bharat forge limited : a project of corporate finance by asokendu samanta

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Bharat Forge Limited (Project of Corporate Finance of Prof. Ram Kumar Kakani) by Asokendu Samanta (SMSID 104118, SID RB09035) Post Graduate Certificate in Business Management (PGCBM 15) Powai, Mumbai 1 May 2009, [11:00 a.m.]

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Abstract – Bharat Forge Limited (BFL), one of the world's largest forging companies is based in Pune, India and has nine manufacturing plants in India, Germany, Sweden, United States, Scotland, United Kingdom and mainland China. The flagship company of the USD 2.4 billion Kalyani Group was founded by Indian billionaire Baba Kalyani in 1961 and is listed both in BSE and NSE. BFL manufactures various forged and machined components for the automotive and non-automotive sector (Fig. 1). In this present report, analyses of BFL, mainly from corporate finance point of view are made. Various aspects (cash flow analysis, ratio analysis, capital budgeting, valuation of stock, working capital management, analysis with its peers) are done chapter wise collecting data mainly from company’s website and annual report. Sample calculations (ratio, NPV, IRR, Intrinsic value of stock) are shown in details and remarks are made wherever required. At the end, conclusions are drawn in chapter seven analyzing all aspects.

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  • 1. Bharat Forge Limited(Project of Corporate Finance of Prof. Ram Kumar Kakani)by Asokendu Samanta (SMSID 104118, SID RB09035)Post Graduate Certificate in Business Management (PGCBM 15) Powai, Mumbai 1 May 2009, [11:00 a.m.]

2. A Project On Bharat Forge Limited 1Bharat Forge Limited (Project of Corporate Finance of Prof. Ram Kumar Kakani)Asokendu SamantaSMSID 104118, SID RB09035, PGCBM 15, XLRI, Center- Powai, Mumbai, Email: [email protected], May 1, 2009 [11:00 a.m.]Abstract Bharat Forge Limited (BFL), one of the worlds largest forging companies is based in Pune,India and has nine manufacturing plants in India, Germany, Sweden, United States, Scotland, UnitedKingdom and mainland China. The flagship company of the USD 2.4 billion Kalyani Group was foundedby Indian billionaire Baba Kalyani in 1961 and is listed both in BSE and NSE. BFL manufactures variousforged and machined components for the automotive and non-automotive sector (Fig. 1). In this presentreport, analyses of BFL, mainly from corporate finance point of view are made. Various aspects (cashflow analysis, ratio analysis, capital budgeting, valuation of stock, working capital management, analysiswith its peers) are done chapter wise collecting data mainly from companys website and annual report.Sample calculations (ratio, NPV, IRR, Intrinsic value of stock) are shown in details and remarks are madewherever required. At the end, conclusions are drawn in chapter seven analyzing all aspects.Key Words: Bharat Forge Limited, Capital Budgeting, Cash Flow Analysis, Intrinsic Value, IRR, NPVFig. 1 Bharat Forge has the main business in automotive sector, though is expanding in various horizons[Source: Companys annual report 2007-08]Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 3. A Project On Bharat Forge Limited2ContentsAbstract 1Contents 2-3Chapter 1 Profile of the Company4-71.1 Introduction 41.2 Manufacturing Units and Products 51.3 Customer of Bharat Forge 51.4 Award, Recognition and Honors51.5 Major Milestone and Financial Facts61.6 Competitors of Bharat Forge Limited7Chapter 2 Financial Statement and Cash Flow Analysis 8-122.1 Balance Sheet, Profit And Loss, and Cash Flow8Chapter 3 Financial Analysis and Planning13-223.1 Introduction133.2 Common Size Balance Sheet and Income Statement143.3 Ration Analysis 163.4 Comparison with Peer20Chapter 4 Valuation Of Stock 23-264.1 Introduction234.2 Constant Growth Dividend Model244.3 Two Phase Growth Dividend Model 25Chapter 5 Capital Investment Decision27-345.1 Introduction27 Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 4. A Project On Bharat Forge Limited 35.2 Average Tax Calculation295.3 Capacity Expansion Plan295.3.1 Straight Line Depreciation Method295.3.2 Written Down Value Depreciation Method 32Chapter 6 Working Capital Management35-376.1 Introduction 356.2 Short Term and Long Term Loan37Chapter 7 Conclusions387.1 Summary38References 39Abbreviation 39Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 5. A Project On Bharat Forge Limited 4Chapter ONE PROFILE OF THE COMPANY1.1 INTRODUCTIONBharat Forge Ltd. (Table 1.1), the flagship company of the US $ 2.4 billion Kalyani Group (Ref. 1), is a leading global Full Service Supplier of forged and machined - engine & chassis components. It is the largest exporter of auto components from India and leading chassis component manufacturer in the world. Global leadership is BFLs dream and underthe visionary leadership of its Chairman, Mr. B. N. Kalyani, the company is steadfastly marching towardsits goal.Table 1.1 Quick facts of Bharat Forge Company Bharat Forge Limited (BFL) Website www.bharatforge.com Head QuarterMumbai, Maharashtra, India Established in1961 TypePrivate (BSE, NSE) ChairmanMr. B. N. Kalyani Product Forged and machined - engine & chassis components Total Employee4000 Total Asset / Net ProfitRs. 2879.01 Crore / Rs. 273.59 CroreAsokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 6. A Project On Bharat Forge Limited51.2 MANUFACTURING UNITS AND PRODUCTSWith manufacturing facilities spread across 12 locations and 6 countries (Fig. 1.1), four in India, three inGermany, one each in Sweden, Scotland, USA and two in China, the company manufactures a wide rangeof safety and critical components for passenger cars, SUVs, light, medium & heavy commercial vehicles,tractors and diesel engines. The company also manufactures specialized components for the aerospace,power, energy, oil & gas, rail & marine, mining & construction equipment, and other industries. It iscapable of producing complex large volume parts in both steel and aluminium. Fig. 1.1 Global presence of Bharat Forge (Ref. 1)1.3 CUSTOMER OF BHARAT FORGEIts customer base includes virtually every global automotive OEM and Tier I supplier. Daimler Chrysler,Toyota, BMW, General Motors, Volkswagen, Audi, Renault, Ford, Volvo, Caterpillar - Perkins, Iveco,Arvin Meritor, Detroit Diesel, Cummins, Dana Corporation, Honda, Scania and several others sourcetheir complex forging requirements including machined crankshafts, front axle beams and steeringknuckles from Bharat Forge.1.4 AWARD, RECOGNITION AND HONORSBFL is a recipient of several national and international honors, recognition and awards (Ref. 1). ForbesMagazine has listed it for consecutive three years in its global Best under a Billion list. AutomotiveComponent Manufacturers Association of India (ACMA) has honored it over past four years for its exportexcellence. Outlook recognized BFL as the Best Value Creator for 2004 among large companies. BFL hasalso been awarded the Indo German Chamber of Commerce (IGCC) Award for Outstanding Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 7. A Project On Bharat Forge Limited 6Contribution towards Promotion of the Indo-German Economic Relations for the Year 2005. BharatForge received GKD-NIQR award for Outstanding Organization in 2005.1.5 MAJOR MILESTONE AND FINANCIAL FACTSMile stones and a few financial facts of Bharat Forge Limited are given in Table 1.2 (Ref. 1) and Table1.3 (Ref. 2) respectively.Table 1.2 Major mile stones of Bharat Forge YearMile Stone 1961 Incorporation 1962 Technical agreement with SIFCO, USA for hammer forging technology 1966 Start of hammer shop commercial production 1972 Execution of maiden export order to Greece 1984 Technical agreement with Tokyo Drop Forge, Japan for technology up-gradation 1985 Entry in the USSR market 1986 Technical agreement with Jidosha Buhin Kogyo, Japan for machining of front axle beams1990-91 Breakthrough in the markets of Japan, USA and UK for the critical suspension and enginecomponents like front axle beams and machined crankshafts 1991 Implementation of a large US $50 million forging facility up-gradation program in Weingarten(Germany) 1993 ISO 9002 accreditation 1996 Technical agreement with Metalart Corporation, Japan for small forgings 1999 QS 9000 accreditation 2004 Acquired one of the largest German Forging Companies, CDP Aluminiumtechnik now knownas Bharat Forge Aluminiumtechnik. 2005 Acquired Federal Forge in USA and Imatra Kilsta, AB, Sweden along with its wholly ownedsubsidiary Scottish Stampings in Scotland. Signed a JV with FAW Corporation, - the largestautomotive group in China. Table 1.3 A few financial facts of Bharat Forge (Rs. in crore)Mar 08Mar 07 Mar 06 Mar 05Mar 04 Total Asset2879.012841.19 2253.25 941.60 617.35 Total Income 2315.251938.55 1631.04 1226.47851.14 Net Profit 273.59 240.95206.97161.63 124.91Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 8. A Project On Bharat Forge Limited71.6 COMPETITORS OF BHARAT FORGE LIMITEDBharat Forge has a few competitors. The comparisons between them (Ref. 3) are shown in Table 1.4.Table 1.4: Comparisons (March 2008) between Bharat Forge and its competitorsShare Price*Market Cap Sale TurnoverNet ProfitTotal Assets (Rs.)(Rs. Cr.)(Rs. Cr.) (Rs. Cr.) (Rs. Cr.)Bharat Forge125.60 2,796.51 2,196.50273.592,879.01Mahindra Forge 45.50 311.98 214.13 -14.17 974.09Ahmednagar Forge 42.25 147.54 661.1663.44 551.84Jayaswal Neco12.50 141.11 1,473.6285.59 783.77Hinduja Foundry65.90 123.07 451.4216.92 420.03* At the close of 9 April, 2009 Market Cap (Rs. Cr.)3,000.00 Sales Turnover (Rs. Cr.)2,500.002,000.001,500.001,000.00500.00 0.00 Bharat Forge Mahindra Forge Ahmednagar ForgeFig. 1.2 Comparison (based on March 2008) of three companies [Chart prepared by author collecting data from Ref. 3]Analysis and Remarks: It can be observed from Table 1.4 that Bharat Forge is well ahead from itsnearest competitor Mahindra Forge in every aspect (market cap, sales, net profit and total asset). Itcan also be observed that in spite of global economy meltdown, Bharat Forge made a good profit(Rs. 273.59 cr) in March 2008, when Mahindra Forge suffered losses. The bar charts (Fig 1.2) ofMarket cap and Sales turnover between Bharat, Mahindra and Ahmednagar Forge also establishthe supremacy of Bharat Forge. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 9. A Project On Bharat Forge Limited8 ChapterTWO FINANCIAL STATEMENTAND CASH FLOW ANALYSIS2.1 BALANCE SHEET, PROFIT AND LOSS, AND CASH FLOWB harat Forge Ltd. has a lot of associated companies. As such it has its own balance sheet and aconsolidated balance sheet. Similarly it has its own profit and loss account and cash flow anda consolidated version. In the present project, emphasis is given on its own balance sheet,profit and loss account and cash flow rather than consolidated versions. Certain importantfinancial statements of Bharat Forge are shown below. These are Balance sheet (Table 2.1), Profit andloss account (Table 2.2) and Cash flow statements (Table 2.3) for the last five years. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 10. A Project On Bharat Forge Limited 9 Table 2.1 Balance sheet of Bharat Forge [Arranged by author collecting data from annual reports, Ref. 2]Balance Sheet Rs (Crore)Mar 08Mar 07 Mar 06 Mar 05 Mar 04Sources of FundsShareholders FundEquity share capital44.5444.5444.4639.5637.68Preference share capital 0.0010.0010.0020.0030.00Reserves & surplus1428.741272.261109.67 383.00 183.56Loan FundsSecured loans461.58 373.57 381.60 383.21 219.05Unsecured loans825.911028.04 610.8634.6766.52Deferred Tax AdjustmentDeferred tax liabilities 138.53 119.77 103.0285.3985.02Deferred tax assets-20.29-6.99-6.37-4.22-4.47Total 2879.012841.192253.25 941.60 617.35Application of FundsFixed AssetsGross block 2029.631735.061265.12 948.78 821.97Less : accumulated depreciation711.77 583.13 489.87 421.33 370.79Net block 1317.861151.93 775.25 527.46 451.18Capital work-in-progress 427.14 274.80 370.70 275.9087.71Investments593.67 450.71 444.0238.35 34.3765Current AssetsInventories338.12 302.79 254.27 186.08 133.13Sundry debtors 356.29 253.95 188.55 143.06 100.14Cash and bank balance164.99 736.28 505.4128.13 8.60Other current assets88.1183.6791.3166.4444.32Loans and advances 678.50 472.33 495.71 361.07 236.63Current LiabilitiesLiabilities634.33 575.69 511.49 431.82 338.08Provisions 451.33 309.80 361.73 257.37 148.78Net Current Assets 540.34 963.52 662.0395.6035.96Miscellaneous expenses not written 0.00 0.23 1.25 4.30 8.13Total 2879.012841.192253.25 941.60 617.35Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 11. A Project On Bharat Forge Limited 10Table 2.2 Profit and loss account of Bharat Forge [Arranged by author collecting data from annual reports, Ref. 2] Profit and Loss AccountRs (Crore) Mar 08 Mar 07Mar 06 Mar 05 Mar 04 Income Sales (Gross) 2293.211966.151632.101243.23 853.15 Less: Excise Duty172.61 156.02 120.6591.4170.05 Net Sales 2120.601810.131511.451151.82 783.10 Operating Income75.9054.3066.4867.2448.95 Other Income88.4080.8853.11 7.4019.09 Exceptional Income/(Expenditure)30.35-6.75 0.00 0.00 0.00 Total Income2315.251938.551631.041226.47 851.14 Expenditure Manufacturing Cost1674.341396.831188.33 891.60 591.85 Profit before depreciation, interest and tax (PBDIT) 640.91 541.72 442.72 334.86 259.29 Depreciation 138.9499.8073.0452.5645.77 Profit before interest and tax (PBIT)501.97 441.92 369.68 282.31 213.52 Interest 104.9982.1154.7934.2332.36 Profit before tax (PBT)396.98 359.81 314.89 248.08 181.17 Tax123.39 118.86 107.9386.4556.26 Profit after tax (PAT) 273.59 240.95 206.97 161.63 124.91Table 2.3 Cash flow of Bharat Forge [Arranged by author collecting data from annual reports, Ref. 2]Cash Flow Statement Rs (Crore)2007-082006-072005-062004-052003-04A. Cash Flow From Operating ActivitiesProfit Before Tax (PBT)396.98 359.81314.89 248.08 181.16Adjustment for Interest / Depreciation / Othersi) Depreciation and amortization 138.9499.80 73.0452.56 45.77ii) Interest paid104.9982.11 54.7934.23 32.36iii) Other adjustments 5.24 9.413.77 5.236.88Total249.17 191.32131.6092.01 85.01Adjustment for Dividend/ Other incomei) Interest received (27.98)(53.93)(29.12) (0.40) (0.48)ii) Dividend (26.06)(16.21) (9.75) 0.00 0.00iii) Profit on sale of investments (30.55) (0.38) (0.14) 0.00 0.00iv) Other adjustments (1.08) (0.22) (3.83) (2.00) (3.02)Total(85.66)(70.74)(42.83) (2.41) (3.51)Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 12. A Project On Bharat Forge Limited11Operating Profit Before Working Capital Changes560.48 480.39403.66 337.68 262.67Changes in Working Capital(Increase) / Decrease in Current Assetsi) Inventories (35.33)(48.52)(68.18)(52.95) (6.72)ii) Sundry debtors(106.29)(65.49)(45.41)(43.13)(19.53)iii) Other current assets, loans and advances(71.09)(30.23)(59.01)(66.67)(50.27)Increase / (Decrease) Current liabilitiesLiabilities96.3765.8285.7350.26 91.18Total (116.34)(78.43)(86.88) (112.48) 14.67Cash Generated From Operation444.15401.96316.79 225.20 277.33Direct Tax Paid(98.52) (106.19)(98.55)(87.27)(54.38)Net Cash From Operating Activities(A)345.63295.77218.24 137.93 222.95B. Cash Flow From Investment Activitiesi) investment in subsidiary companies(52.05)(52.91) (152.16) (3.97)(34.38)ii) (Increase) / Decrease in investment in MF(90.92)46.22 (253.51) 0.00(88.87)iii) Capital expenditure(540.78) (286.91) (304.94) (260.34) (0.50)iv) Interest Capitalised(0.82) (4.73) (5.42) (2.15) 8.49v) Sale proceeds of assets 22.72 0.39 1.62 (2.02) 0.48vi) Loan on wholly owned subsidiaries(41.49)(10.75) (4.46) (0.62) 0.00vii) Non operating income- interest, dividend84.5970.0638.38 0.40 0.00Net Cash Used in Investment Activities(B) (618.75) (238.62) (680.50) (268.70) (114.77)C. Cash Flow From Financial ActivitiesIncrease / (Decrease) in share capital / borrowing (64.20)319.22 455.66 127.98 (62.41)Adjustments to net worth (38.03) 9.60597.11 101.940.00Interest paid (104.15)(77.89)(50.48)(34.70)(31.82)Dividend (91.79)(77.22)(62.74)(44.92)(28.70)Net Cash Used in Financing Activities (C) (298.17)173.71939.55 150.29 (122.93)Net Change in Cash and cash Equivalents (A+B+C) (571.29)230.86477.2919.52(14.74)Cash, Equivalent at Begin of Year (Opening Balance) 736.28505.41 28.13 8.6023.34Cash, Equivalent at Close of Year (Closing Balance) 164.99736.28505.4128.13 8.60Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 13. A Project On Bharat Forge Limited 12 Analysis and Remarks Analyzing the above mentioned statements, the following points can be observed. 1. It is observed from Profit and Loss account that net profits have been increasing constantly from 2003-04 to 2007-08 with a growth of nearly 15%, which is a healthy sign of the company. 2. Cash flow from operating activity is increased steadily from 2005-06 to 2007-08. In terms of growth it is 35.53% from 2005-06 to 2006-07 and 16.85% from 2006-07 to 2007-08. This is mainly because sales have increased at a rate of 16-20 %. 3. Cash flows from investment activity are fluctuating. In 2004-05 it was (268.70 cr), in 2005-06 it was (680.50 cr), in 2006-07 it was (238.62 cr) and in 2007-08 it was (618.75 cr). It is observed that Bharat Forge has invested a good amount (540.78 cr) in capital expenditure recently in 2007-08, leading to a huge cash outflow. This is mainly because of its expansion plan in Pune for close die forging and crankshaft machining (details are given in capital budgeting chapter, chapter 5) 4. Cash flow from financial activity is negative in recent year 2007-08. This is mainly because decrease in share capital and outflow due to dividend and interest paid. In 2005-2006, there was a huge inflow of cash from financial activity due to adjustment of net worth.Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 14. A Project On Bharat Forge Limited13 ChapterTHREEFINANCIAL ANALYSISAND PLANNING3.1 INTRODUCTIONB In this chapter, financial analysis and planning of Bharat Forge are discussed. Common sizebalance sheet (Table 3.1) and income statement (Table 3.2) are prepared for readycomparison. Various ratios are calculated. These are mainly short term solvency ratio, longterm solvency ratio, turnover ratio and profitability ratios. Sample calculations of each ratiofor financial year 2007-08 are shown. These ratios are compared with its nearest peer Mahindra Forge.Analysis and remarks are made whenever is applicable. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 15. A Project On Bharat Forge Limited143.2 COMMON SIZE BALANCE SHEET AND INCOME STATEMENTTable 3.1 Common size Balance Sheet of Bharat ForgeCommon SizeBalance Sheet Mar 08 Mar 07 Mar 06 Mar 05Mar 04Sources of FundsShareholders FundEquity share capital1.55 1.571.97 4.206.10Preference share capital0.00 0.350.44 2.124.86Reserves & surplus 49.6344.78 49.2540.68 29.73Loan FundsSecured loans16.0313.15 16.9440.70 35.48Unsecured loans28.6936.18 27.11 3.68 10.77Deferred Tax AdjustmentDeferred tax liabilities4.81 4.224.579.0713.77Deferred tax assets-0.70-0.25 -0.28 -0.45-0.72Total 100 %100 % 100 % 100 %100 %Application of FundsFixed AssetsGross block70.5061.07 56.15100.76 133.14Less : accumulated depreciation24.7220.52 21.74 44.7560.06Net block45.7740.54 34.41 56.0273.08Capital work-in-progress 14.84 9.67 16.45 29.3014.21Investments20.6215.86 19.71 4.075.57Current AssetsInventories11.7410.66 11.2819.76 21.57Sundry debtors 12.38 8.948.3715.19 16.22Cash and bank balance 5.7325.91 22.43 2.991.39Other current assets3.06 2.944.05 7.067.18Loans and advances 23.5716.62 22.0038.35 38.33Current LiabilitiesLiabilities22.0320.26 22.7045.86 54.76Provisions 15.6810.90 16.0527.33 24.10Net Current Assets 18.7733.91 29.3810.155.82Miscellaneous expenses not written0.00 0.010.06 0.461.32Total 100 %100 % 100 % 100 %100 % Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 16. A Project On Bharat Forge Limited15Table 3.2 Common size Income Statement of Bharat ForgeCommon SizeIncome StatementMar 08Mar 07 Mar 06 Mar 05Mar 04IncomeSales (Gross) 100 %100 % 100 % 100 %100 %Less: Excise Duty 7.53 7.947.397.35 8.21Net Sales92.4792.06 92.61 92.6591.79Operating Income3.31 2.764.075.41 5.74Other Income3.86 4.113.250.60 2.24Exceptional Income/(Expenditure)1.32-0.340.000.00 0.00Total Income100.9698.60 99.94 98.6599.76ExpenditureManufacturing Cost 73.0171.04 72.8171.72 69.37Profit before depreciation, interestand tax (PBDIT)27.9527.55 27.1326.93 30.39Depreciation6.06 5.084.48 4.235.36Profit before interest and tax (PBIT)21.8922.48 22.6522.71 25.03Interest4.58 4.183.36 2.753.79Profit before tax (PBT)17.3118.30 19.2919.95 21.23Tax 5.38 6.056.61 6.956.59Profit after tax (PAT) 11.9312.26 12.6813.00 14.64 Analysis and Remarks Analyzing the above mentioned common size statements, the following points are observed. 1. Reserves and surpluses have increased to nearly 50% of the total asset in March 2008, which was nearly 30% in March 2004. 2. Working capital (Current asset Current liabilities), is decreased in FY 2007-08 compared to FY 2006-07. 3. Manufacturing cost is nearly 70% of gross sales. This is nearly constant for last five financial years. 4. Net profit is 12% of gross sale, indicates that Bharat Forge is not a net profit margin based organization. In fact it utilizes its assets (volume based gain). Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 17. A Project On Bharat Forge Limited163.3 RATIO ANALYSIS Table 3.3 Short term solvency ratioBharat ForgeMar Mar MarMar Mar 08 07 0605 04Short Term Solvency RatioCurrent Ratio 1.33 1.84 1.57 1.010.91Quick Ratio 1.05 1.54 1.31 0.770.68Cash Ratio0.13 0.73 0.52 0.040.02 Calculation for Short Term Solvency Ratio of Bharat Forge (FY 2007-08)Current assets1626 .00 Current ratio === 1 .33 Current liabilitie s 1224 .19 Current assets Inventory1626 .00 338 .12 Quick ratio = == 1.05 Current liabilitie s1224 .19Cash 164 .99 Cash ratio === 0 .13Current liabilitie s1224 .19 Remarks 1. Current ratio 1.33 indicates that Bharat Forge has its current liabilities covered 1.33 times. To a creditor or a supplier this is satisfactory as the ratio is greater than 1. 2. It is seen that current ratio was less than 1 in Mar04, which means net working capital was negative. This was not a good sign for a healthy firm. However in the subsequent years current ratios are greater than 1. 3. Quick ratio is the acid test of the company. It is seen that in recent years Bharat Forge has quick ratios greater than 1. This is a very healthy sign of the company as company has sufficient cash in hand. 4. As company like Bharat Forge deals with lots of inventory, as a result a difference (20-30%) between current and quick ratio is observed always. 5. A very short term creditor might be interested in cash ratio. It is observed that in FY 2007-08, cash has decreased significantly from the previous FY 2006-07. This is not encouraging fact to a short term supplier of Bharat Forge. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 18. A Project On Bharat Forge Limited 17Table 3.4 Long term solvency ratio Bharat ForgeMarMar Mar MarMar 0807 06 0504 Long Term Solvency Ratio Total Debt Ratio0.49 0.53 0.48 0.530.59 Debt Equity Ratio 0.87 1.06 0.85 0.941.14 Equity Multiplier*1.95*2.14 1.94 2.132.46 Times Interest Earned Ratio 4.78 5.38 6.75 8.256.60 Cash Coverage Ratio 6.10 6.60 8.08 9.788.01* Equity Multiplier = 1+ Debt equity ratio, however in present case minor difference is observed due to account of deferred taxCalculation for Long Term Solvency Ratio of Bharat Forge (FY 2007-08) Total assets Total equity 2760.76 1473.28Total debt ratio = = = 0.49Total assets2760.76Total debt 1287.49Debt equity ratio === 0.87 Total equity1473.28Total asset2879.01Equity multiplier === 1.95 Total equity1473.28 PBIT 501.97Times interest earned ratio = = = 4.78Interest104.99 PBIT + Depreciation501.97 + 138.94Cash coverage ratio = == 6.10 Interest104.99Remarks1. It is interesting to notice that Bharat Forge maintains a constant total debt ratio for the last five yearswhich is nearly 0.5.2. Equity multiplier = 1 + debt equity ratio. But in this case a minor difference is observed due to deferredtax accounting.3. Time interest ratio 4.78 in FY 2007-08 indicates that company has 4.78 times interest obligationcovered.4. Cash coverage ratio 6.10 indicates BFL has a good capability to generate cash from operations.Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 19. A Project On Bharat Forge Limited 18Table 3.5 Turnover ratioBharat Forge Mar Mar MarMar Mar08 07 0605 04Turnover RatioInventory Turnover Ratio 4.95 4.61 4.67 4.794.45Days Sales in Inventory73.71 79.1278.1076.1882.11Receivable Turnover6.44 7.74 8.66 8.698.52Days Sales in Receivables56.71 47.1442.1742.0042.84Total Asset Turnover 0.80 0.69 0.72 1.321.38Capital Intensity1.26 1.45 1.38 0.760.72 Calculation for Turnover Ratio of Bharat Forge (FY 2007-08)Cost of good sold1674 .34 Inventory turnover === 4 .95Inventory 338 .12365 days365 Days sales in inventory === 73 .71 Inventory turnover 4.95Sales2293 .21 Receivable turnover = == 6 .44 Account receiable356 .29365 days 365 Days sales in receivable === 56 .71Re ceivable turnover 6.44Sales 2293 .21 Total asset turnover = = = 0 .80 Total assets 2879 .01 Total assets2879 .01 Capital intensity = == 1 .26 Sales 2293 .21 Remarks 1. Inventory turnover ratio 4.95 times indicates, Bharat Forge sold off the entire inventory 4.95 times over the year. In other words inventory sits 73.7 days (Days sales in inventory) on average before it is sold. A marginal change is observed in recent years over last year. 2. From days sales in receivables (56.71 days) indicates that on average Bharat Forge takes 56.71 days to collect its credit sales. In recent year (FY 2007-08) this ratio is more. This indicates Bharat Forge took longer time to collect its credit than previous years. 3. Total asset turnover 0.80 indicates for every rupee in assets, Bharat Forge generated Rs. 0.80 in FY 2007-08. It has increased from the past two years but decreased from FY04 and FY05.Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 20. A Project On Bharat Forge Limited 19 Table 3.6 Profitability ratioBharat Forge Mar Mar MarMar Mar08 07 0605 04Profitability RatioProfit Margin 11.93 12.2612.6813.0014.64Return on Asset (ROA)9.50 8.48 9.19 17.1720.23Return on Equity (ROE)18.57 18.1617.7836.5249.72 Calculation for Profitability Ratio of Bharat Forge (FY 2007-08)Net income273.59 Profit margin == 100 = 11.93Sales 2293.21 Net income 273.59 Return on asset (ROA) = =100 = 9.50 Total asset2879.01Net income273.59 Return on equity (ROE) ==100 = 18.57Total equity 1473.28 Du Pont IdentityNet income Sales Assets Return on equity (ROE)= SalesAssets Total equity = Profit margin Total asset turnover Equity multiplier = 11.93 0.80 1.95 = 18.60 Remarks 1. For every rupee in sales, Bharat Forge generates a little less than 12 paisa in profit. This ratio has decreased in recent year from the previous four years which may be a concern for the company. 2. Return on asset (ROA) is a measure of profit per rupee of assets. Though it has increased in FY 2007- 08, it was observed very high in FY 2003-04. 3. Return on equity (ROE) is a true bottom line measure of performance as the goal of a company is to benefit share holders. For the last three years it has been increasing marginally, which may attract more share holders to invest their money in Bharat Forge.Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 21. A Project On Bharat Forge Limited 203.4 COMPARISON WITH PEERTable 3.7 Comparison in short term solvency ratio Bharat ForgeShort TermMahindra ForgeSolvency MarMarMar MarMar Mar080706 0807 06 1.331.841.57 Current Ratio 1.261.73 2.26 1.051.541.31Quick Ratio0.651.05 1.72 0.130.730.52 Cash Ratio0.010.03 0.02 Remarks 1. It is observed that current ratios both for Bharat Forge and Mahindra Forge are nearly same in FY 2007-08 and FY 2006-07. However, quick ratio of Bharat Forge is better than Mahindra Forge. It indicates that Bharat Forge has more liquidity in current asset than Mahindra Forge. 2. Cash ratio is very low for Mhindra. This will discourage short term supplier to supply material to Mahindra Forge.Table 3.8 Comparison in long term solvency ratio Bharat Forge Long TermMahindra Forge Solvency MarMarMar MarMar Mar080706 0807 06 0.490.530.48Total Debt Ratio 0.220.46 0.29 0.871.060.85 Debt Equity Ratio 0.270.84 1.05 1.952.141.94Equity Multiplier1.271.84 2.05 Times Interest Earned 4.785.386.75 0.912.00-0.33 Ratio 6.106.608.08Cash Coverage Ratio1.813.18 0.28Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 22. A Project On Bharat Forge Limited21 Remarks 1. Debt equity ratio of Mahindra Forge is not encouraging in recent year which is 0.27. It means that they are loosing their control. 2. It is observed that Times interest earned ratio was negative for Mahindra Forge in FY 2005-06. It indicated that they did not have their interest obligation coverage during FY04-05. However the ratio is increased in successive two financial years. On the other hand Bharat Forge has a good coverage for interest obligation. Table 3.9 Comparison in turnover ratio Bharat Forge TurnoverMahindra Forge Ratio MarMar MarMar Mar Mar0807 0608 07 06 Inventory Turnover 4.954.614.677.968.08 5.45 RatioDays Sales in73.71 79.1278.1045.85 45.1766.97 Inventory 6.447.748.66Receivable Turnover 9.428.7613.08Days Sales in56.71 47.1442.1738.74 41.6627.90 Receivables 0.800.690.72Total Asset Turnover0.251.13 0.93 1.261.451.38 Capital Intensity4.000.88 1.07 Remarks 1. For the case of Inventory turnover ratio, Mahindra Forge has advantage. Their inventory sits only 46 (FY 08) days on average before it is sold. Whereas for Bharat Forge it is nearly 74 days. 2. For receivable turnover ratio also Mahindra has an edge. They receive their credit sales in 39 days (FY 08) on an average, whereas Bharat takes 57 days on average to collect their credit sales. 3. Total asset turnover is very low (0.25) in FY08 of Mahindra. Though it was good in the past. On the other hand Bharats ratio is nearly constant, indicating their sales are proportional to their assets. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 23. A Project On Bharat Forge Limited22Table 3.10 Comparison in profitability ratio Bharat Forge Profitability Mahindra Forge Ratio MarMarMar Mar Mar Mar080706 08 07 0611.93 12.26 12.68Profit Margin -5.50-4.95-5.16 Return on Asset 9.508.489.19-1.39-5.57-4.80(ROA) Return on Equity18.57 18.16 17.78-1.77 -10.29-6.74(ROE) Remarks 1. Profitability ratios are not at all encouraging for Mahindra Forge. The consecutive negative numbers indicate that they are now a loss making company. On the other hand at the time of global melt down also, Bharat Forges continuous profit corroborates the fact that they are now the market the leader. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 24. A Project On Bharat Forge Limited 23Chapter FOURVALUATION OF STOCK4.1 INTRODUCTION Valuation of stock is done in this chapter. Dividends given by the company for the last tenyears are shown in Table 4.1. Two methods, constant dividend growth and two phasegrowth are considered for this purpose. Assumptions are clearly mentioned for each caseand calculations for each case are shown. At the end the intrinsic value of the stock iscompared with the current market price of the share and verdict is given whether it will be profitable tobuy or sale the share of Bharat Forge. Table 4.1 shows the dividend paid by Bharat Forge in the last tenyears. In Table 4.2, market value is calculated.Table 4.1 Dividend given in the last ten years (May-June) Year 2008 2007 2006 2005 2004 2003 20022001 2000 1999 1998 1997 Dividend 175175150125100 60 3530 50 30 40 40 (%) Dividend per share3.503.50 3.00 2.50 2.00 1.20.7 0.61.00.60.80.8(Rs)**Face value of share = 2 Rs as given in companys Profit and Loss AccountAsokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 25. A Project On Bharat Forge Limited24 Table 4.2 Maket value measure Bharat ForgeMar Mar MarMar Mar 08 07 0605 04 Market Value Measure Number of shares (Crore)22.33 22.3521.7920.3819.52 Earning per share (EPS) 12.25 10.789.50 7.936.40 Dividend per share 3.50 3.50 3.00 2.502.00 Retention ratio0.71 0.68 0.68 0.680.69 Long term growth rate (g) 13.26 12.2612.1625.0134.18 Calculation for Market Value of Bharat Forge (FY 2007-08) Net income273.59 Earning per share (EPS) == = 12.25 Shares outs tan ding 22.33Pr ice per share125.60 Price earning ratio === 10.25 Earning per share 12.25 Market price of share125.60 Market to book ratio = = = 1.90 Book value per share 1473.28 / 22.33 Dividend paid 3.5 22.33 Retention ratio = 1 = 1 = 0.7143Net profit273.9 Long term growth rate (g) = ROE Re tention ratio = 18.57 0.7143 = 13.26 %4.2 CONSTANT GROWTH DIVIDEND MODELAssumptionsi) Expected rate of return (R) = 14.5%ii) Constant dividend growth model Valuation of share of Bharat Forge (Constant Growth Method)D (1+ g ) 3.5 ( 1 + 0.1318 ) Value of a share = == Rs. 300.10 (R g )( 0.145 0.1318 )Verdict: As the intrinsic value (Rs.300.10) of the share is more than current market price(Rs.125.60) of the share, one may buy the share. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 26. A Project On Bharat Forge Limited 254.3 TWO PHASE GROWTH DIVIDEND MODELAssumptionsi) Initial growth (g1) = 13.18 % (as calculated before) (It will continue up to 5 years)ii) Second phase growth (g2) = 10% (from 6th year onwards)iii) Expected rate of return (R) = 14.5% Table 4.3 Calculation of expected dividend and its present value Future Growth Expected PresentYearRate (g1)Dividend* Value 10.1318 3.963.46 20.1318 4.483.42 30.1318 5.073.38 40.1318 5.743.34 50.1318 6.503.30*Expected Dividend = Present Dividend ( 1 + g1 )n where, n = particular yearExpected DividendPresent Value = , where, n = particular year ( 1 + R )nValuation of share of Bharat Forge (Two Phase Growth Method)From 6th year onwards it will be acting as a growing perpetuity. So the price at the end ofyear 5 is given byDiv 6Div 5 ( 1 + 0.10) 6.5 1.1 P5 === = 158.89( R g2 )( 0.145 0.10) 0.045The present value of P5 today,P5158.89 == 80.74(1 + R ) 5 ( 1 + 0.145)The present value of all dividends today = (3.46+3.42+3.38+3.34+3.30+80.74) = Rs. 97.64Verdict: As the intrinsic value (Rs.97.64) of the share is less than current market price (Rs.125.60)of the share, one may sale the share to earn profit.It is interesting to observe that two different models (Constant Growth and Two Phase Growth) give twodifferent intrinsic values of the share, one is higher than market price and one is lesser than market price.This is mainly due to the assumption of growth rate (g2). Variation of Bharat Forge stocks is shown inFig. 4.1.Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 27. A Project On Bharat Forge Limited26Fig 4.1 Variation of stock price of Bharat Forge during last five years[Source: http://www.moneycontrol.com] Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 28. A Project On Bharat Forge Limited27 ChapterFIVECAPITALINVESTMENT DECISION5.1 INTRODUCTIONI nvestment decisions is an important aspect for the growth of the company. Fig. 5.1 shows thatBharat Forge has initiated an expansion plan in Pune, India for close die forging and crankshaftmachining. An out flow of Rs. 540 Cr. (noticed in cash flow statement) due to capitalexpenditure in FY 2007-08 corroborate the facts of expansion project. In this chapter capitalbudgeting decisions are discussed with various techniques namely payback period, net present value,Internal rate of return and profitability index. Average tax of Bharat Forge is calculated for the last fiveyears which is needed in calculating capital budgeting. Having made certain assumptions, NPV, IRR, PIare calculated both for straight-line depreciation and Written Down Value depreciation method.Calculations are shown for each case. And at the end decision are given whether it is profitable inaccepting this project. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 29. A Project On Bharat Forge Limited28 Fig. 5.1 Capacity expansion plan of Bharat Forge [Source: Companys annual report 2007-08, page no. 68] Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 30. A Project On Bharat Forge Limited295.2 CALCULATION OF AVERAGE TAX OF BHARAT FORGETable 5.1 Average tax rate of Bharat Forge Average Tax (Rs Crore)Mar08Mar07 Mar06Mar05 Mar04 PBT396.98359.81314.89 248.08 181.16 PAT273.59240.95206.97 161.63 124.91 Taxes Paid 123.39118.86107.9386.4556.26 Average Tax (%) 31.08 33.03 34.2834.8531.06Table 5.2 Individual tax components of Bharat Forge Individual Tax(Rs Crore) ComponentsMar08Mar07 Mar06 Mar05Mar04 Current Tax 98.20100.73 89.1485.84 53.66 Deferred Tax18.3916.1315.490.61 2.60 Fringe Benefit Tax 6.80 2.00 3.30 - - Total Tax123.39118.86107.9386.45 56.265.3 CAPACITY EXPANSION PLANBharat Forge has initiated an expansion project of close die forging and crank shaft machining at Pune.This expansion plan is discussed by two methods (Straight line depreciation and Written down valuedepreciation method).5.3.1 Straight Line Depreciation MethodFollowing data are collected / assumed for the expansion plani) Capital expenditure = Rs. 540 Cr (From Cash flow account of Bharat Forge 2007-08)ii) Let us assume that revenue will increase by Rs 410 Cr on each yeariii) Assume that rise of operating cost = 70 Cr (nearly 4% of the total operating cost of Bharat Forge)iv) Book value of the machine at the end of 4 year = Rs. 110 Crore (It will be scrapped at that cost)v) Depreciation (Straight line method)vi) Average tax rate 34 % (as calculated in Table 5.1)vii) Expected rate of return R = 15% Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 31. A Project On Bharat Forge Limited 30Table 5.3 Capital Budgeting (Rs. Cr) of Bharat Forge (SL Method) Capital Budgeting Of Bharat ForgeYear 0 Year 1Year 2 Year 3 Year 4 Expansion Plan Investment Cost-540.0110.0 Tax0.0* Change in Net Working Capital-30.030.0# Shipping and Installation Cost -50.0 Cash Flow from Investment Activity-620.0140.0 Income Revenue410.0 410.0410.0 410.0 Expenses70.070.0 70.070.0 Operating Profit 340.0 340.0340.0 340.0 Depreciation (Straight-line)$120.0 120.0120.0 120.0 Earning Before Tax 220.0 220.0220.0 220.0 Tax (@34%)74.874.8 74.874.8 Net Income 145.2 145.2145.2 145.2 Cash Flow From Operating Activity -620.0 265.2 265.2265.2 405.2 (Add Depreciation)Note: * As the Selling price = Book value, no tax is paid# At the end of 4th year, working capital will be + ve (inflow of fund)$ Depreciation (Straight-line) = (620-110)/4= Rs 120.0 Cr per yearCalculation of Pay Back Period(620.0-265.2-265.2) = 89.6 Cr.(89.6*12)/265.2 = 4.05 MonthsSo, Pay back period = 2 years and 4 monthsCalculation of NPV (Net Present Value)265.2265.2 265.2405.2NPV = 620.0 + + ++ ( 1 + 0.15 ) ( 1 + 0.15 ) 2( 1 + 0.15 ) 3 ( 1 + 0.15 )4= 620.0 + ( 230.60 + 200.53 + 174.37+ 231.67 )= 620.0 + 837.17= 217.17Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 32. A Project On Bharat Forge Limited 31Calculation of IRR (Internal Rate of Return)For calculation of IRR, NPV will be zero.Let us assume that, rate is x 265.2 265.2265.2405.2So, 620.0 ++ ++= 0(1 + x ) (1 + x )2 (1 + x ) 3( 1 + x )4By Trial and error,Let us take x = 10%, NPV = 316.270 (too high)To decrease this value we have to increase the value of x.Let us take x = 30 %, NPV = 3.505 (little high)By interpolation (if y is the interpolated value)0.1 0.3 316.27 3.505= 0.1 y316.27 0So, y = 0.30224So, IRR = 30.22%Calculation of PI (Profitability Index) Summation of Cash Flow From Year1837.17PI = == 1.35Cash Outflow At Year 0620.00Table 5.4 Capital Budgeting Decision (Depreciation-Straight Line Method)Pay Back NPV IRRPI PeriodCriteria 2 years NPV > 0 IRR > PI > 1.0(Assume)Discount Rate (15%)Present Case 2 yr 4 months + 217.17 30.22% 1.35RemarksShould NotCan BeCan BeCan Be Be AcceptedAcceptedAcceptedAcceptedAsokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 33. A Project On Bharat Forge Limited32800 If IRR > Discount Rate, NPV = +ve If IRR < Discount Rate, NPV = -ve Net Present Value (Rs, Cr) 600400200+ve NPVIRR = 30.32%0-ve NPV-200 0 1020 304050 Discount Rate (%) Fig 5.2 NPV and IRR of the present analysis (SL)5.3.2 Written Down Value Depreciation MethodFollowing data are collected / assumed for the expansion plani) Capital expenditure = Rs. 540 Cr (From Cash flow account of Bharat Forge 2007-08)ii) Let us assume that revenue will increase by Rs 410 Cr on each yeariii) Assume that rise of operating cost = 70 Cr (nearly 4% of the total operating cost of Bharat Forge)iv) Machine will be scrapped at the end of 4 year at Rs. 110 Crorev) Depreciation (Written Down Value @ 30%)vi) Average tax rate 34 % (as calculated in Table 5.1)vii) Expected rate of return R = 15%Table 5.5 Depreciation based on written down value (WDV)Depreciation Year 0 Year 1 Year 2Year 3 Year 4Written Down Value Value before Depreciation 590.0 413.0 289.1202.4 Depreciation (@30%) 177.0 123.9 86.760.7Value after Depreciation 413.0 289.1 202.4141.7 Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 34. A Project On Bharat Forge Limited 33Table 5.6 Capital Budgeting (Rs. Cr) of Bharat Forge (WDV Method)Capital Budgeting OfBharat Forge Year 0 Year 1 Year 2Year 3 Year 4Expansion PlanInvestmentCost-540.0110.0Tax 10.8*Change in Net Working Capital-30.0 30.0Shipping and Installation Cost -50.0Cash Flow from Investment Activity-620.0150.8IncomeRevenue410.0 410.0410.0 410.0Expenses70.070.0 70.070.0Operating Profit 340.0 340.0340.0 340.0Depreciation (WDV) 177.0 123.9 86.760.7Earning Before Tax 163.0 216.1253.3 279.3Tax (@34%)55.473.5 86.195.0Net Income 107.6 142.6167.2 184.3Cash Flow From Operating Activity -620.0 284.6 266.5253.9 395.8(Add Depreciation)Note: * As the Selling price (Rs 110 Cr) < Book value (Rs. 141.7 Cr), Company will get tax benefit (Tax benefit= 0.34 *(141.7-110) = Rs. 10.78 Cr)As per the calculation shown before the Pay back period, NPV, IRR and PI are tabulated in Table 5.7. Table 5.7 Capital Budgeting Decision (Depreciation-Written Down Value Method) Pay Back NPVIRRPIPeriodCriteria2 years NPV > 0 IRR >PI > 1.0 (Assume)DiscountRate (15%)Present Case 2 yr 3.3 + 222.23 31.00%1.36 monthsRemarksShould NotCan BeCan BeCan Be Be AcceptedAcceptedAcceptedAcceptedAsokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 35. A Project On Bharat Forge Limited34800 If IRR > Discount Rate, NPV = +ve If IRR < Discount Rate, NPV = -ve600 Net Present Value (Rs, Cr)400200 +ve NPV IRR = 31%0-ve NPV-200 010 20 304050Discount Rate (%) Fig 5.3 NPV and IRR of the present analysis (WDV) Analysis and Remarks 1. An expansion project at Pune is analyzed by Straight Line (SL) and Written Down Value (WDV) depreciation methods. It is observed that in both the cases decisions are same. 2. Average tax rate of Bharat Forge is calculated in Table 5.1 which is required for capital budgeting calculation. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 36. A Project On Bharat Forge Limited35 Chapter SIXWORKING CAPITALMANAGEMENT6.1 INTRODUCTIONWorking capital management defines cash cycle and operating cycle (Fig. 6.1). It also defines inventory period, receivable and payable period. It will give an idea whether company is taking short term loan to manage its seasonal variation. In this present chapter operating and cash cycles of Bharat Forge are calculated and attempts have been made tofind out how Bharat Forge is trying to manage its short term requirement.It can be seen from Table 3.5, of Chapter 3 that for Bharat Forge, inventory periods are 73.71, 79.12,78.10, 76.18 and 82.11 days for the 2007-08, 2006-07, 2005-06, 2004-05, 2003-04 financial yearsrespectively. So, average inventory period of BFL for the last five years is 77.84 days.From the same table, receivable periods are 56.71, 47.14, 42.17, 42.00, 42.84 days for the 2007-08,2006-07, 2005-06, 2004-05, 2003-04 financial years respectively. So, average receivable period of BFLfor the last five years is 46.17 days. It is observed that receivable periods for 2005-06, 2004-05 and 2003-04 were nearly constant which were on an average 42 days. However, in the recent year (2007-08), it isincreased 20.3% from the last year (2006-07) and 34.48% from 2005-06 financial years.Similarly payable turnover periods are 138.28, 150.43, 157.11, 176.78 and 208.50 days for the 2007-08,2006-07, 2005-06, 2004-05, 2003-04 financial years respectively. So, average receivable period of BFLfor the last five years is 166.22 days. It is observed that payable period was very high in 2003-04, whichwas 2008.5 days. In recent past BFL is paying its supplier in less time. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 37. A Project On Bharat Forge Limited36Fig. 6.1 Cash flow time line and the short term operating activities of a typical manufacturing firm[Source: Ross et al. 2009] Bharat Forge Limited: Operating and Cash Cycles Average Inventory Period = 77.84 days Average Receivable Period = 46.17 days Average Payable Period = 166.22 days Average Operating Cycle = Av. Inventory Period + Av. Receivable Period = 77.84 + 46.17 = 124.01 days Average Cash Cycle = Av. Operating Cycle Av. Payable Period = 124.01 166.22 = - 42.21 days Remarks: It is interesting to notice that Cash cycle of Bharat Forge is negative. It means that Bharat Forge usages suppliers money for daily operation.It is observed from Table 6.1 that though sales have increased by 16.63% from FY07 to FY08, NetWorking Capital has decreased significantly by 43.92 %. Inventory days are decreased marginally by6.84%. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 38. A Project On Bharat Forge Limited 37 Table 6.1 Comparisons of working capitalFY 2006-07 FY 2007-08Changes (%)Sales (Rs, Cr)1966.152293.21 + 16.63 %Working Capital963.52 540.34 - 43.92 %Inventory Days79.1273.71- 6.84 %Creditors Days 150.43 138.28- 8.08 %Debtors Days 47.1456.71 + 20.30 %6.2 SHORT TERM AND LONG TERM LOANIt is observed from the annual report of Bharat Forge, that Bharat Forge has taken short term loans (Table6.2) from banks under a buyers line of Credit for import of goods, etc. Import of goods is acting as aseasonal variation (Fig. 6.2) in this case.Fig. 6.2 Short term financing to manage seasonal variation [Source: Ross et al. 2009]Table 6.2 Loan taken by Bharat ForgeLoans (Cr)FY 2007-08 FY 2006-07 FY 2005-06Secured Loan 461.58 373.57 381.60Unsecured Loan 825.911028.04 610.86Short Term Loan 88.82 224.39 133.89Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 39. A Project On Bharat Forge Limited38 Chapter SEVEN CONCLUSIONS7.1 SUMMARYA nalysis on Bharat Forge Limited is carried out in this report mainly from financial aspects.It is understood that Bharat Forge is a market leader in forging work not only in India butalso in global market. It has received many accolades. It is observed that when its peersare making losses, Bharat Forge continues making profits. The following conclusions aredrawn based on the analysis on Bharat Forge.i)Bharat Forge Limited is one of the largest forging companies in the world having customers likeDaimler Chrysler, Toyota, BMW, General Motors, Volkswagen, Audi, Renault, Ford, Volvo,Caterpillar, Honda and several others.ii) Its assets and net profit in FY 2007-08 are 2879.01 Cr. and 273.59 Cr. respectively, whereas itsnearest competitor, Mahindra Forge has 974.09 Cr. and -14.17 Cr. (loss) respectively.iii)Net profits of Bharat Forge have been increasing constantly from 2003-04 to 2007-08 with agrowth of nearly 15%, which is a healthy sign of the company.iv) As company like Bharat Forge deals with lots of inventory (volume based company), a difference(20-30%) between current and quick ratio is observed always.v)It is observed that two different models (Constant Growth and Two Phase Growth) give twodifferent intrinsic value of the share, one is higher than market price and one is lesser than marketprice. This is mainly due to the assumption of growth rate (g2).vi) Bharat Forge has initiated an expansion project of close die forging and crank shaft machining atPune. Straight line depreciation and Written down depreciation method gives similar opinionwhether the projects can be accepted.vii)It is observed in working capital management that Bharat Forges cash cycle is negative. Itindicates that Bharat Forge efficiently uses its suppliers money in its operation. Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai 40. A Project On Bharat Forge Limited39References1. Official website of Bharat Forge Limited (http://www.bharatforge.com)2. Annual reports (2007-08, 2006-07, 2005-06, 2004-05 and 2003-04) of Bharat Forge Limited3. Web site (http://money.rediff.com)4. Web site (http://www.moneycontrol.com)5. Corporate Finance, Stephen A. Ross, Randolph W. Westerfield, Jeffrey Jaffe and Ram Kumar Kakani, 8th Edition, 2009, Tata Mcgraw Hill Publication, New Delhi.6. Fundamentals of Financial Management, Gregory A. Kuhlemeyer, 11th Edition, 2001, Printice Hall.7. Class Note on Corporate Finance, by Prof. Ram Kumar Kakani, PGCBM 15 Course, XLRI, Jamshedpur, 2009.AbbreviationBFLBharat Forge LimitedBSEBombay Stock ExchangeEPSEarning Per ShareFY Financial YearIRRInternal Rate of ReturnIV Intrinsic value (of Share)NPVNet Present ValueNSENational Stock ExchangePATProfit After TaxPBTProfit Before TaxPBIT Profit Before Interest and TaxPI Profitability IndexROEReturn On EquitySL Straight Line (Method of Depreciation)WDVWritten Down Value (Method of Depreciation) Asokendu Samanta (SMS ID 104118), PGCBM 15, Center: Powai, Mumbai