68000000000001
1.68000000000001
1.78 1.78 1.68000000000001
THER-MAX
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 2.76750000000002
2.93249999999998
3.1675 3.13 3.035 3.0065
0.51.52.53.54.55.5
DEBTORS TURNOVER RATIO
Axis Title
L&T and BHEL have higher EPS as they are established players in the sector and so their earnings have been higher over the years.
31.03.2003 31.03.2004 31.3.2005 31.3.2006 31.3.2007
L&T NaN 15.0408923910007
61.981420268241 86.7960053810462
95.0695209155457
80.1890070202378
BHEL NaN 18.1610557280602
26.89 38.95 68.6 98.66
C&G NaN 5.11 14.48 20.04 44.3 7.81
Thermax NaN 2.45740663029794
2.74695761644985
2.81997482165338
8.60873215785055
15.7682619647355
10
30
50
70
90
110
EPS
Axis Title
Thermax and C&G are commanding higher P/E ratios as their future growth potential has been really high due to their efficient management of resources and good demand for their products.
L&T BHEL C&G Thermax
31.03.2003 NaN 35.04 12.3017621145374 10.06 11.2313524590164
31.03.2004 NaN 15.84 22.4804760133878 10.64 27.1318347082189
31.3.2005 NaN 11.5155069131588 19.7021822849807 21.62 42.1103050595238
31.3.2006 NaN 25.588642675091 32.7543731778424 23.69 36.1725738808154
31.3.2007 NaN 20.2035174171832 22.9145550375025 25.54 24.3178354632589
2.5
7.5
12.5
17.5
22.5
27.5
32.5
37.5
42.5
Price Earning Ratio
Axis Title
COMPARATIVE ANALYSIS – L&T
Long term liability has increased constantly over the period of five years.
Share capital has shown year on year decrease of 30% because of buyback in
the year 2004.
Reserves has increased by more than 200% in the period of 2003 to 2007 on
account of higher retention ratios.
The current asset has increased by a CAGR of 12%. Most of this increase can
be explained by the increase in the receivables.
Net fixed asset has decreased at a constant rate of 0.39% because of no
investment in fixed asset in the span of 5 yrs.
COMPARATIVE ANALYSIS – Crompton & Greaves
Total borrowings has increased over the years with an increase of about 117 %
in the year 2007 because of increase in foreign borrowings.
Current liabilities has increased abruptly in the year 2006 by 163 % due to the
increase in sundry
creditors, provision & deposits & advances from employees.
Current asset has increased in the year 2006 because of the increase in the
receivables by about 100 % & inventories by about 200 %.
COMPARATIVE ANALYSIS – THERMAX
Current liabilities is increasing at an increasing rate.
Long term liabilities is decreasing.
Reserve is increasing at an increasing rate which shows that the company is
increasing its retained earnings and thus decreasing the cost of debt.
Current asset is increasing at an increasing rate. This shows that the company
is using its current asset to pay back its current liabilities.
Company is increasing its fixed assets at a much faster rate.
Sales has increase at a faster rate.
COMPARATIVE ANALYSIS – BHEL
Growth in current liabilities has almost been constant over the years.
BHEL’s reserve is increasing at an increasing rate because of increased retained
earnings.
Growth in the current assets has been constant and equal to the current
liabilities which is a good strategy followed by the company.
Sales has increased at greater rate over the years.
CAGR ANALYSIS:BALANCE SHEET
BHEL L & T CROMPTON GREAVES LTD
THERMAX
Current liabilities36.32 52.42
40.1 54.10
Long term liabilities-36.59 8.15
18.37 -38.20
Share capital---- -30.92
8.77 ----
reserves17 23.32
22.34 13.60
Current assets29.56 12.74
35.55 31
Net fixed assets1.16 -0.39
27.95 14.5
Other assets-5.46 16.86
.93 35.5
ANALYSIS:
• L & T’s current liabilities is increasing at a faster rate compared to current
assets.
• BHEL & THERMAX are decreasing its long term liabilities.
• The high growth of NFA of Crompton & greaves indicate that it is
expanding.
• L & T has decreased its share capital which will increase EPS.
CAGR ANALYSIS OF INCOME STATEMENT:
BHEL L & T CROMPTON GREAVES LTD
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
ANALYSIS :
• In terms of sales Crompton & greaves is the best performing company.
• In terms of expenses L & T is the best performing company as it is
increasing at only 14.96%.
• In terms of cogs, L & T is very cost efficient.
• L & T’s cagr growth in gross profit is less than C & G , THERMAX which
suggest that price of project undertaken is low.
Contd:
• Company has got high CAPEX.
• Investments in bonds and shares of other companies is generating an
increasing stream of dividends and interests.
• A glance at the working capital account differences indicates that
receivables, other than assets have grown over a period of 5 years.
• The company is looking to grow by taking long term debts.
Contd:
• Cash flow from operating activities has decreased drastically in 2005
because of increase in receivable & inventory.
• The company’s investment in CAPEX has increased over the years.
Contd:
• The company is getting a positive cash flow from operating activities
because of more efficient management of working capital.
• The company has increased its investment in CAPEX. The funding has
been done mainly from borrowing which gets reflected in increasing
debt-equity ratio.
Contd:
• The cash flow from financing activities is negative in the first two years
because the company was repaying its past borrowing.
• During the last 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.
Contd:
• The 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.
• If we look at the firm’s tax figures, we can safely derive that it has reduced
its debt component steadily, due to which its outflow in the form of
interest payments have come down substantially.
Findings from DU-PONT analysis
As a risk averse investor we would like to invest in BHEL
As a risk taker investor we will prefer to go with Thermax.
Findings from CAGR analysis
Rank 1 to Crompton Greaves –it is having a highest cagr of around 28% in its net fixed assets which will give future benefit at a high rate .
Rank 2 to BHEL- 1)It stand 2nd in the CAGR of PAT
2) company’s total expenses is having a low CAGR in comparison except L & T.
Rank 3 to Thermax- Its CAGR in sales is much higher than L & T and further Thermax gross profit is also high in comparison to L & T
Rank 4 to L & T- As it is less competitive in terms of CAGR.
Findings From Cash Flow Analysis L &T- 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.
BHEL: Like L & T , it has also maintained positive cash flow from operating
activities because of healthy management of its working capital. 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.
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 Common size analysis
• Rank 1 to BHEL
• Rank 2 to L & T
• Rank 3 to Thermax
• Rank 4 to Crompton & Greaves
Findings From sustainable growth rate model
Because of its higher ROE L&T has outsmarted most of the stocks over the years.
BHEL has the highest Net Profit Margin its ROE is lowest among the competitors
and the below the industry average.
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.
Findings from Benchmarking Ratios
• L&T has outperformed the other 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.
• Crompton greaves and Thermax are managing their resources in an efficient
manner.
> their gross profit margin is above the industry average and their current assets
and average receivables period are lower than the industry average.
> their inventory turnover ratio is higher than the other players.
> lower receivables period
ConclusionL & 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
Thank You
