investments project

28
Post-Graduate Program in Software Enterprise Management Indian Institute of Management, Bangalore Investments – Q1 2009-10 Prof. M.S. Narasimhan Group Project Submission Analysis and Valuation for Bharat Heavy Electricals Ltd. Submitted by Group – 15 Amit Bhalotia 2008007 Dharmesh Dipak Gandhi 2008019 Swapna Acharla 2007064

Upload: dharmesh-gandhi

Post on 07-Dec-2014

1.444 views

Category:

Documents


0 download

DESCRIPTION

Investments projects BHEL

TRANSCRIPT

Page 1: Investments Project

Post-Graduate Program in Software Enterprise Management

Indian Institute of Management, Bangalore

Investments – Q1 2009-10

Prof. M.S. Narasimhan

Group Project Submission

Analysis and Valuation for

Bharat Heavy Electricals Ltd.

Submitted by Group – 15

Amit Bhalotia 2008007

Dharmesh Dipak Gandhi 2008019

Swapna Acharla 2007064

Page 2: Investments Project

Investments Group Project Group 15

Page 2 of 28

Table of Contents

Industry Analysis .....................................................................................................................................3

OVERVIEW OF INDIAN CAPITAL GOODS INDUSTRY............................................................................3

PAST & FUTURE PERFORMANCE OF THE INDUSTRY...........................................................................3

INDUSTRY ANALYSIS........................................................................................................................3

INDUSTRY – KEY RATIO ANALYSIS...................................................................................................3

INDUSTRY – COMPARITIVE ANALYSIS .............................................................................................4

Outlook ...............................................................................................................................................5

Competitiveness Analysis of Indian Capital Goods sector ..............................................................5

Business Environment Competitiveness Issues ..................................................................................6

TRADE POLICY ISSUES .....................................................................................................................6

EXPORT PROMOTION POLICY ISSUES .............................................................................................7

INDUSTRIAL STRUCTURE ISSUES.....................................................................................................7

Conclusion from Industry Analysis......................................................................................................8

Company Analysis .................................................................................................................................11

Products & Services ..........................................................................................................................11

Financials...........................................................................................................................................12

Valuation...........................................................................................................................................13

Technical Analysis .................................................................................................................................18

Momentum Indicators ......................................................................................................................19

Conclusions from Technical Analysis ................................................................................................20

Derivatives ............................................................................................................................................21

Futures Analysis ................................................................................................................................21

Options Analysis................................................................................................................................22

Time Variation...............................................................................................................................26

Conclusions .............................................................................................. Error! Bookmark not defined.

References ............................................................................................................................................28

Page 3: Investments Project

Investments Group Project Group 15

Page 3 of 28

Industry Analysis

OVERVIEW OF INDIAN CAPITAL GOODS INDUSTRY

PAST & FUTURE PERFORMANCE OF THE INDUSTRY

For the purpose of this study, BHEL has been classified under the Capital goods industry (defined as

product / equipment of high value, durable economic asset life > 3 years, used as plant and

machinery for agricultural, industrial and commercial purpose in production / service delivery

process).

INDUSTRY ANALYSIS

Capital goods industry despite sitting on healthy order book undergoes the strains of economic

slowdown with lower pace of order execution as well as lower order inflow especially in

manufacturing and private sector infrastructure investment. While the lower pace of order

execution was pinching the revenue booking of the industry the lower order flow escalates the

competition and pressure on margin. On the background the performance of capital goods sector

players has been mixed for the quarter ended Jun 2009.

The aggregate of other 25 companies forming part of BSE Capital Goods (CG) Index recorded decent

12% rise in revenues to Rs 26866 crore. The operating margin has been flat at 11.5% thus facilitating

12% growth in operating profit to Rs 3088 crore. The growth in PBT was moderated to 6% at Rs 2927

crore. The taxation was lower by 14% to Rs 800 crore, which facilitated relatively better 18% rise in

net profit to Rs 2127 crore. The aggregates were powered by powerful show by handful of players

led by industry heavy weights of Larsen & Toubro, BHEL and Crompton Greaves.

INDUSTRY – KEY RATIO ANALYSIS

INDUSTRY AVERAGES 2009 2006 2005 2004 2003 2002 2001 2000 1999

No. of Companies 17 8 9 11 14 11 13 13 9

Key Ratios

Debt-Equity Ratio 0.18 0.17 0.19 0.22 0.26 0.35 0.39 0.34 0.35

Long Term Debt-Equity Ratio 0.17 0.15 0.16 0.18 0.21 0.2 0.2 0.21 0.23

Current Ratio 1.53 1.52 1.53 1.58 1.61 1.5 1.39 1.37 1.37

Turnover Ratios

Fixed Assets 3.94 3.85 2.98 2.62 2.45 2.41 2.24 2.48 2.72

Inventory 5.48 5.28 5.1 5.02 4.59 4.23 3.76 4.07 4.15

Debtors 2.7 2.62 2.37 2.4 2.15 1.97 1.84 2.08 2.33

Interest Cover Ratio 19.94 23.77 13.98 10.55 7.39 5.48 2.26 4.14 5.88

PBIDTM (%) 16.93 17.24 15.53 14.46 13.99 13.51 8.11 12.56 14.29

PBITM (%) 15.3 15.62 13.5 12.23 11.55 11.18 5.39 10.02 12.05

PBDTM (%) 16.17 16.58 14.56 13.3 12.43 11.47 5.73 10.14 12.24

CPM (%) 11.32 11.56 9.91 9.17 8.12 8.62 5.66 7.22 8.1

APATM (%) 9.69 9.94 7.88 6.95 5.68 6.28 2.94 4.68 5.87

ROCE (%) 34.68 34.87 25.72 21.49 19.15 17.93 8.26 18.08 23.74

Page 4: Investments Project

Investments Group Project Group 15

Page 4 of 28

RONW (%) 25.99 25.86 17.82 14.69 11.38 12.87 5.93 10.95 15.47

Source: Capitaline

INDUSTRY – COMPARITIVE ANALYSIS

FY09 LARSEN &

TOURBO BHEL

CROMPTON

GREEVES

THERMAX

LTD

s Mar ' 09 Mar ' 09 Mar ' 09 Mar ' 09

Adjusted EPS (Rs) 45.05 59.59 13.93 32.13

Dividend per share 10.5 15.25 2 5

Operating profit per share (Rs) 70.72 75.75 20.6 41.39

Net operating income per share (Rs) 578.06 399.18 127.64 259.79

Profitability ratios

Operating margin (%) 12.23 18.97 16.14 15.93

Gross profit margin (%) 11.39 17.65 15.17 14.89

Net profit margin (%) 10.06 13.87 8.4 9.09

Adjusted cash margin (%) 8.5 15.41 11.76 13.13

Adjusted return on net worth (%) 21.21 27.07 41.6 39.79

Leverage ratios

Long term debt / Equity 0.43 0.01 0.04 -

Total debt/equity 0.52 0.01 0.04 -

Owners fund as % of total source 65.47 99.12 95.81 100

Fixed assets turnover ratio 6.23 4.48 4.25 5.29

Liquidity ratios

Current ratio 1.3 1.38 1.32 1.23

Quick ratio 0.96 1.09 1.13 1.01

Inventory turnover ratio 6.01 3.88 17.88 12.2

Payout ratios

Dividend payout ratio (net profit) 20.58 30.54 21.59 24.26

Coverage ratios

Adjusted cash flow time total debt 2.23 0.02 0.09 -

Financial charges coverage ratio 6.35 134.86 28.07 55.04

Component ratios

Material cost component (% earnings) 27.51 53.22 66.28 68.29

Selling cost Component 0.92 1.12 4.7 2.86

Exports as percent of total sales 21.7 4.8 24.77 20.82

Import comp. in raw mat. consumed 44.34 27.73 15.74 16.49

Long term assets / total Assets 0.35 0.04 0.26 0.28

Source: Rediff.com

The Transmission and Distribution equipment industry especially transformers that has seen

aggressive capacity expansion by players resulted in increased supply leading to heightening of

competition in the market place. Moreover the competition from Korean and other overseas players

has increased with global slowdown on international competitive bidding tenders. This increased

competition has resulted in sharp fall in prices of products/ projects affecting T&D equipment

manufacturers as well as T&D turnkey project service players.

China’s power equipment manufacturers, leveraging their lower

costs and shorter delivery periods, have begun hitting Indian

majors like BHEL where it hurts most—and are walking away with

orders worth thousands of crores of rupees. India plans to add

90,000 MW during the 11th Five- Year Plan ending March 31,

2012. According to one estimate, by McKinsey & Co., India needs

Page 5: Investments Project

Investments Group Project Group 15

Page 5 of 28

315- 335 GW (1 GW=1,000 MW) by 2017 if it has to grow at 8 per cent over the next 10 years. In this

background, the market for power equipment has become very lucrative and there’s a lot of action

taking place. While Chinese companies have bagged contracts for an estimated 18,000-20,000 MW

of equipment to be supplied over the next 8- 10 years, BHEL’s market share actually fell by a little

over a percentage point to 63.68 per cent in 2007-08. Few complain about the quality of BHEL’s

equipment. But its delivery record is the culprit. The PSU power equipment major is sitting on orders

worth Rs 85,500 crore, but is plagued by tardy implementation that is holding back incremental

capacity addition. Today, its production lines are stretched and it often ends up paying huge

penalties for delays, while the Chinese companies invariably deliver on time.

There is, thus, a yawning gap between the demand and supply of

electricity generating equipment, and given current trends, this is likely

to grow as many more power projects are conceived of and

implemented, both in the public and private sectors. Not surprisingly,

foreign power equipment suppliers, like ABB (Sweden), Ansaldo (Italy),

Doosan (South Korea), Hitachi and Toshiba (Japan) and Power

Machines (Russia), are staking out the Indian market. The ground

reality is that BHEL, which is struggling with capacity constraints— a

function of flawed planning— is hard put to maintain its existing

market share of about 65 per cent. It has already lost several large

contracts, most notably the Tata promoted ultra mega power projects

(UMPP) at Mundra to Japanese rival Toshiba Corporation. A number of

private power projects may switch to Chinese suppliers, because their equipment is a lot cheaper;

and, more importantly, they deliver in about 30 months.

Outlook

Capital goods sector is the major sufferer of slowdown in private investment on the back of

economic slowdown. Now with improvement in macroeconomic indicators there are signs of

positives in most of the key sectors although certain industrial segments continue to face stiff

challenges in driving demand. With crude oil prices showing signs of stability/ hardening, renewed

interest is expected in oil exploration and production not only in the country but also in Gulf there by

giving push for renewal of infrastructure building activity in that

region. Indian capital goods sector having greater interest in

building infrastructure of Middle East countries are expected to

gain if that happens.

A new stable government in place also lend confidence among

private players to invest especially in infrastructure development

such as roads, and power. Though short-term outlook is cloudy the

long-term outlook for the sector is good with renewal of private

investment to back up the public sector spending in the country as

well as infrastructure build up in overseas markets

Competitiveness Analysis of Indian Capital Goods sector

Page 6: Investments Project

Investments Group Project Group 15

Page 6 of 28

The study of the performance of the Capital Goods sector reveals that its fortunes are inextricably

linked with that of the overall Indian industry. High degree of correlation between the performances

of the two sectors is further accentuated by high elasticity of Capital Goods industry to changes in

industry growth. The Capital Goods value added contributes a fairly constant proportion (9-12%) of

the total manufacturing value added, thus establishing that manufacturing as the key end-user

sector of Capital Goods drives the performance of the latter. Another key determinant of the

demand for Capital Goods is the gross investment undertaken in the economy. The apparent

consumption of Capital Goods constitutes a constant share (17-21 %) of the total Gross Domestic

Investment in the country. On the supply side the output of Capital Goods is determined by

investments in Capital Goods sector and capacity utilization. The investments in the Capital Goods

sector have declined with the decline in the relative profitability of the Capital Goods sector with

respect to other sectors. The export performance corroborates the inward focus of Capital Goods

industry as less than one-tenth of its sales is directed to exports.

Business Environment Competitiveness Issues

TRADE POLICY ISSUES

� The raw materials used are largely domestic in origin. With the dismantling of various price

controls on key inputs, Indian Capital Goods manufacturers now procure raw materials at

market prices, which move in line with international prices. The raw material price indices

have risen faster than the machinery price index. It is difficult for the Indian Capital Goods

manufacturers to pass on the rise in prices to the customers, thereby impacting their

profitability. However the rising cost of raw materials has prodded only a few Indian

manufacturers to resort to value engineering techniques for efficient raw material usage and

cost reduction. The quality of raw materials is also not up to the international standards in

terms of dimensional tolerances and metallurgical properties, and this, in turn, affects the

quality of the final product.

� There is comparatively high incidence of indirect taxation (excise duty, octroi duty/entry tax,

Merit duty, central sales tax, sales tax, service tax etc.) in the case of the Indian Capital

Goods sector when compared to taxes faced by Capital Goods sectors of other nations.

Imposition of surfeit of taxes on Capital Goods sector increases the final price to the end

consumer, thereby stifling demand. The cost disadvantage due to indirect taxes to Indian

Capital Goods manufacturers can be as high as 24 percent in certain cases. Combining above

cost disadvantages with the high cost of finance and infrastructure inadequacies, the

domestic Capital Goods producers suffer from an overall cost disadvantage upto 34 per cent

against the imports.

� Inversion of duty structure (higher import duty on select raw materials like copper, rubber

components etc. compared to that of finished Capital goods import) results in a reduced

effective protection rate for the electrical segment as a whole.

� Zero-duty imports for projects like refinery, fertilizer etc. puts the domestic Capital Goods

industry at a clear disadvantage. The purchase preference in favour of public sector

enterprises results in distortion of the market mechanism. It deprives the private sector

firms of a level playing field and also erodes the profitability of the public sector enterprise.

Page 7: Investments Project

Investments Group Project Group 15

Page 7 of 28

EXPORT PROMOTION POLICY ISSUES

� Export transaction costs for Indian Capital Goods industry are among the highest in the

world. Heavy transaction costs not only increase the price of the final export product, but

also result in inordinate delays in export fulfilment, thus affecting export competitiveness.

According to available studies, total cost of transaction of engineering goods in India works

to around 10 per cent of the total export earnings. It is further estimated that if the

procedural complexities were eliminated, then the export sales of Indian Capital Goods is

likely to go up significantly (by 28 per cent as per Exim Bank estimates)

� Indian Capital Goods industry also lags in strong institutional mechanisms for export credit

and promotion. Credit periods in international markets ranges from 90 to 360 days at

interest terms varying from 0.25 to 4 per cent with 1 to 3 years moratorium. In India the

interest rates vary from 6.5 to 10 per cent. The Export–Import Bank today raises money at

commercial rates from the market and is unable to offer competitive rates

� Indian firms, in general, lack export thrust in their marketing strategies. The emergence of

global market, through lowering of tariff barriers, has led to blurring of margins between

domestic and export markets. Very few Indian firms have a global mindset. The focus is

largely on the domestic market; exports gain importance only in case of fall in domestic

demand

INDUSTRIAL STRUCTURE ISSUES

� The ownership pattern in Indian Capital Goods Industry is marked by the dominance of

Public Sector Enterprises (PSEs) in heavy engineering, machine tools, boiler manufacturing,

while private firms prevail in industrial machinery segments such as cement, sugar and most

other non-electrical machinery. The impending privatization of these large PSEs would

radically change the industry structure. The firm structures and their ownership pattern at

the end of the privatization process would significantly affect the development of this sector

in the future.

� Indian Capital Goods manufacturers have working capital requirements as high as 45 per

cent of net sales (against global benchmark of 15 per cent). High interest rate regime in India

results in a substantial 7 to 8 per cent interest rate differential relative to the reference

countries, amounting to 3.1 - 3.6 % capital cost disadvantage due to interest differential and

0.9 per cent due to higher working capital requirement.

� The quality of infrastructure (transport, communication and power) is poor, thus affecting

competitive delivery schedules and increasing operating costs. The delivery time of locally

made Capital Goods in many cases is 1.5 to 2 times longer than in industrialized nations.

Companies tend to lose orders on delivery schedules. Inland transport is slow, although the

railroad density is among the highest in the world. The cost of electric power is comparable

to that in other nations, but the reliability is poor. Many Indian Capital Goods firms have set

up their own captive power plants to obviate the problem. This has added to the costs.

Overall the infrastructure inadequacies are estimated to translate into 5 per cent cost

disadvantage for Indian Capital Goods manufacturers’ vis-à-vis foreign manufacturers.

� Indian Capital Goods sector is characterized by a large width of products (almost all major

Capital Goods are domestically manufactured) - a legacy of import-substitution policy. This is

reflected in the import and export weights calculated for the various reference and

Page 8: Investments Project

Investments Group Project Group 15

Page 8 of 28

benchmark countries. Low values for both weights would indicate an inward oriented

economy focused on catering only to its demand through domestic production. In the case

of India, the import weight works to 21 percent, while the export weight is 7 percent. A case

in point is the vibrant German Capital Goods sector, which has an import weight of 32

percent and export weight of 41 percent with a self-sufficiency of 115 percent. Even nations

with advanced Capital Goods sector do not produce the entire range of Capital Goods, but

instead focus on select segments or sub segments. The Indian Capital Goods sector, on the

other hand, lacks sufficient depth largely due to low demand sophistication of the Indian

market, thus, resulting in comparatively low competitiveness. The case on hand, BHEL, has

been making equipment of assorted sizes and specifications because of lack of other orders.

Its ability to deliver was hampered by such customized orders and the absence of bulk

orders. If it standardizes its specifications and sizes, like Chinese do, it can easily ramp up its

capacity

Conclusion from Industry Analysis

Investors, however, remain divided about BHEL’s long-term prospects: While accounting for the

slowdown in fresh investments on capacity creation, it is noted that BHEL has a strong order book

and that should stand it in good stead. However, with the larger part of orders from central and

state utilities completed, the private sector is likely to dominate going ahead. These players prefer

Chinese manufacturers, which promise better delivery terms (28 months) and quote 25 per cent

lower prices. So, retaining market share might prove to be difficult for BHEL

Capital goods showed a spectacular performance with 11.8% growth compared to 7.8% growth in

Jun’08. In Apr-Jun’09 they declined to 1.0% compared to 7.9% growth in the previous period

<Swapna ---- what is the conclusion of the industry analysis ? what is the learning from it for

company analysis? ADD Appropriate FOOTNOTES>

<DO WE NEED THIS?>

Page 9: Investments Project

Investments Group Project Group 15

Page 9 of 28

<THESE ARE SOME POINTS I HAVE COME ACROSS, SHALL I GO AHEAD & SUBSTANTIATE THEM WITH DATA?>

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.

BHEL is again the best in terms of EBITDA as % of sales.

BHEL’s operating expenses has been well managed over the years and hence its EBIT is better than its

competitors, closely followed by L&T.

ØBHEL’s fixed asset has been the lowest which shows less money is tied in fixed asset as compared to others.

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

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.

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

ØBHEL’s ROE has been better than other players over the years but finally all are on the same platform.

Thermax has bettered all other companies due to smaller asset base and greater revenues from its operations.

At the end, it is BHEL which has outsmarted others due to less COGS and S&G expenses as compared.

ØC&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.

The smaller players, Thermax and C&G have been managing their inventory efficiently and it is above the

industry average

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.

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

Page 10: Investments Project

Investments Group Project Group 15

Page 10 of 28

Ø 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.

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.

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.

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.

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

Page 11: Investments Project

Investments Group Project Group 15

Page 11 of 28

Company Analysis

Bharat Heavy Electricals Limited (BHEL) is one of the largest engineering enterprises of its kind in

India. BHEL is the largest domestic capital goods manufacturer in India and the 12th largest in the

world. The international competitors of BHEL are General Electric, Siemens, Alsthom and ABB. BHEL

offers a wide spectrum of equipment, systems and services in the field of power, transmission,

industry, transportation, oil & gas, non-conventional energy sources and telecommunication. Power

constitutes 52.5 per cent of its business. The company has 14 manufacturing divisions, 8 service

centers and 4 power sector regional centers. Its first plant was set up at Bhopal in 1956 under

technical collaboration with AEI, UK followed by three more major plants at Hardwar, Hyderabad

and Tiruchirapalli with Russian and Czechoslovak assistance.

Products & Services

BHEL manufactures over 200 products under 30 major product groups. The company has installed

equipment for over 64,000 mw of power generation for utilities, captive and industrial users. Its

strengths are comparable product range and cost competitiveness with foreign manufacturers. The

company enjoys a crucial advantage of depreciated assets. The company is cost-competitive when it

comes to power plant equipment and has bagged a number of power project orders placed in India

against open international competitive bidding.

The company has joint venture with Siemens for servicing old Indian fossil fuel power plants and

with GE for designing of heavy-duty gas turbines. A thirty-two thermal power stations equipped with

Bhel’s generating sets have been given productivity awards by the power ministry. Of these power

stations, eight have received gold medals. The awards have been given for meritorious and efficient

performance based on account of reduced inputs.

Bharat Heavy Electricals is mulling to pick up equity stake or even buy out forgings ventures in

Eastern Europe and China. BHEL’s chairman and managing director, K Ravi Kumar said the company

was looking at a Romanian firm and others in East Europe. He also said that Chinese firms are also

being looked at. He further said that the company was also keeping its options open on the idea of

picking up stake in the proposed Areva-Bharat Forge forgings venture. By adopting this strategy,

BHEL aims at blocking some capacity to tide over a shortage of forgings and casting being faced by

the company.

Company announced an investment of Rs 120 billion over the next four years to pick up equity in

power projects and to boost its capacity to support the generation of about 20,000 MW. The

company said that funding will come from internal accruals as BHEL is a cash-rich company. BHEL’s

current manufacturing capacity can support power generation of 10,000 MW. It includes 2,500 MW

of hydro electricity production, and 500 MW captive power plants for the industrial sector. A

thousand MW is exported and the power plants coming up can generate 6,000 MW. By the end of

this fiscal, the company hopes to make equipment for generating 15,000 MW.

As part of India’s largest solar power-based island electrification project in india, Bharat Heavy

Electricals (BHEL) has successfully commissioned two grid-interactive solar power plants of 100 KWp

Page 12: Investments Project

Investments Group Project Group 15

Page 12 of 28

each in Lakshadweep. With this, the company has commissioned a total of eleven solar power plants

in the Lakshadweep islands, adding over 1 MW of solar power to the power generating capacity of

the coral islands in the Arabian Sea. The plants have been set up at Chetlat and Amini islands of

Lakshadweep. BHEL has earlier commissioned solar power plants of various ratings up to 150 KWp at

the islands of Agatti, Andrott, Bangaram, Bitra, Kadmat, Kalpeni, Kavaratti, Kiltan and Minicoy.

Bharat Heavy Electricals (BHEL) has achieved yet another milestone in the Middle East region with a

prestigious export order for two gas turbine generating units of 126 MW each from the Sultanate of

Oman. Valued at Rs 3,750 million, the order envisages supply and supervision of erection and

commissioning of two numbers state-of-the-art gas turbine generating units of 126 MW each for a

power project being set up by Petroleum Development Oman (PDO) at Amal, nearly 700 kms from

Muscat.

Company has secured prestigious contract worth Rs 40.15 billion (USD 845 million) from Hindalco

Industries. The order is for the supply and erection of the main plant package for its upcoming

captive power plant (6x150 MW) at Aditya Aluminium in Sambalpur district of Orissa. The order

comes close on the heels of an order placed on BHEL by Hindalco recently for a similar boiler and

turbine generator package for its captive power plant at Mahan Aluminium in Singrauli district of

Madhya Pradesh

Financials

Annual results for FY2008-09

Description Amount(Rs. in

lakhs)

Net Sales/Income from Operations 2623419.00

Other Operating Income 62444.00

Increase/Decrease in Stock in trade and work in progress -115154.00

Consumption of Raw Materials 1712039.00

Employees Cost 411279.00

Depreciation 33427.00

Other Expenditure 235114.00

Total Expenditure 2276705.00

Profit from Operations before Other Income, Interest & Exceptional Items 409158.00

Other Income 78798.00

Profit before Interest & Exceptional Items 487956.00

Interest 3071.00

Profit after Interest but before Exceptional Items 484885.00

Profit(+)/Loss(-) from Ordinary Activities before tax 484885.00

Tax Expense 171064.00

Page 13: Investments Project

Investments Group Project Group 15

Page 13 of 28

Net Profit(+)/Loss(-) from Ordinary Activities after tax 313821.00

Extraordinary Items -

Net Profit (+) / Loss (-) for the period 313821.00

Dividend (%) 170

Face Value (in Rs.) 10.00

Paid-up Equity Share Capital 48952.00

Reserves excluding Revaluation Reserves 1244929.00

Basic EPS before Extraordinary items (in Rs.) 64.11

Diluted EPS before Extraordinary items (in Rs.) 64.11

Basic EPS after Extraordinary items (in Rs.) 64.11

Diluted EPS after Extraordinary items (in Rs.) 64.11

Public Shareholding (Number of Shares) 158009600.00

Public Shareholding (%) 32.28

Promoter & Promoter group Number of Shares Non-encumbered 331510400.00

Promoter & Promoter group Shares Non-encumbered (as a % of total shareholding of

Promoter and Promoter Group) 100.00

Promoter & Promoter group Shares Non-encumbered (as a % total share capital of

the company) 67.72

Valuation

At current market price, stock is trading at 22.68 P/E multiple of its FY2010 estimated earnings. We

recommend investors to buy “BHEL” with medium to long term investment horizon.

Valuation Model (all calculations based on 2008 annual reports)

• Multi-Stage growth model

• Revenue Projection from 2007-08 annual report and 11th 5 year plan projections

• Cost model from historical data and its dependence on revenue by regression

• Verification of the cost model by looking at R2 value

• Historical dividend policy.

• Terminal distribution of surplus reserves as dividend.

• At the end a stable growth

• Discount rate estimated by CAPM on industry

• Rf taken as 90-day t-bill of RBI

• Rm taken as market return since 2001

• β of industry taken . Calculations shown below.

Company Beta equity Debt/Equity MktCap Beta assets

ALSTOM 0.170695078 0 3,443.15 0.170695078

BHEL 0.546713639 0.01 107,758.00 0.541300633

Page 14: Investments Project

Investments Group Project Group 15

Page 14 of 28

Crompton 0.07584418 0.04 10,347.71 0.072927096

Amaraja 0.051710637 0.7 979.97 0.030418022

Beta asset avg 0.487245651

Debt/Equity 0.017771062

Beta equity

industry 0.495904523

Rm 21.10%

2001

onwards

Rf 4.5842%

Re 12.78%

From the annual report the

• Capacity will go up from 10000 MW to 15000 MW in 2009.This will further go up to 20000

MW in 2012.

• Looking at the huge order backlog and revenue visibility it is apparent that capacity is the

bottleneck here.

• The revenue is expected to double by 2013 looking at the doubling of the capacity. This is in

line with the eleventh plan.

• A total of 4200 crore capital investment in the process.

• The investment is assumed to be put equally in 4 years from 2009 to 2012.

• The depreciation is calculated and is retired over a period of 10 years. Using straight line

method.

Cost Item Intercept X-variable R2

Raw Materials -548.14 0.5332 0.99

Power & Fuel Cost 145.23 0.0066 0.96

Employee Cost 1032.81 0.0750 0.57

Other

Manufacturing

Expenses

74.05 0.0987 0.98

Selling and

Administration

Expenses

-88.75 0.0461 0.86

Miscellaneous

Expenses 626.56 0.0000 0.01

Page 15: Investments Project

Investments Group Project Group 15

Page 15 of 28

• Except Misc expenses all others are linearly correlated. Since misc expenses don’t have

much of a linear relation with net sales, they are assumed to be constant at the 2008 value.

• The investments are assumed to be invested in some liquid mutual funds (7%) that would

earn something above the t-bill rate.

• The growth rate till 2012 is assumed to be 25%. It is then expected to drop a little to 15%

before stabilizing to 10% growth.

• Post the 15th year stable growth rate model is applied.

Ratios

Fixed Asset Turnover Ratio 18.74

Inventory/Sales 0.29

Receivable/Sales 0.62

Current Liabilities/Expenses 1.00

Dividend Payout Ratio 0.26

Cost of Equity 12.78%

Present value of 10 year Dividend 216

Present value of 11-15 year Dividend 122

16-inf 2041

Residual Value 436

Total Value 2815

Market Price (as of July 2nd

2008) 2056.55

Book Value as on March 2008 220.1

EPS as on March 2008 55.82

Price - Earning Ration as on July 2, 2008 36.84

Interest on investments 7%

Recommendation BUY

Page 16: Investments Project

Investments Group Project Group 15

Page 16 of 28

Limitations of the model: Sensitive to the stable growth rate chosen. Small variations in the terminal

growth rate lead to large variations in the estimates of price.

Alternative Valuation Model

Based on PEG ratio: This is taking price as on 2nd July, 2008

PEG ratio as on 2nd July,2008 Growth rate for next 3

years

PEG

Ratio

Recommendation for July 2,

2008

At expected growth rate for next

3 years 25 1.47 SELL

PEG of 1 is typically fairly valued 20 1.84 SELL

15 2.46 SELL

As on 21st Aug 2009

PE ratio(for earnings

2009)

PEG ratio at 30%

growth

PEG ratio at 25%

growth

52 wk Low 984 13.81548262 0.460516087 0.552619305

52 wk High 2405 33.76649969 1.12554999 1.350659988

Current price(as on 21st

Aug,2009)

2297

.8 32.26139833 1.075379944 1.290455933

Based on Reliance Money analyst report (Based on 2009 earnings and 2010, 2011

estimated earnings)

Comparison FY11 forward PE multiple

Industry 22

BHEL 19.02129617

Recommendation BUY as on 21st Aug 2009

Page 17: Investments Project

Investments Group Project Group 15

Page 17 of 28

Reliance Money Report and calculations

Year 2008 2009 2010 2011

Net Sales 193046.4 248,645.90 314,636.60 385,115.20

%Growth 12% 28.80% 26.50% 22.40%

EBIDTA 33191.8 40,259.80 58,552.30 73,347.30

%Growth 2.80% 21.30% 45.40% 25.30%

Other Income 14447.6 8,609.30 10,639.60 12,921.30

Interest 354.2 412.9 517.1 611.2

Dep 2972.1 3,163.80 4,975.70 5,531.00

PBT 44313.1 45,292.30 63,699.10 80,126.40

%Growth 18.60% 2.20% 40.60% 25.8

Tax 19,620.50 15,852.30 22,294.70 28,044.20

Deferred tax -4027.7 -951.1 -1,274.00 -1,602.50

Adj PAT 28,720.30 30,391.10 42,678.40 53,684.70

%Growth 18.4 6.30% 40.40% 25.80%

Extraordinary -17.2

Reported PAT 28,703.10 30,391.10 42,678.40 53,684.70

%Growth 18.4 6.20% 40.40% 25.80%

Div% 152.5 245 250 270

EPS 58.4 62.1 87.2 109.7

BVPS 220.1 268 341.1 81.1

Dividend 7465.18 11993.24 12238 13217.04

Equity Cap 4,895.20 4,895.20 4,895.20 4,895.20

Reserves 102,846.90 126,313.10 162,066.60 208,826.40

Net Worth 107,742.10 131,208.30 166,961.80 213,721.60

Unsecured Loans 951.8 900.8 900.8 900.8

Total Loans 951.8 900.8 900.8 900.8

Total Liability 108,693.90 132,109.10 167,862.60 214,622.40

Net Block 16,392.90 26,835.50 28,298.00 31,126.20

Investments 82.9 82.9 82.9 82.9

Deferred Tax Assets 13,379.30 12,428.20 11,154.20 9,551.70

Inventory 57,364.00 71,934.80 88,084.20 105,984.80

Debtors 119,748.70 169,217.40 193,151.90 229,999.30

Cash Balance 83,860.20 83,923.50 133,257.80 182,969.80

Other CA 16,074.30 13,405.70 13,405.70 13,405.70

Current Liabilities 165,764.50 205,471.40 257,481.20 313,468.60

Provisions 32,443.90 40,247.40 42,090.80 45,029.30

NCA 78,838.80 92,762.60 128,327.60 173,861.60

Total Assets 108,693.90 132,109.10 167,862.60 214,622.40

Dividend growth rate 60.66% 2.04% 8.00%

Page 18: Investments Project

Investments Group Project Group 15

Page 18 of 28

Technical Analysis

Yahoo Finance & iCharts.in were used to

generate the technical charts for BHEL.

From the 10 year and 5 year charts, we

observe that the company saw huge growth

from 2001 to mid-2006; and since then it

has been trading in a band (with support line

trending downwards). This is explained by

the increase in order book backlog since

2006.

To further analyse we took the 1 yr chart

which looks almost horizontal. The price has

traded below 50-day MA up to Mar’09 and

then has been trading slightly above 50-day

MA. This is possibly explained by the overall

market turnaround in Mar’09 and the stock

price has gone up on market momentum.

Page 19: Investments Project

Investments Group Project Group 15

Page 19 of 28

Momentum Indicators

Looking at the momentum

indicators – MACD, RSI and MFI;

we find that MACD, MFI & RSI are

positively correlated. No

deviations in the money flow vs

the convergence-divergence

indicator shows that volume have

been supportive of the price

trends.

Page 20: Investments Project

Investments Group Project Group 15

Page 20 of 28

Conclusions from Technical Analysis

• The charts indicate the BHEL has been trading in a band from 1200 to 2200 for more than 3

years. The price movements are in line with market momentum most of the time. In absence

of any break-outs or fundamental change in the company’s operations, a trading strategy

based on technical charts can be developed - buy on every oversold indication and sell on

every overbought indication from MACD and MFI indicators.

• As discussed in the company analysis, BHEL is going to add capacity in Dec 2009 and then

again in 2011-12. An early indication of this will show up in the charts with increase in

volume and price. Also, the MFI will indicate large money moving in, before the results for

Dec’09 quarter is out. This will be a good point to buy and hold for a long term, as it will

probably cause a breakout.

Page 21: Investments Project

Investments Group Project Group 15

Page 21 of 28

Derivatives

Futures Analysis

Expiry on 27th

Aug 2009

Process

• Look at the theoretical futures prices and its deviation from the actual prices.

• Look at the cost of carry numbers =+ve/-ve

• Look at the Open Interest numbers and see if they tell a story.

Date

Futures

Price

Change in

OI %

Spot

Price

Differe

nce

Daily

spot

price

return

Theoretic

al

futures

price

Deviation

From theoretical

price(%)

Increase/dec

rease

Trend

Reversal

cost of

carry

1-Jul-

09 2223 8.99% 2214.5 8.5 2231.2 -0.37% 8.5

2-Jul-

09 2150 4.30%

2153.5

5 -3.55 -2.75% 2169.5 -0.90% 0 -3.55

3-Jul-

09 2190.1 13.89% 2186.3 3.8 1.52% 2202.2 -0.55% 1 YES 3.8

6-Jul-

09 2073.25 1.82% 2100.5 -27.25 -3.92% 2115.0 -1.97% 0 YES -27.25

7-Jul-

09 2145 3.51% 2132.7 12.3 1.53% 2147.1 -0.10% 1 YES 12.3

8-Jul-

09 2043.25 5.00% 2047.9 -4.65 -3.98% 2061.5 -0.88% 0 YES -4.65

9-Jul-

09 2015.3 8.40%

2022.2

5 -6.95 -1.25% 2035.4 -0.99% 0 NO -6.95

10-Jul-

09 1973.7 18.63%

1985.9

5 -12.25 -1.80% 1998.6 -1.24% 0 NO -12.25

13-Jul-

09 1957.75 4.17%

1959.7

5 -2 -1.32% 1971.4 -0.69% 0 NO -2

14-Jul-

09 2045.8 11.11%

2047.5

5 -1.75 4.48% 2059.5 -0.66% 1 YES -1.75

15-Jul-

09 2172.1 2.58% 2187.2 -15.1 6.82% 2199.7 -1.25% 1 NO -15.1

16-Jul-

09 2187.35 10.19%

2200.4

5 -13.1 0.61% 2212.7 -1.15% 1 NO -13.1

17-Jul-

09 2228.65 -5.88% 2227.2 1.45 1.22% 2239.3 -0.48% 1 NO 1.45

20-Jul-

09 2277 93.12% 2276.6 0.4 2.22% 2288.1 -0.48% 1 NO 0.4

21-Jul-

09 2212.4 48.90% 2213.6 -1.2 -2.77% 2224.4 -0.54% 0 YES -1.2

22-Jul-

09 2148.2 0.46%

2146.6

5 1.55 -3.02% 2156.9 -0.40% 0 NO 1.55

23-Jul-

09 2175.2 4.74% 2168.2 7 1.00% 2178.2 -0.14% 1 YES 7

24-Jul-

09 2208.85 6.42%

2210.6

5 -1.8 1.96% 2220.6 -0.53% 1 NO -1.8

27-Jul-

09 2261.6 6.68% 2260.8 0.8 2.27% 2270.1 -0.37% 1 NO 0.8

28-Jul-

09 2270.15 11.09%

2263.5

5 6.6 0.12% 2272.5 -0.10% 1 NO 6.6

29-Jul-

09 2248.4 15.53% 2239.3 9.1 -1.07% 2247.9 0.02% 0 YES 9.1

30-Jul-

09 2210.9 15.79% 2200.8 10.1 -1.72% 2209.0 0.09% 0 NO 10.1

31-Jul-

09 2234.85 -1.34% 2230.3 4.55 1.34% 2238.3 -0.15% 1 YES 4.55

3-Aug-

09 2351.55 -1.18%

2346.6

5 4.9 5.22% 2354.1 -0.11% 1 NO 4.9

4-Aug-

09 2335.5 -9.13%

2331.3

5 4.15 -0.65% 2338.4 -0.13% 0 YES 4.15

Page 22: Investments Project

Investments Group Project Group 15

Page 22 of 28

5-Aug-

09 2318.7 0.88% 2309.9 8.8 -0.92% 2316.6 0.09% 0 NO 8.8

6-Aug-

09 2272.3 -3.64% 2273.2 -0.9 -1.59% 2279.5 -0.32% 0 NO -0.9

7-Aug-

09 2182.9 2.66% 2183.2 -0.3 -3.96% 2189.0 -0.28% 0 NO -0.3

10-

Aug-09 2146.15 -0.55% 2148.5 -2.35 -1.59% 2153.3 -0.33% 0 NO -2.35

11-

Aug-09 2145.8 -3.04%

2147.4

5 -1.65 -0.05% 2152.0 -0.29% 0 NO -1.65

Cost of carry oscillates between positive and negative sides. So spot and futures should be treated as

2 different markets. Negative cost of carry does exist but any arbitrage opportunity will be erased by

transaction costs and taxes.

Open Interest change and price trends do not seem to give any pattern to have any correlation.

Maybe some more analysis is required.

Options Analysis

Process

• Analyze the variation of option prices with the underlying stock prices

• Look at the theoretical option pricing based on risk-free rate and historical annualized

volatility and examine the difference

• Look at the implied volatility based on the option price.

• Do this for ITM, OTM call and put option which is decided as on 11th

Aug,2009

Current Market Price(as

on 11th

Aug,2009) 2147

Interest Rate 5%

Expiry Date 8/27/2009

Div Yield 0%

OTM Call Strike Price 2160

Theoretical Call Value 109.0267

Theoretical Put Value 87.62995

Actual Call Value 74.4

Current Date 8/11/2009

DTE 16

Years 0.043836

Implied Call Volatility 43.69%

Historical Volatility 0.63

Implied Put Volatility 42.90%

OTM Put Strike Price 2100

Actual Put Value 52.95

ITM call strike price 2100

ITM Put Strike price 2200

Deep ITM call strike price 1900

Deep ITM put strike price 2400

Final implied Volatility

(based on 11th

Aug,

pricing) 43%

Page 23: Investments Project

Investments Group Project Group 15

Page 23 of 28

OTM Call Option at 2160

Date Underlying price Call at 2160 Theoretical value

Theoretical value at

implied volatility Difference Implied Call Volatility

Open Int

3-Aug-09 2346.65 119.7 261.3747654 224.0332809 -104.3333 0.004%

150

4-Aug-09 2331.35 119.7 247.4520088 210.1616256 -90.46163 0.004%

150

5-Aug-09 2309.9 119.7 229.2770602 191.7078295 -72.00783 0.004%

150

6-Aug-09 2273.2 119.7 201.0905789 162.5536194 -42.85362 12.127%

150

7-Aug-09 2183.2 94.15 142.3022632 102.1096946 -7.959695 39.028%

300000

10-Aug-09 2148.5 75 113.2179646 76.23906465 -1.239065 42.332%

300750

11-Aug-09 2147.45 74.4 109.0749512 73.21060433 1.189396 43.667%

300900

12-Aug-09 2159.2 70.2 111.4934474 76.64967366 -6.449674 39.303%

301050

13-Aug-09 2225.6 92.75 145.9973477 113.4218587 -20.67186 29.613%

300600

14-Aug-09 2200.6 92.75 126.8258973 94.75348234 -2.003482 41.737%

300600

17-Aug-09 2181.25 71.75 102.6873871 74.3010344 -2.551034 41.195%

300600

18-Aug-09 2246.85 71.75 138.7121878 114.3336464 -42.58365 0.004%

300600

19-Aug-09 2214.85 71.75 112.9871153 88.61798624 -16.86799 28.149%

300600

20-Aug-09 2253.75 100 133.8615913 113.5249231 -13.52492 25.898%

300300

21-Aug-09 2301.8 130 165.1910313 150.7981669 -20.79817 0.004%

300300

24-Aug-09 2343.8 130 188.9577607 185.1730884 -55.17309 0.004%

300300

25-Aug-09 2303.5 130 147.9859379 144.5999616 -14.59996 0.004%

300300

26-Aug-09 2298.6 130 139.7048955 138.9133832 -8.913383 0.004%

300300

As is evident from the above, only when the liquidity in terms of open interest increased did we see

the actual and theoretical prices(based on implied call volatility from 11th Aug price) converge. The

difference in implied call volatility suggests that the option pricing varies a lot with the volatility

number put in the model. This should depend on the expectations of the market at that particular

point of time and would keep varying with each day. So one number based on historical volatility

would not give the correct option price.

ITM Call Option at 2100

Date Underlying price

Call

at 2100 Theoretical value

Theoretical value

at implied volatility Difference

Implied

Call Volatility Open Int

3-Aug-09 2346.65 131 303.5098803 272.0068753 -141.0069 0.004% 1200

4-Aug-09 2331.35 131 289.0274437 257.4451087 -126.4451 0.004% 1200

5-Aug-09 2309.9 131 269.8920818 237.7930455 -106.793 0.004% 1200

6-Aug-09 2273.2 131 239.6950756 206.0490319 -75.04903 0.004% 1200

7-Aug-09 2183.2 131 174.8629498 137.2291292 -6.229129 39.577% 1200

10-Aug-09 2148.5 131 143.4295701 107.8424972 23.1575 56.049% 1200

11-Aug-09 2147.45 131 139.2860326 104.7736527 26.22635 58.224% 1200

12-Aug-09 2159.2 96.7 142.8132206 109.7851662 -13.08517 34.824% 900

Page 24: Investments Project

Investments Group Project Group 15

Page 24 of 28

13-Aug-09 2225.6 96.7 183.1890683 154.7980619 -58.09806 0.004% 900

14-Aug-09 2200.6 96.7 162.1851652 133.5682736 -36.86827 0.004% 900

17-Aug-09 2181.25 96.7 137.1095404 111.6600515 -14.96005 29.827% 900

18-Aug-09 2246.85 96.7 180.1627955 161.0212818 -64.32128 0.004% 900

19-Aug-09 2214.85 96.7 151.8707901 131.9835872 -35.28359 0.004% 900

20-Aug-09 2253.75 96.7 177.596322 162.8368268 -66.13683 0.004% 900

21-Aug-09 2301.8 96.7 214.5047261 205.7175438 -109.0175 0.004% 900

24-Aug-09 2343.8 96.7 245.8861828 244.6504215 -147.9504 0.004% 900

25-Aug-09 2303.5 96.7 204.9241973 204.0631084 -107.3631 0.004% 900

26-Aug-09 2298.6 96.7 198.929913 198.863813 -102.1638 0.004% 900

Again we see a huge difference in the pricing, mainly due to very less liquidity.

Page 25: Investments Project

Investments Group Project Group 15

Page 25 of 28

OTM Put Option at 2100

Date Underlying price Put at 2100 Theoretical value

Theoretical value at

implied volatility Difference

Implied

Put Volatility Open Interest

3-Aug-09 2346.65 57.55 50.54522901 30.88821095 26.66179 66.921% 300

4-Aug-09 2331.35 57.55 51.62552337 32.58679322 24.96321 66.341% 300

5-Aug-09 2309.9 57.55 54.20292543 35.85326861 21.69673 64.892% 300

6-Aug-09 2273.2 57.55 60.9687161 43.66936395 13.88064 61.092% 300

7-Aug-09 2183.2 41.5 86.39942026 73.49577845 -31.9958 39.005% 300

10-Aug-09 2148.5 56 90.45472812 83.13637004 -27.1364 43.644% 300

11-Aug-09 2147.45 51.1 87.62415251 81.42838475 -30.3284 41.821% 300

12-Aug-09 2159.2 51.1 79.66433531 73.38796307 -22.288 45.742% 300

13-Aug-09 2225.6 24.5 53.90321084 44.03069106 -19.5307 42.225% 300

14-Aug-09 2200.6 23.9 58.16236862 50.63289156 -26.7329 38.746% 450

17-Aug-09 2181.25 34.9 53.22612449 50.34237799 -15.4424 48.771% 2400

18-Aug-09 2246.85 11.9 30.94257243 25.04570271 -13.1457 43.125% 3300

19-Aug-09 2214.85 10 34.91379299 31.60078924 -21.6008 36.976% 3900

20-Aug-09 2253.75 3.1 22.00258389 17.87850674 -14.7785 34.595% 3750

21-Aug-09 2301.8 2 11.12427999 7.372565227 -5.37257 41.721% 3750

24-Aug-09 2343.8 2 1.295811014 0.560134618 1.439865 67.921% 3750

25-Aug-09 2303.5 2 0.897249725 0.557958367 1.442042 72.399% 3750

26-Aug-09 2298.6 2 0.066422724 0.042364629 1.957635 100.391% 3750

Again the difference in theoretical valuation based on implied volatility and the actual prices show a

divergence. The implied volatility number seems to vary a lot indicating a lot of uncertainty in the

market.

Let’s look at what difference the variation in price has on option prices and the corresponding delta,

gamma indicators

Variation

in %

points

Underl

ying

Price

Theoretic

al Call

Value

Call Value at

Implied

Volatility

Theoretic

al

Put Value

Put

Value at

implied

put

volatilit

y

Call

Delta

Put

Delta

Call

Gamma

Put

Gamma

1 2168 120.4 84.9 79.3 45.3 0.54 -0.34 0.0020 0.0019

2 2190 132.4 97.1 71.6 38.6 0.59 -0.30 0.0020 0.0018

3 2211 145.0 110.2 64.5 32.6 0.63 -0.26 0.0019 0.0016

4 2233 158.3 124.1 58.0 27.4 0.67 -0.23 0.0018 0.0015

5 2254 172.1 138.8 52.0 22.9 0.71 -0.20 0.0017 0.0014

6 2276 186.5 154.4 46.5 19.0 0.74 -0.17 0.0016 0.0012

7 2297 201.5 170.6 41.5 15.7 0.77 -0.14 0.0015 0.0011

8 2319 217.0 187.6 36.9 12.8 0.80 -0.12 0.0013 0.0010

9 2340 232.9 205.1 32.8 10.5 0.83 -0.10 0.0012 0.0008

10 2362 249.4 223.2 29.1 8.5 0.86 -0.08 0.0011 0.0007

11 2383 266.3 241.7 25.7 6.8 0.88 -0.07 0.0009 0.0006

12 2405 283.5 260.8 22.7 5.5 0.90 -0.06 0.0008 0.0005

13 2426 301.2 280.2 19.9 4.4 0.91 -0.05 0.0007 0.0005

14 2448 319.3 299.9 17.5 3.5 0.93 -0.04 0.0006 0.0004

15 2469 337.7 319.9 15.3 2.7 0.94 -0.03 0.0005 0.0003

-1 2126 98.3 63.4 96.6 61.5 0.46 -0.42 0.0021 0.0020

-2 2104 88.2 54.1 106.1 71.0 0.41 -0.46 0.0021 0.0021

Page 26: Investments Project

Investments Group Project Group 15

Page 26 of 28

-3 2083 78.8 45.7 116.4 81.4 0.37 -0.51 0.0020 0.0021

-4 2061 70.1 38.2 127.3 92.8 0.33 -0.55 0.0019 0.0021

-5 2040 62.0 31.6 138.9 105.2 0.29 -0.60 0.0018 0.0021

-6 2018 54.5 25.9 151.1 118.6 0.25 -0.65 0.0017 0.0020

-7 1997 47.7 20.9 164.0 132.9 0.21 -0.69 0.0016 0.0020

-8 1975 41.4 16.7 177.6 148.2 0.18 -0.73 0.0015 0.0019

-9 1954 35.8 13.2 191.9 164.3 0.15 -0.77 0.0013 0.0017

-10 1932 30.8 10.3 206.8 181.2 0.12 -0.80 0.0012 0.0016

-11 1911 26.2 7.9 222.3 198.8 0.10 -0.84 0.0010 0.0014

-12 1889 22.2 6.0 238.4 217.1 0.08 -0.87 0.0009 0.0013

-13 1868 18.7 4.4 255.1 236.0 0.06 -0.89 0.0007 0.0011

-14 1846 15.6 3.3 272.3 255.3 0.05 -0.91 0.0006 0.0010

-15 1825 12.9 2.3 290.0 275.2 0.04 -0.93 0.0005 0.0008

Here we would look at the impact of time on the theoretical option prices

Time Variation

Da

ys

to

ex

pir

y

OTM call

Theoretic

al Call

Value

OTM put

Theoretic

al Put

Value

ITM call

Theoretic

al Call

Value

ITM put

Theoretic

al Put

Value

Deep ITM

call

Theoretic

al Call

Value

Deep

ITM put

Theoretic

al Put

Value

OTM

call

theta

OTM

Put

theta

ITM

Call

theta

ITM

put

theta

Deep ITM

Call theta

Deep ITM

Put theta

27 97.74 73.86 128.61 125.18 270.93 269.72 -1.99 -1.66 -1.95 -1.66 -1.193286 -1.005002

26 95.73 72.18 126.65 123.50 269.74 268.72 -2.03 -1.69 -1.98 -1.70 -1.192633 -1.005563

25 93.68 70.47 124.65 121.78 268.55 267.71 -2.06 -1.73 -2.01 -1.73 -1.191116 -1.005226

24 91.60 68.73 122.62 120.03 267.36 266.71 -2.10 -1.77 -2.05 -1.77 -1.188603 -1.003841

23 89.47 66.94 120.55 118.24 266.17 265.70 -2.15 -1.81 -2.09 -1.81 -1.184936 -1.001227

22 87.30 65.12 118.44 116.41 264.99 264.70 -2.19 -1.85 -2.13 -1.85 -1.179933 -0.997172

21 85.09 63.25 116.28 114.54 263.81 263.71 -2.24 -1.89 -2.18 -1.90 -1.173380 -0.991423

20 82.82 61.33 114.08 112.62 262.64 262.72 -2.29 -1.94 -2.23 -1.94 -1.165026 -0.983681

19 80.50 59.36 111.82 110.65 261.48 261.74 -2.35 -1.99 -2.28 -2.00 -1.154576 -0.973586

18 78.12 57.34 109.51 108.62 260.34 260.78 -2.41 -2.05 -2.34 -2.05 -1.141681 -0.960705

17 75.68 55.26 107.15 106.54 259.20 259.82 -2.48 -2.11 -2.40 -2.11 -1.125930 -0.944519

16 73.17 53.12 104.72 104.40 258.09 258.89 -2.55 -2.18 -2.46 -2.18 -1.106838 -0.924398

15 70.58 50.91 102.22 102.19 256.99 257.98 -2.63 -2.25 -2.53 -2.25 -1.083833 -0.899581

14 67.92 48.63 99.65 99.90 255.92 257.09 -2.71 -2.33 -2.61 -2.33 -1.056241 -0.869138

13 65.15 46.26 96.99 97.53 254.88 256.24 -2.81 -2.41 -2.70 -2.41 -1.023274 -0.831944

12 62.29 43.80 94.25 95.08 253.87 255.43 -2.92 -2.51 -2.80 -2.51 -0.984027 -0.786628

11 59.31 41.24 91.40 92.52 252.91 254.67 -3.04 -2.62 -2.90 -2.61 -0.937475 -0.731539

10 56.20 38.56 88.43 89.85 252.00 253.97 -3.18 -2.74 -3.03 -2.73 -0.882512 -0.664716

9 52.94 35.75 85.34 87.05 251.15 253.35 -3.35 -2.88 -3.17 -2.87 -0.818042 -0.583891

8 49.50 32.79 82.09 84.10 250.37 252.81 -3.54 -3.04 -3.33 -3.03 -0.743191 -0.486611

7 45.85 29.65 78.66 80.99 249.67 252.38 -3.77 -3.24 -3.52 -3.21 -0.657751 -0.370597

6 41.94 26.31 75.03 77.67 249.06 252.07 -4.06 -3.47 -3.75 -3.43 -0.563047 -0.234669

5 37.70 22.70 71.14 74.11 248.54 251.91 -4.43 -3.75 -4.04 -3.70 -0.463529 -0.080900

4 33.04 18.78 66.93 70.26 248.13 251.92 -4.93 -4.11 -4.39 -4.02 -0.369173 0.080888

3 27.77 14.46 62.32 66.04 247.80 252.07 -5.65 -4.57 -4.86 -4.44 -0.297097 0.225755

Page 27: Investments Project

Investments Group Project Group 15

Page 27 of 28

2 21.58 9.59 57.16 61.35 247.52 252.35 -6.85 -5.19 -5.48 -4.94 -0.264086 0.312348

1 13.64 4.06 51.35 56.21 247.26 252.67 -9.46 -5.79 -6.08 -5.20 -0.260242 0.328672

Recommendation

BHEL does not seem to be a trading stock and has mostly been range bound for the last few years.

Its valuation seems to give a BUY indication and the new capacity additions might give a fillip to the

stock along with the recovery of the economy. The fundamentals of the company are strong and the

capacity expansion would start bringing in the revenues in 2010.So, one needs to look out for

oversold indicators and BUY on that. The July, 2008 valuations pegs the value at around 2800. The

2009 PE based valuation also gives it a strong BUY. In the absence of any technical triggers it would

be a BUY and HOLD strategy.

The futures pricing does not throw up any arbitrage opportunities. Also the trading volumes in the

options market is not very high which implies that the impact cost would be very high in the options

market and values are not close to the theoretical values.

Page 28: Investments Project

Investments Group Project Group 15

Page 28 of 28

References

• Reliance Money BHEL Report 9th April, 2009

• Jaypee Capital Services Institutional Equity Research

• Crisil Research Press Release Aug 6,2009

• Crisil Research , Indian Infrastructure

• BHEL Annual Reports