Financial Analysis of Navratnas Nine PSUs

Contemporary Issue: Final Report
Topic: “Navratna: A Financial Analysis of the 9 PSUs”
Faculty Guide: Prof. M. S. Bhatt
Submitted By:
Hardik Jain (8076)
Jain Amit Manraj (8077)
Submitted on: Saturday, 31st October, 2009

Navratna: A Financial Analysis of the 9 PSUs
I. EXECUTIVE SUMMARY
Project title: Navratna – A Financial Analysis of the 9 PSUs
Project Guide : Prof. M. S. Bhat
Name of student : Hardik Jain & Jain Amit Manraj
Contemporary Issue means the current issue. It may be in the economy, in some sector,
some industry or some company. The event that is more in lime light because of some or the
other reason. Like everyone else, we also tried to find the most happening issue. We thought
of various issues and decided on our topic. Government‘s declaration of divestment of its
stake in the PSUs in budget, we were sceptical if such a move might help the government but
would it improve the companies‘ performance and gain investors‘ confidence in them? So we
thought government had already divested its funds from various companies so why not study
them and try to understand has the divestment had any positive impact on the companies.
Now, to decide which companies we should select, we thought of taking the Navratnas. The
government claims them to be their best, so why not test them.
Testing companies‘ performances needs lot of time and resources which were scarce for us.
So we decided to limit our study to whatever we have. Hence, using the available resources
like Capitaline Databases and Moneycontrol.com, we decided to do the financial analysis of
the companies. Financial Analysis is based on the evergreen ratio analysis. When we talk of
performance, we need certain benchmark to compare the performance so as to judge
whether it was good or poor. So we also performed competitor ratio analysis. We also found
the company valuations based on ECF, FCF & CCF and hence tried to ascertain which
company is undervalued and which is overvalued.
Tracking share prices also becomes an important part of our study. After the divestment, it‘s
general public‘s money which is invested in these companies. So it becomes essential to
ascertain as to which company has provided how much return to the shareholders. We used
the various tools of technical analysis to find the returns and expected price trends for the
stocks. Also, based on the CAPM (Capital Asset Price Model), we calculated the risks and
returns for the company.
The study was divided into two hypothesis:

1. ―The PSUs have not performed well over the years as compared to their competitors
in the same industry.‖
Hardik Jain (PGDM No. 08076) & Jain Amit Manraj (PGDM No. 08077) 2
2. ―The Share prices of PSUs are not correlated with the Market performance.‖
The report contains the methodology for hypothesis testing and the summary of the
conclusions as to accept or reject the hypothesis.
Signature of the Student Signature of the Project Guide
Hardik Jain Prof. M S Bhat Marakini

Professor-Operations,
SDMIMD, Mysore
Jain Amit Manraj
Date: 31/10/09
II. ACKNOWLEDGEMENT
We would like to thank almighty God for giving us an ability to perform our work
successfully.
We would like to thank SDMIMD for giving us an opportunity to work on the topic.
We would like to thank Prof. M. S. Bhatt for helping us in completing our research and
motivating and guiding us through the project.
We would like to thank each and every one who is directly or indirectly associated with our
project for providing us their constant support and help.
- Hardik Jain & Jain Amit Manraj
III. LIST OF ABBREVIATIONS
PSU Public Sector Unit

BHEL Bharat Heavy Electricals Ltd
BPCL Bharat Petroleum Corporation Ltd
HPCL Hindustan Petroleum Corporation Ltd
GAIL Gas Authority of India Ltd
IOCL Indian Oil Corporation Ltd
MTNL Mahanagar Telephone Nigam Ltd
SAIL Steel Authority of India Ltd
ONGC Oil and Natural Gas Corporation
NTPC National Thermal Power Corporation
FCF Free Cash Flow
ECF Equity Cash Flow
CCF Capital Cash Flow
NSE National Stock Exchange
HPR Holding Period Return
HPY Holding Period Yield
CAPM Capital Asset Pricing Model
IV. TABLE OF CONTENTS

I. EXECUTIVE SUMMARY .......................................................................................................................... 2
II. ACKNOWLEDGEMENT .......................................................................................................................... 4
III. LIST OF ABBREVIATIONS .................................................................................................................. 5
IV. TABLE OF CONTENTS ........................................................................................................................... 6
1. INTRODUCTION ......................................................................................................................................... 7
2. EMERGENCE OF PSUS & NAVRATNAS ............................................................................................ 8
3. SCOPE OF THE STUDY .......................................................................................................................... 11
4. PURPOSE OF THE STUDY ................................................................................................................... 11
5. HYPOTHESIS............................................................................................................................................. 12
6. TESTING OF HYPOTHESIS -1 ............................................................................................................. 13
6.1 METHODOLOGY .................................................................................................................................... 13
6.1.1 Ratio Analysis ..................................................................................................................................... 13
6.1.2 Summary – Ratio Analysis .................................................................................................................. 21
6.1.3 Free Cash Flow (FCF) ....................................................................................................................... 22
6.1.4 Equity Cash Flow (ECF)..................................................................................................................... 22
6.1.5 Capital Cash Flows (CCF) ................................................................................................................. 23
6.2 SUMMARY TABLE ................................................................................................................................. 23
6.3 STATISTICAL ANALYSIS ...................................................................................................................... 24
7. TESTING OF HYPOTHESIS – II ......................................................................................................... 25
7.1 METHODOLOGY..................................................................................................................................... 25
7.1.1 Stock Analysis ..................................................................................................................................... 26
7.1.2 Regression Analysis ............................................................................................................................ 27
7.1.3 Technical Analysis .............................................................................................................................. 28
7.1.4 Trend Analysis .................................................................................................................................... 30
7.1.5 HPR - Holding Period Return ............................................................................................................. 31
7.1.6 HPY - Holding Period Yield ................................................................................................................ 31
7.1.7 Sharpe Ratio ....................................................................................................................................... 32
7.1.8 Treynor Ratio ...................................................................................................................................... 32
7.2 RESULT .................................................................................................................................................... 34
8. REFERENCES ............................................................................................................................................ 36
1. INTRODUCTION
Indian Economy has undergone a tremendous change over the last century. The Pre-
Independent Indian Economy was paralyzed by the Colonial system. The British
administration exploited the Indian resources to feed their British counterparts in Britain.
The advent of exploitation of farmers, labourers, etc. was very widespread. The trade and
commerce was very much restricted and the domestic producers were exploited.
Post-independence, Indian Economy faced many ups and downs. The implementation of
Nehru-Mahalanobis Model in the Indian Economy proved to be the stepping stone for
industrialization in the economy. The focus on industrial output in the second five year plan
(1956-61) drove huge investment in the industrial sector. The economy saw production rising
and new investments made. The government investment was seen heavily in the building of
infrastructure facilities. The various tasks of the second five year plan in India were:
 To increase by 25% the national income

 To make the country more industrialized
 To increase employment opportunities so that every citizen gets a job
The domestic production of industrial goods in the public sector was encouraged by the
second five year plan in India. The total amount for development given allocated under the
second five year plan in India was Rs. 4,800 crore. This money had been distributed under
the second five year plan in India for the development of various sectors. They were:
 Mining and industry

 Community and agriculture development
 Power and irrigation
 Social services
 Communications and transport
 Miscellaneous
During the second five year plan India, 5 steel plants had been established, apart from a
hydro-electric power project which was also undertaken and implemented. The production
of coal increased during this period. Also, more railway lines were added in the north-east
part of the country, during the Indian second five year plan. Land reform measures had been
taken during the period of the second five year plan India, in order to remove the socio-
economic constraints of the rural population. The second five year plan India had, to a large
extent, improved the living standards of the people.
2. EMERGENCE OF PSUs & NAVRATNAs

The Government of India established various companies and corporations to achieve the
industrial production & improve the overall economy. The major sectors as described earlier
were the mining & industry, Power Generation, Social Services, etc. The overall economy
showed tremendous improvement but with hick ups. However, the efficiency of performance
of these entities was under question. Some enterprises performed extraordinarily while some
were not able to even perform well. Hence, the government came up with the concept of
NAVRATNAs. Under this, the government identified 9 companies in 1997 as its crown jewels
or the most prestigious PSUs, which allowed them greater autonomy to compete in the
global market. The following are the original 9 companies with brief details of each:
1) BHEL (Bharat Heavy Electrical Limited): BHEL is the largest

engineering and manufacturing enterprise in India in the energy-
related/infrastructure sector, today. BHEL was established more than 40
years ago, ushering in the indigenous Heavy Electrical Equipment industry in
India - a dream that has been more than realized with a well-recognized track
record of performance. BHEL's operations are organised around three
business sectors, namely Power, Industry - including Transmission,
Transportation, Telecommunication & Renewable Energy - and Overseas
Business. BHEL has a strong customer orientation and is sensitive to his
needs and responds quickly to the changes in the market.
2) SAIL (Steel Authority of India Limited): SAIL is the leading steel-

making company in India. It is a fully integrated iron and steel maker,
producing both basic and special steels for domestic construction,
engineering, power, railway, automotive and defense industries and for sale in
export markets. The company has the distinction of being India‘s largest
producer of iron ore and of having the country‘s second largest mines
network. This gives SAIL a competitive edge in terms of captive availability of
iron ore, limestone, and dolomite which are inputs for steel making. SAIL has
a well-equipped Research and Development Centre for Iron and Steel
(RDCIS) at Ranchi which helps to produce quality steel and develop new
technologies for the steel industry. SAIL's wide marketing spread ensures
availability of quality steel in virtually all the districts of the country.
3) GAIL (Gas Authority of India Limited): GAIL is India's flagship

Natural Gas company, integrating all aspects of the Natural Gas value chain
(including Exploration & Production, Processing, Transmission, Distribution
and Marketing) and its related services. GAIL today has reached new
milestones with its strategic diversification into Petrochemicals, Telecom and
Liquid Hydrocarbons besides gas infrastructure. The company has also
extended its presence in Power, Liquefied Natural Gas re-gasification, City
Gas Distribution and Exploration & Production through equity and joint
ventures participations.
4) HPCL (Hindustan Petroleum Corporation Limited): HPCL, a

fortune 500 company, is one of the major integrated oil refining and
marketing companies in India. It is a Mega Public Sector Undertaking (PSU)
with Navaratna status. HPCL accounts for about 20% of the market share and
about 10% of the nation's refining capacity. Business Process Re-Engineering
exercise, creation of Strategic Business Units, ERP implementation,
Organizational Transformation, Balanced Score Card, Competency Mapping,
benchmarking of refineries and terminals for product specifications, ISO
certification of Refineries and Supply Chain Management are some of the
initiatives that broke new grounds.
5) BPCL (Bharat Petroleum Corporation Ltd.) On 24th January

1976, the Burmah Shell Group of Companies was taken over by the
Government of India to form Bharat Refineries Limited. On 1st August 1977,
it was renamed Bharat Petroleum Corporation Limited. It was also the first
refinery to process newly found indigenous crude (Bombay High), in the
country. The core strength of BPCL has always been the ardent pursuit of
qualitative excellence for maximisation of customer satisfaction. Thus Bharat
Petroleum, the erstwhile Burmah Shell, has today become one of the most
formidable names in the petroleum industry. Bharat Petroleum produces a
diverse range of products, from petrochemicals and solvents to aircraft fuel
and specialty lubricants and markets them through its wide network of Petrol
Stations, Kerosene Dealers, LPG Distributors, Lube Shoppes, besides
supplying fuel directly to hundreds of industries, and several international
and domestic airlines.
6) IOCL (Indian Oil Corporation Limited): India‘s flagship national

oil company and downstream petroleum major, IOCL is celebrating its
Golden Jubilee in 2009. It is India's largest commercial enterprise, with a
sales turnover of Rs. 2, 85,337 crore – the highest-ever for an Indian company
– and a net profit of Rs. 2, 950 crore for the year 2008-09. IOCL is also the
highest ranked Indian company in the prestigious Fortune 'Global 500' listing
at 105th position in 2009. IOCL is currently forging ahead on a well laid-out
road map through vertical integration— upstream into oil exploration &
production (E&P) and downstream into petrochemicals – and diversification
into natural gas marketing, bio fuels, wind power projects, besides
globalisation of its downstream operations. IOCL has set up subsidiaries in Sri
Lanka, Mauritius and the United Arab Emirates (UAE), and is simultaneously
scouting for new business opportunities in the energy markets of Asia and
Africa.
7) ONGC (Oil and Natural Gas Corporation Limited): ONGC

(incorporated on June 23, 1993) is an Indian public sector petroleum
company. It is a Fortune Global 500 company ranked 335th, and contributes
77% of India's crude oil production and 81% of India's natural gas production.
It is the highest profit making corporation in India. ONGC is one of Asia's
largest and most active companies involved in exploration and production of
oil. It is involved in exploring for and exploiting hydrocarbons in 26
sedimentary basins of India. It produces about 30% of India's crude oil
requirement. It owns and operates more than 11,000 kilometers of pipelines
in India.
8) MTNL (Mahanagar Telephone Nigam Limited): MTNL is an

Indian Government-owned telephone service provider in the cities of
Mumbai, Thane, New Delhi, and Navi Mumbai in India. The company was a
monopoly until 2000, when the telecom sector was opened to other service
providers. MTNL provides fixed line telephones, cellular connection of both
GSM — Dolphin (Postpaid) and Trump (prepaid) and WLL (CDMA) —
Garuda-FW and Garuda-Mobile and internet services through dialup and DSL
— Broadband internet TriBand. MTNL has also started Games on demand,
video on demand and IPTV services in India through its Broadband Internet
service called Triband. MTNL is the first company to start 3G services in India
under the name of "MTNL 3G Jadoo" Services offered include Video call,
Mobile TV and Mobile Broadband with high speed data connectivity up to 2
Mbps speed from 11th December 2008, getting India on 3G map of the world.
9) NTPC (National Thermal Power Corporation): India‘s largest

power company, NTPC was set up in 1975 to accelerate power development in
India. NTPC is emerging as a diversified power major with presence in the
entire value chain of the power generation business. Apart from power
generation, which is the mainstay of the company, NTPC has already ventured
into consultancy, power trading, ash utilisation and coal mining. NTPC was
ranked 317th in the ‗2009, Forbes Global 2000‘ ranking of the World‘s biggest
companies. NTPC has adopted a multi-pronged growth strategy which
includes capacity addition through green field projects, expansion of existing
stations, joint ventures, subsidiaries and takeover of stations. NTPC has been
operating its plants at high efficiency levels. Although the company has
18.79% of the total national capacity it contributes 28.60% of total power
generation due to its focus on high efficiency.
3. SCOPE OF THE STUDY

The scope of our study will include financial analysis of the companies based on their past
performance. Also, we would like to make a comparative analysis of PSUs against their
respective industries. We also wish to make an analysis of the stock prices of the companies
against the markets.
4. PURPOSE OF THE STUDY

The purpose of study is to study the performance of the Navrtnas over the years. We wish to
ascertain whether the Navratnas have really grown to expected levels by doing the analysis of
their financial statements and stock prices. The study would enable us to have more
knowledge about the working of the PSUs, whether the PSUs performed at par with their
respective industries. We also wish to study whether the Navratna companies really proved
to be the jewels in the crown of the Indian Economy.
5. HYPOTHESIS
The study will try to test the following null hypothesis:
1. “The PSUs have not performed well over the years as compared to their
competitors in the same industry.”
2. “The Share prices of PSUs are not correlated with the Market
performance.”
6. TESTING OF HYPOTHESIS -1
As per the purpose of the study, we wish to compare the growth of the Navratnas as
compared to their respective competitors. Here we are looking forward to test the hypothesis
that is – “The PSUs have not performed well over the years as compared to their
competitors in the same industry.”
6.1 METHODOLOGY
The methodology used to test this hypothesis is as follows:
1. We tried to find the major competitors for the companies in their respective
industries. The best way we could find is using www.moneycontrol.com as our
reference site for deciding on the competitors to be analyzed.
2. After finalizing on the competitors, we calculated the ratios for the Navratnas and
their competitors for the financial years ending on 31 st March 2008 and 31st
March 2009.
3. The respective ratios are then compared among the companies and the company
with the best ratio is given highest points and for the remaining companies
proportionate points are given. ( In case of negative ratio, a ‗0‘ (zero) is given)
4. Based on total score the companies are given rankings. Then the Navratnas are
compared and hence decided whether they have performed better than their
major competitors.( In case of unavailability of information for a ratio, that ratio
is excluded from calculation in all the companies to keep them on same level)
5. If the company lies in the top-2 rank, we have considered it to be better than the
major competitor, while at 3rd position its average performance and ranks below
that is poor performance compared to major competitors.
Also, the HPR, HPY, Sharpe & Treynor Ratios are calculated for the Navratnas.
6.1.1 Ratio Analysis

Ratios form an important part of any financial analysis. Just numbers do not matter
in the analysis of the financial statements of the company. We need ratios to compare
and contrast the company‘s performance over the years. The following part of the
report explains the ratios, their meaning, importance and hence their impact on
company‘s performance.
Ratios can be broadly divided in the following ways:
Liquidity Ratio Profitability Indicator Ratios
 Current Ratio  Net Profit Margin Analysis

 Quick Ratio  Return on Assets
 Return on equity
 Return on Capital Employed
Debt Ratios Operating Performance Ratio
 Debt Ratio  Fixed Asset Turnover

 Debt Equity Ratio  Debtor Turnover
 Interest Coverage Ratio  Creditor Turnover
 Inventory Turnover
Cash Flow Indicator Ratio Investment Valuation Ratios
 Operating cash flow to  Book value per share

turnover  Market price to book value
 FCF to operating cash flow ratio
 EPS
 PE ratio
 Dividend Payout Ratio
1) Liquidity Ratio
Liquidity is a crucial factor for any business‘ success. It enables the company to honour
its short term commitments. These ratios show company‘s efficiency in managing its
cash and other short term resources.
a) Current Ratio
Current ratio is defined as the ratio of current assets to current liabilities. It shows the
proportion of current liabilities that can be served from its current assets. It is among the
most important ratios for a firm. It also enables company to assess its ability to get debt
and repay the same within time. Usual standards say that the ratio should be above 1 .i.e.
the company should be able to have so much of current assets so as to fulfil its liability
without using its capital assets or other investments.
Current Ratio = Current Assets
Current Liabilities
b) Quick ratio
Quick ratio shows the actual liquid position of the organization. It shows the ratio of the
most liquid of current assets to total current liabilities. The rationale behind this ratio is
to find how much of the total current liabilities can be paid off at any point of time.
Quick Ratio = Liquid Assets (Cash & Bank + Debtors)
Current Liabilities
2) Profitability Indicator Ratio

Profit is among the major objective for any organisation‘s survival and hence drives the
organization to work harder and efficiently to increase its profitability. Also, for an
investor, profit is the base for valuation of the shares and the company as a whole. Profits
are the moral boosters for all the stakeholders in the organization may it be owners,
employees, debtors, creditors, etc.
a) Net Profit Margin Analysis

The Net Profit Margin analysis shows the amount of revenues that actually turn into
profits after allowing for all possible expenses from the revenues.
Net Profit Margin = Net Profit (after Tax) .
Net Sales (Sales- Excise Duty)
b) Return on Assets
Return on assets tries to measure the recovery of investment in fixed assets from the net
profit.
Return on Assets= Net Profit (after Tax)
Average Fixed Assets
c) Return on Equity
Equity shareholders are the most important stakeholders for the organization. They
provide the much required fixed capital to the company. The equity investment stays till
the end of the company and hence is the most illiquid liability. However, it is the most
demanding liability. The expected return for an equity shareholder is always high and
keeps increasing over the year with the increasing experience of the company in its
business.
Return on Equity = Net Profit (after Tax) .
Average Equity Share Capital
d) Return on Capital Employed

Return on Equity shows the returns from the view of an equity investor. However, it is
not correct to evaluate a company‘s return only from the perspective of equity share
holders. It is also necessary to know the return on total capital employed in the business.
This approach helps us to value the firm as a whole. This also helps in assessing the value
of the firm for an M & A as it includes the debt aspect of the firm which will reduce its
profits.
3) Debt Ratio
Debt forms an important factor in today‘s business area. A levered company generally
creates more value to its equity share holders than a totally unlevered firm (excluding
exceptions like Infosys, etc.). However depending largely on debt can also be dangerous
for a business in a downturn when the revenues are lower than earlier but interest
burden is the same. Hence, it becomes important from the view of investing that the
company is levered but not too much levered that it may not be able to cover its debt
obligations in the future.
a) Debt ratio
Debt Ratio shows how much of total capital employed it the proportion of debt. In other
words, it shows what proportion of the company‘s assets are owned by the long term
secured and unsecured loans. Generally a high debt ratio is a sign of higher risk of
bankruptcy of the business in case of downturn or slowdowns.
Debt Ratio = Total Debt (secured+ unsecured)
Total Capital Employed
b) Debt- Equity Ratio

Debt to equity ratio helps an analyst to analyse what is the portion of long term debt as
compared to equity funding. It helps us understand the extent investment of debt for
each unit of equity investment.
Debt Equity Ratio = Total Debt (Secured + Unsecured)
Total Equity Share Capital (incl. Reserves &

surplus)
c) Interest Coverage Ratio

The most important element for deciding on proportion of debt is the interest
component. The interest burden is the limiting factor to company‘s ability to take debt
and hence take advantage of leveraging. The interest coverage ratio shows the extent of
profit over interest burden. The company is expected to earn more than its interest
burden or else it may not have any value for its equity shareholders.
Interest Coverage Ratio = EBIT .
Interest obligation
4) Operating Performance Ratio

All the above ratios are meaningless if the operating ratios of the company are not
analysed. These ratios show the operating efficiency of the company. The better the
efficiency means a better operations hence better profitability.
a) Fixed Asset turnover

This ratio enables us to get a rough idea on productivity of company‘s fixed assets in
generating sales. A growing company generally has an increasing investment in fixed
assets with increase in sales.
Fixed Asset Turnover = Sales (excl. Excise Duty)
Average Fixed Assets
d) Creditor Turnover Ratio

A creditor turnover ratio is another important feature of operations efficiency. The lower
the creditor turnover shows the higher availability of credit period for the company. The
creditor turnover ratio helps in determing the company‘s own credit policy for its
customers.
Creditor Turnover Ratio = COGS .
Average Creditors
e) Debtor Turnover Ratio

Debtor turnover ratio essentially shows company‘s credit policy towards it customers. A
high debtor turnover ratio translates to a lower credit policy in operations.
Debtor Turnover Ratio= Net Sales*(excl. Excise Duty)
Average Debtors
(* generally credit sales are used. However due to lack of information, net sales are assumed
to be credit sales)
f) Inventory Turnover Ratio

The importance of inventory management is increasing with increasing competition and
crushing profit margins. The companies are trying to reduce their inventory to the
optimum levels so as to reduce the carrying cost and other factors.
Inventory Turnover Ratio = COGS .
Average Inventory
5) Cash Flow Indicators

Cash flows are very crucial for a company‘s efficient cash and working capital
management system. They show a safety net over liquidity of the firm and hence help in
assessing the financial health and performance of the company.
The cash flows help in translating the book profits to cash profits hence eliminating non-
cash expenses and receipts.
a) Operating Cash Flow/ Sales Ratio

This ratio helps us in understnding what proportion of sales revenue actually turned into
cash flows for the business. It would be worrisome to see a company's sales grow without
a parallel growth in operating cash flow. Positive and negative changes in a company's
terms of sale and/or the collection experience of its accounts receivable will show up in
this indicator.
Operating Cash Flow/Sales = Operating Cash Flows .
Net Sales (excl. Excise Duty)
b) FCF/ Operating Cash Flow
Just calculating cash revenue from sales is not enough; we need to adjust for changes in
the fixed and working capital in the cash flows. This adjusted cash flow is called Free
Cash Flow (FCF) (more in later stage). The FCF is one step further to operating cash
flows and hence enhances the value of operating cash flow ratio.
FCF/Operating Cash Flows=FCF (operating cash flow – Capital Exp)
Operating Cash Flow
6) Investment Valuation Ratios

These set of ratios is what an investor is always looking at. It tells the investor the value
of his/her investment as against book values and other parameters. It is widely used by
investors to estimate the attractiveness of a potential or existing investment and get an
idea of its valuation.
a) Book Value of Share & Book value to Market value Ratio

The book value of the firm shows the actual worth of shares as per the value arrived in
the books of the company. The book value increases with the increase in net worth of the
company. Market value of the firm is based on various, micro and macro economic
factors that rule the securities market. However, the market price can also be said to be
an expected value of the firm based on its business environment.
Book Value = Total Equity Share Capital ( incl Reserves)
Number of Equity Shares Outstanding
b) EPS (Earning Per Share)

EPS (Earning Per Share) is an important measure for valuation of the company. It
reflects the amount of profits earned by the company per equity share. This is also a
barometer for rising returns over the investment.
EPS= Net Profit (after Tax) .
Number of Shares Outstanding
c) PE Ratio
Price to Earnings per share (PE) ratio is an important ratio used for various types of
valuation. The PE ratio is the most widely used mode of valuation. The company‘s PE
shows how much is the value of its earnings appreciated by the market price.
PE Ratio = Market Price
EPS
d) Dividend Pay out Ratio

Dividends aer the sole receipts that an investor earns from the company in the form of
cash return. The dividends are a part of profits that are disbursed by the company to its
shareholders so as to keep them satisfied as well as use the excess liquidity in a proper
way. The dividend for the company shows its confidence in its activities and future
returns.
Dividend Payout Ratio = Dividend per share
EPS
6.1.2 Summary – Ratio Analysis
Ratio BHEL BPCL GAIL HPCL IOCL MTNL NTPC SAIL ONGC
Liquidity Measurement Ratios
a) Current Ratio 1.5034 1.2028 1.3541 1.3422 1.3822 1.6443 2.5127 1.3592 1.7475
b) Quick Ratio 0.8898 0.2137 0.584 0.1534 0.2496 0.4305 1.4387 0.6148 0.1796
2) Profitability Indicator Ratios
a) Net Profit Margin Analysis 9.60% 2.07% 13.68% 2.26% 3.61% 18.32% 21.77% 6.19% 0.2654
b) Return On Assets 87.39% 15.27% 22.21% 15.59% 17.81% 16.58% 16.72% 19.81% 0.3361
c) Return On Equity 17.92% 19.59% 23.36% 16.51% 22.50% 11.93% 14.20% 18.21% 0.2555
d) Return On Capital Employed 16.14% 13.49% 19.68% 13.48% 15.09% 9.81% 12.84% 20.91% 0.2502
3) Debt Ratios
a) Debt Ratio 0.082 0.453 0.2208 0.3516 0.4649 0.1165 0.303 0.5249 0.1552
b) Debt-Equity Ratio 0.0936 0.86 0.2999 0.6357 0.8986 0.1683 0.4358 2.1156 0.1892
c) Interest Coverage Ratio 39.73 8.4552 21.0456 13.5729 8.5389 139.4225 4.7627 12.1892 8.0377
4) Operating Performance
Ratios
a) Fixed-Asset Turnover 8.1052 7.5632 1.6049 7.1337 5.0464 0.877 0.7726 1.6835 1.2078
b) debtor turnover ratio 1.7664 54.8546 17.11 60.1311 27.5067 5.9745 11.8801 12.4001 13.6258
c) creditor turnover ratio 0.6176 5.8861 1.4266 5.9221 4.0435 0.2725 0.8541 1.5564 1.6776
d) inventory turnover ratio 2.9332 10.3854 20.1496 9.6431 8.1515 17.9662 7.5404 3.6946 7.5586
5) Cash Flow Indicator Ratios
a) Operating Cash Flow/Sales
Ratio 0.1074 0.0352 0.1822 0.028 0.0268 0.3558 0.2639 0.1818 0.3616
b) Free Cash Flow/Operating
Cash Ratio 8.7025 -0.0594 0.801 0.5004 -0.9133 1.3507 0.8046 1.3045 0.7172
6) Investment Valuation Ratios
a) book value per share 214.8499 207.0756 95.029 228.9995 203.6579 152.7195 312.9073 43.1923 330.16
b) Market Price/Book Value
Ratio 340.63% 317.86% 184.48% 129.06% 152.78% 106.46% 113.47% 158.77% 296.99%
c) EPS 38.8308 34.8076 20.9365 35.2557 42.34 16.1232 42.3739 11.7042 78.09
d) Price/Earnings Ratio 17.593 19.5478 8.3765 9.8211 7.54 10.38 8.3744 4.0433 12.56
e) Dividend Payout Ratio 20.49% 30.05% 33.67% 33.04% 28.50% 27.98% 27.81% 9.06% 40.98%
6.1.3 Free Cash Flow (FCF)
FCF is a measure of financial performance calculated as operating cash flow minus
capital expenditures. It represents the cash that a company is able to generate
after laying out the money required to maintain or expand its asset base. FCF is
important because it allows a company to pursue opportunities that enhance
shareholder value. Without cash, it's tough to develop new products, make
acquisitions, pay dividends and reduce debt. It is calculated as:
FCF = (NOPAT) – (Change in Net Operating Assets)
Where, NOPAT – Net Operating Assets after Tax (calculated as EBIT*[1-Tax Rate]).
Change in Net Operating Assets is calculated as change in capital expenditure and

change in working capital. In terms of Balance sheet particulars Net Operating Assets
can be calculated as summation of Total Fixed Assets and Net Current Assets. Net
Current Assets is again calculated by subtracting Total Current Liabilities from Total
Current Assets. Individually these components are calculated as:
Total Current Assets = Inventories + Sundry Debtors + Cash

&Bank + Loans & Advances + Fixed Deposits
Total Current Liabilities = Current Liabilities + Provisions
Total Fixed Assets = Net Block + Capital Work in Progress
Where, Net Block = Gross Block – Accumulated Depreciation
6.1.4 Equity Cash Flow (ECF)

ECF basically provides an outlook about a company with respect to its equity flows. It
describes the actual value for an investor or shareholder in a firm. Positive ECF value
suggests that the firm is making money for its investors even after repayment of its
debt liabilities. It can be calculated as:
ECF = (FCF) – (Net Repayments of Loans/Liabilities)
Where, Net repayment of loans = (Total Debt Repayment) – (Total

Debt Acquired)
In Net repayment of loans, change of equity is also taken care.

6.1.5 Capital Cash Flows (CCF)

As such there is no difference in FCF and CCF, leaving apart the factor of Tax Shield.
CCF also takes care of the tax shield and thus it is discounted with Pre-Tax WACC
while FCF is discounted with Post-Tax WACC. The final evaluation of Present Value
by both ways will approximately provide us the same value.
6.2 SUMMARY TABLE
ACCEPTANCE/
RANK vis-à-vis PERFORMED
PSU AVERAGE POOR REJECTION OF
COMPETITORS WELL
H0
BHEL 1  REJECT
BPCL 2  REJECT
CANNOT BE
GAIL 4 
REJECTED
HPCL 2  REJECT
CANNOT BE
IOCL 3 
REJECTED
CANNOT BE
MTNL 5 
REJECTED
NTPC 2  REJECT
CANNOT BE
ONGC 4 
REJECTED
SAIL 1  REJECT
TOTAL 5 1 3
Thus, the Hypothesis -‖ The PSUs have not performed well over the years as compared
to their competitors in the same industry”, Cannot be Rejected for 4 PSUs while is
Rejected for 5 PSUs. Hence, there is a mixed performance of the PSUs as a whole as
compared to their competitors.
6.3 STATISTICAL ANALYSIS
From 01-Aug-08 to 31-July-09 BHEL BPCL GAIL HPCL IOCL MTNL NTPC ONGC SAIL
Beta Value for the period* 0.0807 0.4319 0.8290 0.4560 0.4312 0.7808 (0.0398) 0.8522 1.3029
Average Return for the period* 0.4893 0.5059 0.1053 0.5967 0.4164 0.1231 0.6025 0.3009 0.5338
Annualized SD for the period* 0.4623 0.5033 0.6335 0.5601 0.4768 0.5320 0.4125 0.5293 0.7781
Treynor's Ratio 5.4936 1.0650 0.0716 1.2078 0.8590 0.0988 (13.9931) 0.2991 0.3745
Sharpe Ratio 0.9590 0.9138 0.0937 0.9834 0.7770 0.1451 1.3493 0.4816 0.6270
* Calculated during third submission.
The Sharpe & Treynor ratios describe the securities returns based on their standard deviations with respect to the market as well as the
securities own volatility. The Sharpe ratio that calculates risk-return based on the securities own standard deviation, has been healthy for most
of the Navratnas. However, only NTPC is able to provide a return more than per unit of volatility while BHEL, BPCL & HPCL are just around 1
while GAIL & MTNL are more towards zero which means that the risk is not giving adequate returns. The Treynor Ratio, which takes the
Market Volatility as the base, for most of the firms is not very satisfactory. Except for BHEL, BPCL & HPCL, the securities have not performed
well in comparison to the Benchmark index NIFTY‘s standard deviation. The PSUs‘ shares deviations have more unsystematic risk as compared
to the systematic risk because of which the Treynor ratio is not encouraging for most of the securities.
7. Testing of Hypothesis – II
As per the purpose of the study, we wish to quantify the growth of the Navratnas for the past
five years. To ascertain this fact we are looking into two major aspects which are taken as the
hypothesis for the study. Here we are looking forward to delve deeper into the second
hypothesis that is – “The Share prices of PSUs (Navratnas) are not correlated
with the Market performance.”
7.1 METHODOLOGY
The methodology used to test this hypothesis is as follows:
1. We have calculated the average annualized return and standard deviation for all
the PSUs as well as for the market that is NSE for the last five years on the basis
of NSE index.
2. Calculation of average return and standard deviation is done for different
timelines. It includes overall return and deviation for the last five years as well as
on annual and semiannual basis. It has been done for both PSUs and Market.
This will basically equip us to compare the average return of PSUs with respect to
Market for different periods for the tenure of last five years.
3. Followed by average annual return and standard deviation we have calculated the
covariance for different timelines as described above. This in turn helped us to
calculate the beta value of the PSUs. The meaning as well as the calculations of
the beta was described in our earlier submissions.
4. Further we have compared the return and risk related to a script with respect to
market in that period of time. This gave us a fair idea of the trend about a script
with respect to market. With the help of such trend analysis we can are in a
position to comment about the results of the second hypothesis.
5. Further to provide a proper comparative look of the study, we have used charts
and tables which again helping us to achieve our objective.
7.1.1 Stock Analysis

 Expected Return
The return on most investments is uncertain; however it is possible to describe the
future returns statistically as a probability distribution or arithmetic mean of
historical data.
Calculation: Daily return has been calculated by using the formulae:
Daily Return E(x) = (Today’s Close – Previous Day Close) /

(Previous Day Close)
Arithmetic Mean of all the Daily Return has provided us the Daily Expected Return.
Annualized Expected Return is obtained by multiplying the daily expected return by a
factor of 252, which stands for the number of trading days in a year.
(NOTE: 5 year data has been used, 1st Aug‘ 04 to 31st July‘ 2009.)
 Standard Deviation
It is a measure of the dispersion of a set of data from its mean. In finance, standard
deviation is applied to the annual rate of return of an investment to measure the
investment's volatility.
Calculation: Daily Standard deviation has been calculated using the formulae:
Daily S D = (Square root ((Daily return – Expected Daily

Return)^2)*(1/n-1)))
Annualized Standard Deviation is obtained by multiplying the factor of 252.
 Covariance:
It can be defined as a measure of the degree to which returns on two risky assets
move in tandem. A positive covariance means that asset returns move together. A
negative covariance means returns move inversely.
Calculation: Daily Covariance between NSE and Navratnas has been calculated by
using the formulae:
Cov(A,B) = Sigma((A-E(A))*(B-E(B)))*(1/(n-1)
Where E(x) = expected value of x

n is the total number of observations
It is again annualized by multiplying it with the factor of 252.
 Beta Calculation
In finance, the beta (β) of a stock or portfolio is a number describing the relation of
its returns with that of the financial market as a whole. An asset with a beta of 0
means that its price is not at all correlated with the market; that asset is independent.
A positive beta means that the asset generally follows the market. A negative beta
shows that the asset inversely follows the market; the asset generally decreases in
value if the market goes up and vice versa. It is also used as a measure of the
volatility, or systematic risk, of a security or a portfolio in comparison to the market
as a whole. Beta is used in the capital asset pricing model (CAPM), a model that
calculates the expected return of an asset based on its beta and expected market
returns.
Calculation:
We have used two procedures to calculate the β value. The procedures are as follows:
a. In the first procedure we have used the formulae –

β = Cov(Asset, Market) / SD(Market)^2
Cov(Asset, Market) Covariance of an asset with respect to market.
SD (Market) Standard Deviation of Market.
b. In the second procedure we have used the Regression analysis for the
calculation of β value, which is described in the next section.
7.1.2 Regression Analysis

In statistics, regression analysis refers to techniques for modeling and analyzing
several variables, when the focus is on the relationship between a dependent variable
and one or more independent variables. More specifically, regression analysis helps
us understand how the typical value of the dependent variable changes when any one
of the independent variables is varied, while the other independent variables

are held fixed.
Analysis of performance of stocks is incomplete if only fundamental analysis of the

economy, industry and company are undertaken. Technical analysis plays a vital role
in identifying various trends, movements that the stocks are making over a period.
Generally a one year analysis is carried out to find out the movements. Here, we have
taken two years for our study because the previous year was not a normal year
(normal year means a year free of any sudden economic, environmental or political
change). Keeping in mind the recession that set in the previous year, also the
parliamentary elections at central level, it becomes prudent to take more than one
year for the analysis. There are various techniques used by various analysts. However,
we confine our self to a few of them namely, Point & Figure Chart, Moving Averages
and Trend lines. The following report consists of the above charts of the Navratnas
and some analysis that we could come out with.
7.1.3 Technical Analysis

Fundamental analysis use economic data that are usually separate from the bond or
stock market. Technical analysis is an alternative method of making the investment
decision and helps in answering the fundamental question: ―What securities should
an investor buy and sell? When should he buy or sell them? Technical Analysis
involves the examination of past market data such as prices and volume of trading,
which leads to an estimate of future price trends and therefore investment decisions.
Technical analysts have a strong opinion that past data resembles the future trends.
Many investment firms recruit technical analysts along with fundamental analysts.
The following are the fundamental assumptions in technical analysis.
1. The market value of any good or service is determined solely by the

interaction of supply & demand.
2. Supply & demand are governed by numerous rational and irrational factors.
Included in these factors are those economic variable relied on by the
fundamental analysts as well as moods, opinion and guesses. The market
weighs all these factors continually and automatically.
3. Disregarding minor fluctuations, the prices for individual securities and the
overall value of the market tend to move in trends, which persist for
appreciable lengths of time.
4. Prevailing trends change in reaction to shifts in supply and demand
relationships. These shifts can be detected sooner or later in the action of the
market itself.
(Source: Investment Analysis & Portfolio Management, Reilly/Brown, 8th ed.,
South-Western Cengage Learning)
Advantages of Technical Analysis
 Technical analysts believe that the fundamental analysis can result in better
returns only if they are able to get the new information much before the market
and investors get it and are able to process it correctly and quickly.
 Technical analysts are sceptical about the quality of accounting or financial
statements. According to them, these statements hide a great deal of information
regarding the company‘s earnings and utilisation of sources. Also, the non-
quantifiable variables that affect the organisation can not be shown in the
financial statements. Even the procedures for recording of information differ over
various organisations.
 Technical analysts need to recognise a movement to a new equilibrium value for
the change due to whatever the reason it may be.
Challenges to Technical Analysis
 The assumption of gradual setting in of the changes in share prices is an example

of Weak-form of Efficient Market Hypothesis (EMH). The empirical studies have
supported the EMH. The Weak-form studies have found that prices do not move
in trends based on statistical tests of auto-correlation and runs.
 The very basis of technical analysis is questionable. The past data or price
patterns may not be repeated.
 The technical analysis requires great deal of subjective judgement and decision
making. Same graph or pattern can be read differently by different analysts.
7.1.4 Trend Analysis

Trend Analysis is the most basic form of analysis on a stock. The closing prices are
taken and a trend is derived. The trend may be derived using linear equation,
quadratic, cubic or even higher powers. The higher the powers, the stronger the trend
however, after certain limits the trend may not be clearly derived.
 Point & Figure Chart
A Point and Figure chart or XO chart as it is known popularly is different from typical
price graphs. General Price graphs will show all the ending prices and volumes to
show a trend whereas the point & figure chart includes only significant price changes
regardless of their timing. Its upto the technician to decide what a significant price
change is and what would be reversal points.
The chart will help in knowing the breakouts in the trends so as to find certain price
trends for given significance level. A long horizontal movement with many reversals
but no major trends up or down is considered as a period of consolidation where in
stocks move from buyers to sellers and back again with no strong price consensus
about its direction. The longer the consolidation period, the larger will be the
subsequent movements. Also, these charts can be useful in showing the support and
resistance level for the stocks.
 Moving Averages
Moving averages show the average price over a period of time rather than daily
change. The moving average lines help in ascertaining trends of price of stocks.
Generally, 50-day and 200-days moving averages are used for consideration. A 50-
days moving average line will show a short term trend and the 200-days line the
longer term trend. The two can be compared in the following aspects: If the overall
price trend has been down, the moving average lines would generally be above the
current prices. Any price breakthrough from below accompanied by higher volumes
is indication of price reversals in a positive change and an upward trend is
speculated. However, if the price breakthrough comes from above the moving line
accompanied by heavy volumes, tend to show negative change and downward trend
is expected. The two lines can be further compared as: if the 50days line crosses 200-
days line from below, it signals an upward movement of prices and gives a bullish
indication. In contrast, if the line crosses from above it shows a downward movement
and hence, bearish sentiments.
 Candle Stick Graphs
Candle Stick Graphs are show the open, high, low and close prices of stock on a daily
basis. It can be used to show the variability of prices on a daily basis. However, with a
clutter of information, the chart may not seem very clear. The chart is still useful as it
also shows a trend based on high and low prices.
7.1.5 HPR - Holding Period Return

HPR is a method to track the activity of a portfolio or a stock over a time period. It is
defined as the how many times is the value of your portfolio currently with respect to
the initial state. Value more than one show that the portfolio has provided some
return for that holding period. Higher the value of the HPR better is the return
provided by that portfolio. It is calculated using:
HPR = (End price) / (Initial price)
7.1.6 HPY - Holding Period Yield

The return earned from the act of holding an asset over a given period. The return is
equal to the income and other gains (such as appreciation) earned from the asset,
divided by the original cost of the asset. This can be taken as a variant of HPR which
provides the return percentage of a stock or a portfolio over a period of time.
Higher the value of the HPY greater the return achieved by the holder. It is calculated
as:
HPY = HPR – 1
 ANNUAL HPR & HPY
Annualized Holding Period Return describes the return obtained by the holder of
the stock or portfolio on the annual basis. It is calculated as:
Annual HPR = (HPR) ^ (1/r)
Where r is the number of years for which the stock is hold.
Annualized Holding Period Yield is calculated as:
Annual HPY = (Annual HPR – 1)
7.1.7 Sharpe Ratio

It was developed by William F. Sharpe, which measures a ratio of return to volatility.
It is useful in comparing two portfolios or stocks in terms of risk-adjusted return. It
basically takes care of total risk involved with a portfolio i.e. both systematic and
unsystematic risk. The higher the Sharpe Ratio, the more sufficient are returns for
each unit of risk. It is calculated by first subtracting the risk free rate from the return
of the portfolio, then dividing by the standard deviation of the portfolio.
Using Sharpe ratios to compare and select among investment alternatives can be
difficult because the measure of risk, portfolio standard deviation, penalizes
portfolios for positive upside returns as much as the undesirable downside returns.
The Sharpe ratio is calculated as follows:
7.1.8 Treynor Ratio

It is ratio for measuring the portfolio performance similar to Sharpe Ratio. The
Treynor Ratio differs from the Sharpe Ratio in so far as the beta to the Market
Benchmark is used as a measure of risk rather than the standard deviation of the
portfolio. It provides a measure of performance on the basis of only systematic risk.
Higher value of Treynor ratio denotes that the investor is provided with high yields by
each unit of market risk.
The Treynor ratio is calculated as follows:
Where,
Treynor ratio,
Portfolio i's return,
Risk free rate
Portfolio i's beta
7.2 RESULT
Ranking of companies based on their share market return
Rank Company Beta Value Annualized
Average
Return
NSE 25.77%
1 SAIL 1.38021 46.73%
2 BHEL 0.12095 41.92%
3 NTPC 0.00064 29.70%
4 GAIL 0.87175 21.72%
5 ONGC 0.91487 18.17%
6 BPCL 0.60784 15.42%
7 IOCL 0.63753 13.46%
8 HPCL 0.65711 10.62%
9 MTNL 0.91255 4.83%
From the above table and graph, it can be clearly seen that, out of the nine PSUs,
only 3 PSUs have outperformed the NIFTY while the rest have underperformed.
However, each of the stock has moved in tandem with the NIFTY though the
magnitude varies. All the share prices have risen over the period so has the
NIFTY. Hence, the Null Hypothesis: “The Share prices of PSUs
(Navratnas) are not correlated with the Market performance.” can
be rejected. However, the degree of relationship is not high in some of the
companies.
8. REFERENCES
Web Sites
 http://nseindia.com/
 http://bseindia.com/
 http://www.moneycontrol.com/
 http://en.wikipedia.org
 http://www.investopedia.com/
Books & Material
 Investment Analysis and Portfolio Management by Reilly & Brown
 Technical Analysis by Mayur Shah
 Financial Management by Brigham & Ehrhardt
Database
 Capital Line

Financial Analysis of Navratnas Nine PSUs

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Contemporary Issue: Final Report

Topic: “Navratna: A Financial Analysis of the 9 PSUs”

Faculty Guide: Prof. M. S. Bhatt

Hardik Jain (8076)

Jain Amit Manraj (8077)

Submitted on: Saturday, 31st October, 2009

Project Guide : Prof. M. S. Bhat

Name of student : Hardik Jain & Jain Amit Manraj

The study was divided into two hypothesis:

Signature of the Student Signature of the Project Guide

Hardik Jain Prof. M S Bhat Marakini

Jain Amit Manraj

- Hardik Jain & Jain Amit Manraj

III. LIST OF ABBREVIATIONS

PSU Public Sector Unit

IV. TABLE OF CONTENTS

 To increase by 25% the national income

 Mining and industry

2. EMERGENCE OF PSUs & NAVRATNAs

1) BHEL (Bharat Heavy Electrical Limited): BHEL is the largest

2) SAIL (Steel Authority of India Limited): SAIL is the leading steel-

3) GAIL (Gas Authority of India Limited): GAIL is India's flagship

4) HPCL (Hindustan Petroleum Corporation Limited): HPCL, a

5) BPCL (Bharat Petroleum Corporation Ltd.) On 24th January

6) IOCL (Indian Oil Corporation Limited): India‘s flagship national

7) ONGC (Oil and Natural Gas Corporation Limited): ONGC

8) MTNL (Mahanagar Telephone Nigam Limited): MTNL is an

9) NTPC (National Thermal Power Corporation): India‘s largest

3. SCOPE OF THE STUDY

4. PURPOSE OF THE STUDY

6.1.1 Ratio Analysis

Ratios can be broadly divided in the following ways:

Liquidity Ratio Profitability Indicator Ratios

 Current Ratio  Net Profit Margin Analysis

 Debt Ratio  Fixed Asset Turnover

 Operating cash flow to  Book value per share

Current Ratio = Current Assets

Quick Ratio = Liquid Assets (Cash & Bank + Debtors)

2) Profitability Indicator Ratio

a) Net Profit Margin Analysis

Net Profit Margin = Net Profit (after Tax) .

Net Sales (Sales- Excise Duty)

Return on Assets= Net Profit (after Tax)

Average Fixed Assets

Return on Equity = Net Profit (after Tax) .

Average Equity Share Capital

d) Return on Capital Employed

Debt Ratio = Total Debt (secured+ unsecured)

Total Capital Employed

b) Debt- Equity Ratio

Debt Equity Ratio = Total Debt (Secured + Unsecured)

Total Equity Share Capital (incl. Reserves &

c) Interest Coverage Ratio

Interest Coverage Ratio = EBIT .

4) Operating Performance Ratio

a) Fixed Asset turnover

Fixed Asset Turnover = Sales (excl. Excise Duty)

Average Fixed Assets

d) Creditor Turnover Ratio

Creditor Turnover Ratio = COGS .

e) Debtor Turnover Ratio

Debtor Turnover Ratio= Net Sales*(excl. Excise Duty)

f) Inventory Turnover Ratio

Inventory Turnover Ratio = COGS .