H1_Group1_Company_Analysis

8/7/2019 H1_Group1_Company_Analysis

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COMPANY ANALYSISBHEL & CROMPTON GREAVES

Submitted by H1 Group 1

Aditi Tyagi FT11101

Aadish Parmar FT11102

Aditya Goel FT11105

Ashish Bulchandani FT 11114

Rahul Kurup FT 11151


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INDIA ECONOMY 2009 & 2010 SNAPSHOT The GDP growth rate decreased significantly in year 2009 to 6.8%, but rate is showing

signs of improvement with first quarter 2010 results as 7.4%.

India had established itself as the world's second fastest growing major economy.

High Fiscal deficit, 6.8% of GDP, leaves the danger on sovereign credit downgrading.

Service industry accounts for 55% of the GDP while the industrial and agricultural sectorcontribute 28% and 17% respectively.

Electrical energy generation would be required to grow at 9% p.a. during the 11th plan

period


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MACRO ECONOMY MEASURES

Macroeconomic indicators

2006 2007 2008 2009

Real GDP growth 9.7 9 6.5 6.8

Inflation 5.2 4.7 8.4 4.5

Consumer price index 6.7 6.2 8.8 4.5

Wholesale price index (WPI) 5.4 4.7 8.6 0.5Short-term interest rate 8.2 8.9 9.6 5.3

Long-term interest rate 7.8 7.9 8.4 7.8

Fiscal balance (per cent of GDP) -7.4 -6.1 -10 -11

Current account balance (per cent of GDP) -1.1 -1 -1.3 -1.3

SECTOR HYDROTOTAL

THERMAL

THERMAL BREAKUPNUCLEAR TOTAL (%)

Coal Lignite Gas/LNG

Central9685 23810 22060 1000 750 3160

36655

(53.2%)

State2637 20352 19365 375 612 -

22989

(33.4%)

Private 3263 5962 5210 0 752 - 9225 (13.4%)

All-India 15585 50124 46635 1375 2114 3160 68869 (100%)


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ELECTRICAL EQUIPMENT INDUSTRY

ANALYSIS

Firms that manufacture power-generating equipment and other heavy electrical equipment, including

power turbines, heavy electrical machinery as well as household electrical appliances.

P/EGross

Margin Operating MarginQuick

Ratio

Current

Ratio D/E ROI ROA ROE

25.69 7.38% -0.71% 3.35 3.96 66.58 -1.63% -0.87% -4.05%

Socio Economical:

Increase in the average house hold incomeRise in the extent of electrificationDevelopment and Industrialization

Competition:

Many players in heavy as well as light equipment categoryGovernment backed PSUs; Usually play on margin

Technological:

Fast technological advancements in electrical as well as electronic sector

Government Policies:

Developmental government policies and reforms

Factors affecting the sector:


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RATIO ANALYSIS


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RATIO ANALYSIS

Quick Ratio

Current Ratio and

Quick Ratio

Similar Current Ratio forall - less than the Industryaverage

Quick Ratio reveals thatCG has slightly more

inventory/current liabilityratio (meaning less cashas part of the currentassets) than its peer

Reveals the capitalintensive nature of the

heavy engineeringindustry (evident fromindustry average as wellas the trend)

0

0.5

1

1.5

2

2005 2006 2007 2008 2009

BHEL

CNG

INDUSTRY

Current Ratio

0

0.2

0.4

0.6

0.8

1

1.2

1.4

2005 2006 2007 2008 2009

BHEL

CNG


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RATIO ANALYSIS CONTD

Inventory Turnover

Inventory Turnover

CG is much better than BHEL in this regard. Both these companies are R&D focused heavy engineering

organizations BHEL works on a different model - receives orders and executes them

over multiple years BHEL could possibly be more profitable if it manages WIP plus other

inventory better

0

5

10

15

20

2005 2006 2007 2008 2009

BHEL

CNG

INDUSTRY


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RATIO ANALYSIS CONTD

0

5

10

15

2005 2006 2007 2008 2009

CG BHEL Industry

Profit Margin

0

10

20

3040

50

20052006200720082009

CG

BHEL

Industry

ROE

Profit Margin on Sales

BHEL excels despitelow Inventory Turnover

BHELs near zerointerest liability pushesprofits up

Return on Equity

Yet, BHEL lags on the

Return to the CommonShareholders

Might hinder capital raisingendeavor in future

CG makes better use ofshareholders equity


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PAYOUT RATIOS

Dividend payout

ratio (net profit)15.28 21.59 21.85 27.93 25.63

Dividend payout ratio

(cash profit)14.09 19.39 19.35 23.19 20.17

Earning retention

ratio82.82 83.21 74.85 69.62 75.73

Cash earnings

retention ratio84.31 84.57 78.11 75.15 80.69

Crompton and Greaves

Dividend

payout ratio

(net profit)

31.02 30.54 28.67 24.09 23.33

Dividend

payout ratio(cash profit)

28.03 27.66 26.04 21.02 18.97

Earning

retention ratio67.69 70.07 71.73 70.40 68.01

Cash earnings

retention ratio70.92 72.83 74.30 74.91 75.67

BHEL


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SWOT ANALYSIS

C&GStrengths

Crompton has acquired super brand status.

Super brand is a unique Internationalrecognition that is bestowed on brands that haveemerged as icons in their category.

In India, a council comprising eminentprofessionals from the fields ofadvertising, marketing, research and media wasformed to determine India's most respectedbrands.

Crompton is in the list of 134 selected brandsand is a market leader with twenty percent of themarket share in organized sector.

Crompton enjoys a great brand loyalty.

Weakness

Crompton products are the costlier as comparedto the other brands.

BHELStrengths

Sound engineering base and ability toassimilate.

Relatively stable industrial relationship andability to manufacture or procure to supplyspares.

Low labour cost.

Low debt equity ratio (even lower than 0.5:1)for all the years under study, enablingcompany to raise capital.

Sound financial position in terms ofprofitability and solvency.

For non- BHEL products, services and sparesare not easily available and if they are, pricecharged are very high.

Weakness

Difficulty in keeping up the commitments on theproduct delivery and desired sequence of suppliesbecause of larger delivery cycles .


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SWOT ANALYSIS

C &GOpportunities

Crompton has an excellent brand recall.

Considering their market image and marketshare, there are great opportunities for

Crompton.Crompton has a good opportunity for tapping alarge percentage of unorganized sectors whichcontributes almost fifty percent of the total fansales.

Threats

Agrowing unorganized sector is a continualworry for CG.

The current share of the organized sector is 50%

and is increasing at a rapid rate.CG has to be constantly on its toes to advertisetheir products better at the same time keep theprices low. Otherwise the unorganized sectormay eat up its market share.

BHEL

Opportunities

Ageing power plants would give rise to morespares and services business.

Demand for power and hence plant equipmentis expected to grow.

Life expansion program for old power stations.

Export opportunities.

Threats

Increased competition both national andinternational.

Multilateral agencies reluctant to lend topower sector because of poor financialmanagement of S.E.Bs

More concessions to private sector and not togovernment owned utilities like NTPC orS.E.Bs, so future power projects would beopened up in private sector.


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BUSINESS STRATEGY


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GROWTH DRIVER FOR BHEL

Driving factor - not new funds raised through Equity or Debt

The cash & bank balances as a percentage of TA has gone up form 20% to 27% in last 5 years

The company is banking on its internal cash flow to drive the growth.

This model is peculiar to Indian PSUs - PSUs have Rs 95,349 crore in cash and as bank balanceat the end of 2008

Financial leverage V/S Internal cash flow.

Cash & Bank Balances2008 2007 2006 2005 2004

BHEL 27.32% 24.93% 22.74% 21.17% 21.88%

CG 6.66% 10.59% 7.82% 4.88% 5.71%


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INVENTORY MANAGEMENT CG maintains relatively low levels of inventories.

BHEL makes products which are highly complex and unique.

BHEL follows job order processing

Inventory

2008 2007 2006 2005 2004

BHEL 18.69% 18.10% 20.60% 19.43% 17.31%

CG 11.11% 15.07% 11.99% 13.41% 13.08%


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IS BHELS HIGH INVENTORY HURTING COMPANY? BHEL also has an order backlog ofRs.117000 Cr as of 2009-2010

As given in the Schedule 8 of Annual report for 2008-9, 24% of BHELs inventories areaccounted by raw materials and 50% by work in progress inventory.

Maintaining higher inventory levels helps BHEL to absorb supply shocks and on timeproject delivery


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ALTMAN BANKRUPTCY PREDICTION

MODEL

Z= 1.2T1 + 1.4T2+ 3.3T3 + .6T4 + .999T5T1 = Working Capital / Total Assets

T2 = Retained Earnings / Total Assets

T3 = EBIT / Total Assets

T4 = Market Value of Equity / Book Value of total Liabilities

T5 = Sales / Total Assets

Z> 2.99 SafeZone 1.8 < Z< 2.99 GreyZone Z< 1.80 DistressZone

CG BHEL

T1 0.041 0.725

T2 1.195 0.183

T3 0.588 0.411

T4 0.005 3.886

T5 4.216 2.008

Z 7.839 6.801

Thus, Both the firms fall within the Safe Zone


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"Our very business in life is not to

get ahead of others... but to get

ahead of ourselves."

Thank You!

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H1_Group1_Company_Analysis