A Report on

Ratio, Intrinsic Value Analysis & BETA Estimation for BHEL & Other
Maharatna PSU and performing a comparative study amongst them

Submitted by
K. Ratna prashanth, 2012H14213P
2012-2014 MBA Batch
Department of Management, BITS Pilani

Under the guidance of

T. Ananthasayanam
DGM, Finance
BHEL Trichy
Introduction

With ever growing changing landscapes in business world, being competitive is good, but not good
enough as one company may overtake other company very easily. Keeping this mind, a Ratio
Analysis, Intrinsic Value Analysis of BHEL is performed in comparison with other Maharatna
PSU. This is done so as to understand how BHEL has fared well in comparison to other important
PSU (Maharatna PSU) financially. Though it may not wise to compare players in different sector,
but it is done so as to understand how BHEL has fared relatively compared to other Maharatna
PSU. After this a BETA Analysis is also performed to understand how BHEL stocks have fared
when compared to other Maharatna PSU stocks. This gives an understanding as to how BHEL can
improve in terms of performance to boost its stock value and worth.
These are the following Companies against which BHEL is compared with-
1. Coal India Limited
2. Indian Oil Corporation Limited
3. NTPC Limited
4. Steel Authority of India limited
5. GAIL (India) Limited
6. Oil and Natural Gas Corporation
Also one needs to understand that not every public sector company can have this Maharatna status
as it is very difficult to achieve. Criteria is listed below for one’s understand of how difficult it is
to attain.
Criteria for Being a Maharatna
1. Should Have a Navratna status.
2. Listed on Indian Stock Exchange with minimum prescribed public shareholding under
SEBI regulations.
3. An average annual turnover of more than Rs. 20,000 Crore during the last 3 years. Earlier
it was Rs 25,000 Crore.
4. An average annual net worth of more than Rs. 10,000 Crore during the last 3 years. Earlier
it was Rs. 15,000 Crore.
5. An average annual net profit after tax of more than Rs. 2500 Crore during the last 3 years.
Earlier it was Rs. 5000 Crore.
6. Should have significant global presence/international operations
About BHEL
Bharat Heavy Electricals Limited (BHEL) is an Indian state-owned integrated power
plant equipment manufacturer and operates as an engineering and manufacturing company based
in New Delhi, India. BHEL was established in 1964, ushering in the indigenous Heavy Electrical
Equipment industry in India.
The company has been earning profits continuously since 1971-72 and paying dividends since
1976-77. It is one of the only 7 mega Public Sector Undertakings (PSUs) of India clubbed under
the esteemed 'Maharatna' status.
It is engaged in the design, engineering, manufacture, construction, testing, commissioning and
servicing of a wide range of products and services for the core sectors of the economy, viz. Power,
Transmission, Industry, Transportation, Renewable Energy, Oil & Gas and Defence.
It is the 7th largest power equipment manufacturer in the world. In the year 2011, it was ranked
ninth most innovative company in the world by US business magazine Forbes
BHEL has a share of 59% in India’s total installed generating capacity contributing 69% (approx.)
to the total power generated from utility sets (excluding non-conventional capacity) as of March
31, 2012
BHEL is one of the only four Indian companies and the only Indian Public Sector Enterprise
figuring in 'The Global Innovation 1000' of Booz & Co., a list of 1,000 publicly traded companies
which are the biggest spenders on R&D in the world.
(Source- Wikipedia, www.bhel.com )
Analysis
Beta Analysis
Beta Coefficient is the term that sheds light on the historical relative volatility of the stock. It tells
about the market volatility of the stock w.r.t to the historical data of the Market Index.
If,
Beta value > 1 ------ > Implies the stock is more volatile than the Index
Beta Value < 1------ > Implies that stock is less volatile than the index
Beta Value = 1------ > Implies that the stock volatility moves with NIFTY
Since a stock’s beta coefficient determines how the stock affects the risk of a diversified portfolio,
beta is the most relevant measure of a stock risk.
Beta value of any security is dependent on return interval (i.e. daily, weekly, monthly or yearly
returns), length of time period chosen for analysis and the market index/ portfolio chosen to which
the security belongs.
Beta is the ratio of covariance of the return on asset and the return on market to variance in the
market retunes. This represents the slope of straight line between market returns (independent
variable) and the returns on the security (dependent variable)
Methodology
For calculating the BETA coefficient values, 8 year daily stock, index data is taken for BHEL and
other Maharatna PSU. Index taken is NIFTY. Other Maharatna PSU Companies compared are
SAIL, ONGC, COAL INDIA, IOCL, NTPC, GAIL.
Results
For 7 years, using the daily data of stock and index value, following β values are found
BHEL SAIL ONGC NTPC GAIL COAL IOCL
INDIA
1.057532263 1.358205 0.890861 0.794859 0.806067 0.554697969 0.806067

Analysis
Beta Value Analysis
βCOALINDIA < βNTPC < βGAIL =βIOCL < βONGC < βBHEL< βSAIL
As one can see, β value of BHEL is above 1 indicating the stock is relatively volatile. In fact the
recent fall in stock price of BHEL implies its volatility. The Safe stock which an investor can
invest from the above is Coal India, followed by NTPC. BHEL is much safer stock compared to
SAIL. This can be attributed the factor that SAIL & BHEL are Engineering based companies
depending on the contracts heavily. This could be one factor which could make the stocks volatile.
Standard Deviation Analysis
Standard Deviation, sheds light on the historical Volatility of stock. High standard deviation means
more volatile stock. Lower Standard Deviation means more Stable Stock.
BHEL SAIL ONGC NTPC GAIL COAL IOCL
INDIA
3.231099882 3.134978 2.848135 2.034853 2.395179 1.768576953 2.395179

From the above data, it can be seen that BHEL has the highest volatility in comparison with other
PSU Maharatna firms. This indicates that stock is highly volatile in nature. We must also
understand that past 2 months of stock performance of BHEL has been highly mixed in nature and
shows that BHEL needs to perform better to gain investor confidence. Among the PSU Maharatna
Coal India limited is the less volatile and stable stock. This is followed by NTPC.
Variance Analysis
It is the measures of dispersion of stock price. Variance Measure the variability from average
(volatility) and risk.
Volatility and risk tells about the risk the investor is willing to take.
BHEL SAIL ONGC NTPC GAIL COAL IOCL
India
10.44000645 9.828089 8.111871 4.140625 5.736881 3.12786444 5.736881

Based on the data, BHEL is the stock which investor can take a risk and invest on it. This has the
highest volatility value. This is followed by SAIL and then by ONGC. BHEL can be said to have
the maximum risk premium in other words. COAL India is the stock where investor can take
minimum risk.
Conclusion

Thus, the beta coefficient analysis, Variance analysis, Standard Deviation analysis for BHEL vs.
OTHER Maharatna PSU is arrived. From the analysis we can interpret that BHEL is a highly risky
stock in comparison with its peer Maharatna PSU. But an industrial wise BETA analysis might
show different, so that too needs to be performed. Safest PSU is COAL India, followed by NTPC
showing that these stocks are safe bets for an investor.1

1
Refer Excel Sheet calculations for BETA, Standard Deviation, Variance values.
Ratio Analysis

Financial ratio analysis is the calculation and comparison of ratios which are derived from
the information in a company's financial statements. The level and historical trends of these
ratios can be used to make inferences about a company's financial condition, its operations
and attractiveness as an investment.
Financial ratios are calculated from one or more pieces of information from a company's financial
statements. For example, the "gross margin" is the gross profit from operations divided by the total
sales or revenues of a company, expressed in percentage terms. In isolation, a financial ratio is a
useless piece of information. In context, however, a financial ratio can give a financial analyst an
excellent picture of a company's situation and the trends that are developing.
Role of Ratio Analysis-
Ratio Analysis helps to appraise the firms in terms of their profitability and efficiency of
performance, either individually or in relation to those of other firms in the same industry. The
process of this appraisal is not complete until the ratios so computed can be compared with
something, as the ratios by themselves do not mean anything. This comparison may be an intra-
firm comparison, inter-firm comparison or comparison with standard ratios. Thus, proper
comparison of ratios may reveal where a firm is placed as compared with earlier periods or in
comparison with other firms in the same industry.
Ratio Analysis is one of the best possible techniques available to the management to impart the
basic functions like planning and control. As the future is closely related to the immediate past,
ratios calculated on the basis of historical financial statements may be of good assistance to predict
the future.
For example, on the basis of inventory turnover ratio or debtors turnover ratio in the past, the level
of inventory and debtors can easily be ascertained for any given amount of sales.
Similarly, the ratio analysis may be able to locate and point out the various areas which need the
management’s attention in order to improve the situation. For example, current ratio which shows
a constant declining trend may indicate the need for further introduction of long term finance in
order to improve the liquidity position.
As the ratio analysis is concerned with all the aspects of a firm’s financial analysis (liquidity,
solvency, activity, profitability and overall performance), it enables the interested persons to know
the financial and operational characteristics of an organisation and take the suitable decisions.
Here Following Five Set of Ratio Analysis is performed
1.) Liquidity ratios- which give us an idea of the firm’s ability to pay off debts that are
maturing within a year.
2.) Asset management ratios- which give us an idea of how efficiently the firm is using its
assets.
 3.) Debt management ratios- which give us an idea of how the firm has financed its assets
as well as the firm’s ability to repay its long-term debt.
4.) Profitability ratios- which give us an idea of how profitably the firm is operating and
utilizing its assets.
5.) Market value ratios- which bring in the stock price and give us an idea of what investors
think about the firm and its future prospects.
Importance of this analysis-
Satisfactory liquidity ratios are necessary if the firm is to continue operating. Good asset
management ratios are necessary for the firm to keep its costs low and thus its net income high.
Debt management ratios give us an idea of how risky the firm is and how much of its operating
income must be paid to bondholders rather than stockholders. Profitability ratios bring together
the asset and debt management ratios and show their effects on ROE. Finally, market value ratios
tell us what investors think about the company and its prospects. All of the ratios are important,
but different ones are more important for some companies than for others. For example, if a firm
borrowed too much in the past and its debt now threatens to drive it into bankruptcy, the debt ratios
are key. Similarly, if a firm expanded too rapidly and now finds itself with excess inventory and
manufacturing capacity, the asset management ratios take center stage. The ROE is always
important; but a high ROE depends on maintaining liquidity, on efficient asset management, and
on the proper use of debt. Managers are, of course, vitally concerned with the stock price; but
managers have little direct control over the stock market while they do have control over their
firm’s ROE. So ROE tends to be the main focal point.

Analysis
There are two set of analysis performed.
1.) Comparison of Past trends within BHEL
2.) Comparison with respect to other PSU (Only if comparable)
Liquidity Ratio’s-
The liquidity ratios help answer this question: Will the firm be able to pay off its debts as they
come due and thus remain a viable organization? If the answer is no, liquidity must be the first
order of business. Here two ratios are analysed. One is Current Ratio, Other is Quick Ratio.
1.) Current Ratio-
The primary liquidity ratio is the current ratio, which is calculated by dividing current assets by
current liabilities:
Current ratio= Current assets/ Current liabilities
Current assets include cash, marketable securities, accounts receivable, and inventories.
By looking at the Chart below it can be found that –
 a.) There has been decline in the past 4 year, but 2012 saw a good performance, improving the
ratio. The ratio is above the industrial average showing BHEL is performing good in
managing current assets and Liabilities.
b.) Comparing the current ratio performance with other Maharatna PSU, BHEL seems to have
performed better as other PSU have shown mixed performance, as there has been a
considerable drop in the value after Year 2010.
Exhibit 1- Current Ratio Trend for BHEL vs Other Maharatna PSU

Current Ratio
2008 2009 2010 2011 2012

3.5
3
2.5
2
1.5
1
0.5
0
BHEL ONGC GAIL NTPC SAIL COAL INDIA IOCL

2.) Quick Ratio

The quick ratio, which measures the firm’s ability to pay off short-term obligations without relying
on the sale of inventories
The second liquidity ratio is the quick, or acid test, ratio, which is calculated by deducting
inventories from current assets and then dividing the remainder by current liabilities:
Quick, or acid test, ratio= (Current assets – Inventories)/ Current liabilities
By looking at Exhibit 2 (Chart) we can find out that
a.) BHEL has shown improved performance in the year 2012, indicating that it has been well
using its current assets and reduced inventories. Sales have been good in that year
indicating better ratio compared to previous year.
b.) Comparing this performance with other PSU, overall trend in other Maharatna PSU
indicate that their sales is dropping and they are accumulating more inventory. BHEL in
this area seems to performing better showing upward movement instead of a downward
movement (Other Maharatna PSU’s).
Exhibit 2- Quick Ratio Trend for BHEL vs Other Maharatna PSU

Quick Ratio
2008 2009 2010 2011 2012

3.5
3
2.5
2
1.5
1
0.5
0
BHEL ONGC GAIL NTPC SAIL COAL INDIA IOCL

Asset Management Ratio’s

These Ratio’s measure how effectively the firm is managing its assets. These ratios answer this
question: Does the amount of each type of asset seem reasonable, too high, or too low in view of
current and projected sales? It helps in telling whether the assets are utilized in the right manner
or not.
1.) Inventory Turnover Ratio
“Turnover ratios” divide sales by some asset: Sales/Various assets. As the name implies, these
ratios show how many times the particular asset is “turned over” during the year. Here is the
inventory turnover ratio:
Inventory turnover ratio= Sales/Inventories
Looking at the Exhibit 3 (Chart) we can find out that,
a.) For BHEL the ratio is showing declining trend, previous year ratio was 4.11, and present
2012 ratio is 3.71 indicating that BHEL ‘Turnover’ per year is decreasing. BHEL needs to
improve this by increasing the sales of the goods it produces, which includes bagging more
orders etc.
b.) For BHEL vs the rest, other Maharatna PSU have fared mixed except for COAL India
whose turnover period has increased by a large amount. Rest of the PSU have shown a
declining trend from 2010.
Exhibit 3- Inventory turnover ratio of BHEL vs Other Maharatna PSU

Inventory Turnover Ratio

2008 2009 2010 2011 2012

140
120
100
80
60
40
20
0
BHEL ONGC GAIL NTPC SAIL COAL INDIA IOCL

2.) Days Sales Outstanding

Accounts receivable are evaluated by the days sales outstanding (DSO) ratio, also called the
average collection period (ACP). It is calculated by dividing accounts receivable by the average
daily sales to find how many days’ sales are tied up in receivables. Thus, the DSO represents the
average length of time the firm must wait after making a sale before receiving cash.
Days sales outstanding (DSO) = Receivables/ Average sales per day
= Receivables/ (Annual sales/365)
Looking at Exhibit 4 (Chart) we can find that
1.) BHEL has considerably reduced the day’s sales outstanding in the year 2012 from 2011,
indicating improved performance, and better selling. This is important as it may block
capital for further needs. Overall trend is skewed, though 2012 figures indicate it is on the
right track. When one looks at industry average, BHEL has a low value, indicating it is a
better performer. Though High DSO means some customers are paying on time, some
aren’t. Credit policy and overall trend indicated BHEL is performing good in this aspect.
2.) When we see the other PSU trends, NTPC & GAIL have shown better performance in
2012, but is its COAL India which has zero Receivables indicating that this firm is a
monopolistic player and an excellent performer. This trend cannot be compared as different
industries have different requirements
Exhibit 4- Day’s Sale outstanding for BHEL vs Other Maharatna PSU

Day's Sales Outstanding

2008 2009 2010 2011 2012

250

200

150

100

50

0
BHEL ONGC GAIL NTPC SAIL COAL INDIA IOCL

3.) Fixed Asset Turnover Ratio

The fixed assets turnover ratio, which is the ratio of sales to net fixed assets, measures how
effectively the firm uses its plant and equipment
Fixed assets turnover ratio = Sales/ Net fixed assets
Looking at Exhibit 5 (Chart)-
a.) BHEL Has shown a slight decrease in the value indicating that sales have decreased a bit
compared to the previous years. The above average industry value indicates that it is using
its fixed assets in right proportions as other firms in the industry (in fact Better). One most
also note that- if we compare an old firm whose fixed assets have been depreciated with a
new company with similar operations that acquired its fixed assets only recently, the old
firm will probably have the higher fixed assets turnover ratio. However, this would be more
reflective of the age of the assets than of inefficiency on the part of the new firm.
b.) Comparing the trend in other Maharatna’s only GAIL and IOCL has shown better
performance, with rest of showing declining trend. It could be observed that BHEL
utilization is different and hence its makes more sense to compare it with other competitors.
One could also draw one important conclusion that sales of other PSU isn’t in line with its
fixed asset base.
Exhibit 5- Fixed Asset Turnover Ratio of BHEL vs Other Maharatna PSU

Fixed Asset Turnover Ratio

2008 2009 2010 2011 2012

0
BHEL ONGC GAIL NTPC SAIL COAL INDIA IOCL

4.) Total Asset Turnover Ratio

The final asset management ratio, the total assets turnover ratio, measures the turnover of all of
the firm’s assets; and it is calculated by dividing sales by total assets:
Total assets turnover ratio = Sales/ Total assets
From Exhibit 6 (Chart), we can find that
a.) BHEL has shown a decline in the year 2012 indicating that it is not showing enough sales
to its total fixed assets. Looking at the fixed asset turnover and this ratio, BHEL must
improve its sales to keep up with its assets and look for new deals.
b.) Looking at the other PSU and BHEL, Coal India limited has lowest of this ratio, indicating
that its fixed asset is huge compared to its sales volume. Looking at other companies, IOCL
has show positive trend in terms of sales, and rest of PSU have been faltering in terms of
performance, indicated lowered sales.
Exhibit 6 Total Asset Turnover Ratio of BHEL vs Other Maharatna PSU

Total Asset Turnover Ratio

2008 2009 2010 2011 2012

4
3.5
3
2.5
2
1.5
1
0.5
0
BHEL ONGC GAIL NTPC SAIL COAL INDIA IOCL

Debt Management Ratio’s:

The use of debt will increase, or “leverage up,” a firm’s ROE if the firm earns more on its assets
than the interest rate it pays on debt. However, debt exposes the firm to more risk than if it financed
only with equity. Thus, firms with relatively high debt ratios typically have higher expected returns
when the economy is normal but lower returns and possibly bankruptcy if the economy goes into
a recession. Therefore, decisions about the use of debt require firms to balance higher expected
returns against increased risk. Capital Structure decides what should be the right size of debt for a
company
1.) Debt Ratio
The ratio of total debt to total assets, generally called the debt ratio, measures the percentage of
funds provided by creditors
Debt ratio = Total debt / Total assets
Total debt includes all current liabilities and long-term debt. Creditors prefer low debt ratios
because the lower the ratio, the greater the cushion against creditors’ losses in the event of
liquidation
Looking at the Exhibit 7, we can infer that,
a.) Looking the BHEL debt ratios, we can find that it has a low Debt ratio and it has been
reducing its debt ratio each year indicating that its profits are financed well and company
has a very good track record financially. Debt ratio of 1 % indicates that BHEL have been
given credits by just 1%
 b.) Looking at the other PSU firms ONGC, Coal India have similar debts to BHEL, and others
have increasing their debt values. This indicates one thing, BHEL is a debt free company,
which is very unique in a company setup.
Exhibit 7- Debt Ratio of BHEL vs Other Maharatna PSU

Debt Ratio
2008 2009 2010 2011 2012

0.6

0.5

0.4

0.3

0.2

0.1

0
BHEL ONGC GAIL NTPC SAIL COAL INDIA IOCL

Profitability Ratios:
It reflects the net result of all of the financing policies and operating decisions.
1.) Operating Margin
The operating margin, is calculated by dividing operating income (EBIT) by sales, gives
the operating profit per dollar of sale
Operating margin = Operating income (EBIT) / Sales
Looking at Exhibit 8, we find that the,
a.) BHEL value of 21% operating Margin is way above industrial average of 15% indicating
that the firm is performing better in this side. Also BHEL has a slight decline from the
previous year indicating that the previous findings of high sales outstanding days. This
shows that operating costs of BHEL is on the rise and BHEL must take steps to reduce it.
b.) Comparing BHEL vs other PSU, Coal India might have shown higher value, but one must
need to know that COAL India’s other income wasn’t considered here as only sales data
was taken into account. Comparing the ratio with other firms they have shown declining
trend, indicating higher operating costs similar to BHEL.
Exhibit 8- Operating Margin of BHEL vs Other Maharatna PSU

Operating Margin
2008 2009 2010 2011 2012

25

20

15

10

0
BHEL ONGC GAIL NTPC SAIL COAL INDIA IOCL

2.) Profit Margin

The profit margin, also sometimes called the net profit margin, is calculated by dividing net income
by sales
Profit margin = Net income / Sales
This ratio measures net income per rupees of sales
Looking at Exhibit 9, we can find that
a.) BHEL performance in 2012 has seen a slight increase from previous year. This shows that
net income has increased for BHEL. Also there is a different way to see, since BHEL does
high pricing, this turns out lower sales, lower net income but higher profit margin. This is
very evident from previous analysis which talks about lesser sales.
b.) When BHEL is compared with Other PSU companies, COAL India has higher value as
income is very high compared to sales, as most of the income come other areas, which are
reported in accounting standard as other income. But the general trend is BHEL has
performed well compared to other PSU which are showing declining trend (except for
ONGC).
Exhibit 9- Profit Margin of BHEL vs Other Maharatna PSU

Profit Margin
2008 2009 2010 2011 2012

90
80
70
60
50
40
30
20
10
0
BHEL ONGC GAIL NTPC SAIL COAL INDIA IOCL

3.) Return on Total Assets

Net income divided by total assets gives us the return on total assets (ROA):
Return on total assets (ROA) = Net income/ Total assets
Exhibit 10- ROA for BHEL vs Other Maharatna PSU

ROA
90
80
70
60
50
40
30
20
10
0
BHEL ONGC GAIL NTPC SAIL COAL INDIA IOCL

2008 2009 2010 2011 2012

4.) Basic Earning Power (BEP) Ratio

Exhibit 11- BEP Ratio for BHEL vs Other Maharatna PSU

BEP Ratio
1.4

1.2

0.8

0.6

0.4

0.2

0
BHEL ONGC GAIL NTPC SAIL COAL INDIA IOCL

2008 2009 2010 2011 2012

5.) Return on Common Equity (ROE)

ROE
16
14
12
10
8
6
4
2
0
BHEL ONGC GAIL NTPC SAIL COAL INDIA IOCL

2008 2009 2010 2011 2012

 TREND ANALYSIS ROE
BHEL ONGC GAIL NTPC SAIL COAL INDIA IOCL

16

14

12

10

0
2008 2009 2010 2011 2012