A study on Capital Budgeting and Asset Management Practices in BHEL

CAPITAL BUDGETING:

Introduction:

Financial management is largely concerned with financing, dividend

and investment decisions of the firm with some overall goal in mind.
Corporate finance theory has developed around a goal of maximizing the
market value of the firm to its shareholders. This is also known as shareholder
wealth maximization. Although various objectives or goals are possible in the
field of finance, the most widely accepted objective for the firm is to
maximize the value of the firm to its owners.
Financing decisions deal with the firm’s optimal capital structure in
terms of debt and equity. Dividend decisions relate to the form in which
returns generated by the firm are passed on to equity-holders. Investment
decisions deal with the way funds raised in financial markets are employed in
productive activities to achieve the firm’s overall goal; in other words, how
much should be invested and what assets should be invested in. The objective
of the investment or capital budgeting decision is to maximize the market
value of the firm to its shareholders. The relationship between the firm’s
overall goal, financial management and capital budgeting is depicted in Figure
1.1.
Funds are invested in both short-term and long-term assets. Capital
budgeting is primarily concerned with sizable investments in long-term assets.
These assets may be tangible items such as property, plant or equipment or
intangible ones such as new technology, patents or trademarks. Investments in
processes such as research, design, development and testing – through which
new technology and new products are created – may also be viewed as
investments in intangible assets.

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Irrespective of whether the investments are in tangible or intangible assets, a
capital investment project can be distinguished from recurrent expenditures by
two features. One is that such projects are significantly large. The other is that
they are generally long-lived projects with their benefits or cash flows
spreading over many years.
Sizable, long-term investments in tangible or intangible assets have
long-term consequences. An investment today will determine the firm’s
strategic position many years hence. These investments also have a
considerable impact on the organization’s future cash flows and the risk
associated with those cash flows. Capital budgeting decisions thus have a
longrange impact on the firm’s performance and they are critical to the firm’s
success or failure.
As such, capital budgeting decisions have a major effect on the value
of the firm and its shareholder wealth. It deals with capital budgeting
decisions, defines the shareholder wealth maximization goal, and distinguishes
three types of investment project on the basis of how they influence the
investment decision process, discusses the capital budgeting process and
identifies one of the most crucial and complex stages in the process, namely,
the financial appraisal of proposed investment projects. This is also known as
economic or financial analysis of the project or simply as ‘project analysis’.

`Actual project analysis in the real world involves voluminous, tedious,

complex and repetitive calculations and relies heavily on computer
spreadsheet packages to handle these evaluations

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CAPITAL BUDGETING:

GOAL OF THE FIRM

Maximize shareholder wealth or value of the firm

Financing Decision Dividend Decision Investment Decisions

Long-term Short-term
Investments Investments

CAPITAL BUDGETING

Figure 1.1. Corporate goal, financial management and capital budgeting.

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Classification of investment projects:

Investment projects can be classified into three categories on the basis

of how they influence the investment decision process: independent projects,
mutually exclusive projects and contingent projects.
An independent project is one the acceptance or rejection of which
does not directly eliminate other projects from consideration or affect the
likelihood of their selection. For example, management may want to introduce
a new product line and at the same time may want to replace a machine which
is currently producing a different product. These two projects can be
considered independently of each other if there are sufficient resources to
adopt both, provided they meet the firm’s investment criteria. These projects
can be evaluated independently and a decision made to accept or reject them
depending upon whether they add value to the firm.
Two or more projects that cannot be pursued simultaneously are called
mutually exclusive projects – the acceptance of one prevents the acceptance of
the alternative proposal. Therefore, mutually exclusive projects involve
‘either-or’ decisions – alternative proposals cannot be pursued simultaneously.
For example, a firm may own a block of land which is large enough to
establish a shoe manufacturing business or a steel fabrication plant. If shoe
manufacturing is chosen the alternative of steel fabrication is eliminated. A car
manufacturing company can locate its manufacturing complex in Sydney,
Brisbane or Adelaide. If it chooses Adelaide, the alternatives of Sydney and
Brisbane are precluded.

4
 Mutually exclusive projects can be evaluated separately to select the
one which yields the highest net present value to the firm. The early
identification of mutually exclusive alternatives is crucial for a logical
screening of investments. Otherwise, a lot of hard work and resources can be
wasted if two divisions independently investigate, develop and initiate projects
which are later recognized to be mutually exclusive.
A contingent project is one the acceptance or rejection of which is
dependent on the decision to accept or reject one or more other projects.
Contingent projects may be complementary or substitutes. For example, the
decision to start a pharmacy may be contingent upon a decision to establish a
doctors’ surgery in an adjacent building. In this case the projects are
complementary to each other. The cash flows of the pharmacy will be
enhanced by the existence of a nearby surgery and conversely the cash flows
of the surgery will be enhanced by the existence of a nearby pharmacy.
In contrast, substitute projects are ones where the degree of success (or
even the success or failure) of one project is increased by the decision to reject
the other project. For example, market research indicates demand sufficient to
justify two restaurants in a shopping complex and the firm is considering one
Chinese and one Thai restaurant. Customers visiting this shopping complex
seem to treat Chinese and Thai food as close substitutes and have a slight
preference for Thai food over Chinese. Consequently, if the firm establishes
both restaurants, the Chinese restaurant’s cash flows are likely to be adversely
affected. This may result in negative net present value for the Chinese
restaurant. In this situation, the success of the Chinese restaurant project will
depend on the decision to reject the Thai restaurant proposal. Since they are
close substitutes, the rejection of one will definitely boost the cash flows of the
other. Contingent projects should be analysed by taking into account the cash
flow interactions of all the projects.

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CAPITAL BUDGETING PROCESS:

Corporate Goal

Strategic Planning

Investment opportunities

Preliminary Screening

Financial appraisal, quantitative analysis, project

evaluation or project analysis

Qualitative factors, judgements and gut feelings

Accept/reject decisions on the projects

Accept Reject

Implementation

Facilitation, monitoring, control and review

Continue, expand or abandon project

Post-implementation audit

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The capital budgeting process

Capital budgeting is a multi-faceted activity. There are several

sequential stages in the process. For typical investment proposals of a large
corporation, the distinctive stages in the capital budgeting process are
depicted, in the form of a highly simplified flow chart.

Strategic planning

A strategic plan is the grand design of the firm and clearly identifies
the business the firm is in and where it intends to position itself in the future.
Strategic planning translates the firm’s corporate goal into specific policies
and directions, sets priorities, specifies the structural, strategic and tactical
areas of business development, and guides the planning process in the pursuit
of solid objectives. A firm’s vision and mission is encapsulated in its strategic
planning framework.
There are feedback loops at different stages, and the feedback to
‘strategic planning’ at the project evaluation and decision stages – indicated by
upward arrows in Figure – is critically important. This feedback may suggest
changes to the future direction of the firm which may cause changes to the
firm’s strategic plan.

Identification of investment opportunities

The identification of investment opportunities and generation of

investment project proposals is an important step in the capital budgeting
process. Project proposals cannot be generated in isolation. They have to fit in
with a firm’s corporate goals, its vision, mission and long-term strategic plan.
Of course, if an excellent investment opportunity presents itself the corporate
vision and strategy may be changed to accommodate it. Thus, there is a two-
way traffic between strategic planning and investment opportunities.

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 Some investments are mandatory – for instance, those investments
required to satisfy particular regulatory, health and safety requirements – and
they are essential for the firm to remain in business. Other investments are
discretionary and are generated by growth opportunities, competition, cost
reduction opportunities and so on. These investments normally represent the
strategic plan of the business firm and, in turn, these investments can set new
directions for the firm’s strategic plan. These discretionary investments form
the basis of the business of the corporation and, therefore, the capital
budgeting process is viewed in this book mainly with these discretionary
investments in mind.
A profitable investment proposal is not just born; someone has to
suggest it. The firm should ensure that it has searched and identified
potentially lucrative investment opportunities and proposals, because the
remainder of the capital budgeting process can only assure that the best of the
proposed investments are evaluated, selected and implemented. There should
be a mechanism such that investment suggestions coming from inside the firm,
such as from its employees, or from outside the firm, such as from advisors to
the firm, are ‘listened to’ by management.
Some firms have research and development (R&D) divisions
constantly searching for and researching into new products, services and
processes and identifying attractive investment opportunities. Sometimes,
excellent investment suggestions come through informal processes such as
employee chats in a staff room or corridor.

Preliminary screening of projects

Generally, in any organization, there will be many potential investment

proposals generated. Obviously, they cannot all go through the rigorous
project analysis process. Therefore, the identified investment opportunities
have to be subjected to a preliminary screening process by management to
isolate the marginal and unsound proposals, because it is not worth spending
resources to thoroughly evaluate such proposals. The preliminary screening
may involve some preliminary quantitative analysis and judgements based on
intuitive feelings and experience.
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Financial appraisal of projects

Projects which pass through the preliminary screening phase become

candidates for rigorous financial appraisal to ascertain if they would add value
to the firm. This stage is also called quantitative analysis, economic and
financial appraisal, project evaluation, or simply project analysis.
This project analysis may predict the expected future cash flows of the
project, analyses the risk associated with those cash flows, develop alternative
cash flow forecasts, examine the sensitivity of the results to possible changes
in the predicted cash flows, subject the cash flows to simulation and prepare
alternative estimates of the project’s net present value.
Thus, the project analysis can involve the application of forecasting
techniques, project evaluation techniques, risk analysis and mathematical
programming techniques such as linear programming. While the basic
concepts, principles and techniques of project evaluation are the same for
different projects, their application to particular types of projects requires
special knowledge and expertise. For example, asset expansion projects, asset
replacement projects, forestry investments, property investments and
international investments have their own special features and peculiarities.
Financial appraisal will provide the estimated addition to the firm’s
value in terms of the projects’ net present values. If the projects identified
within the current strategic framework of the firm repeatedly produce negative
NPVs in the analysis stage, these results send a message to the management to
review its strategic plan. Thus, the feedback from project analysis to strategic
planning plays an important role in the overall capital budgeting process.
The results of the quantitative project analyses heavily influence the
project selection or investment decisions. These decisions clearly affect the
success or failure of the firm and its future direction. Therefore, project
analysis is critically important for the firm. The project focuses on this
complex analytical stage of the capital budgeting process, that is, financial
appraisal of projects (or simply, project analysis).

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Qualitative factors in project evaluation

When a project passes through the quantitative analysis test, it has to

be further evaluated taking into consideration qualitative factors. Qualitative
factors are those which will have an impact on the project, but which are
virtually impossible to evaluate accurately in monetary terms. They are factors
such as:
_ the societal impact of an increase or decrease in employee numbers
_ the environmental impact of the project
_ possible positive or negative governmental political attitudes towards the
project
_ the strategic consequences of consumption of scarce raw materials
_ positive or negative relationships with labour unions about the project
_ possible legal difficulties with respect to the use of patents, copyrights and
trade or brand names
_ impact on the firm’s image if the project is socially questionable.

Some of the items in the above list affect the value of the firm, and
some not. The firm can address these issues during project analysis, by means
of discussion and consultation with the various parties, but these processes
will be lengthy, and their outcomes often unpredictable. It will require
considerable management experience and judgemental skill to incorporate the
outcomes of these processes into the project analysis.
Management may be able to obtain a feel for the impact of some of
these issues, by estimating notional monetary costs or benefits to the project,
and incorporating those values into the appropriate cash flows. Only some of
the items will affect the project benefits; most are externalities. In some cases,
however, those qualitative factors which affect the project benefits may have
such a negative bearing on the project that an otherwise viable project will
have to be abandoned.

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The accept/reject decision

NPV results from the quantitative analysis combined with qualitative

factors form the basis of the decision support information. The analyst relays
this information to management with appropriate recommendations.
Management considers this information and other relevant prior knowledge
using their routine information sources, experience, expertise, ‘gut feeling’
and, of course, judgement to make a major decision – to accept or reject the
proposed investment project.

Project implementation and monitoring

Once investment projects have passed through the decision stage they
then must be implemented by management. During this implementation phase
various divisions of the firm are likely to be involved. An integral part of
project implementation is the constant monitoring of project progress with a
view to identifying potential bottlenecks thus allowing early intervention.
Deviations from the estimated cash flows need to be monitored on a regular
basis with a view to taking corrective actions when needed.

Post-implementation audit

Post-implementation audit does not relate to the current decision

support process of the project; it deals with a post-mortem of the performance
of already implemented projects. An evaluation of the performance of past
decisions, however, can contribute greatly to the improvement of current
investment decision-making by analysing the past ‘rights’ and ‘wrongs’.
The post-implementation audit can provide useful feedback to project
appraisal or strategy formulation. For example, expost assessment of the
strengths (or accuracies) and weaknesses (or inaccuracies) of cash flow
forecasting of past projects can indicate the level of confidence (or otherwise)
that can be attached to cash flow forecasting of current investment projects.

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Company Overview

Bharat Heavy Electricals Limited (BHEL) is the largest engineering

enterprise of its kind in India and is one of the major power plant equipment
manufacturers in the world.

BHEL's Tiruchirapalli Complex is India's largest manufacturer of

boilers and auxiliaries providing total boiler island solutions for utility,
industrial, captive power and heat recovery applications.

The BHEL Tiruchirapalli Complex comprises five units…

 High Pressure Boiler Plant (Tiruchirapalli)

 Seamless Steel Tube Plant (Tiruchirapalli)
 Boiler Auxiliaries Plant (Ranipet)
 Piping Centre (Chennai)
 Industrial Valves Plant (Goindwal)

State-of-the-art Manufacturing Facilities

BHEL’s manufacturing facilities are comparable with the best in the

world with modern design, engineering, material preparation, fabrication,
welding, heat treatment, handling, testing and shipping facilities.  

BHEL’s Tiruchirapalli Complex alone has a covered area of over

175000 sq metres with direct railway link to the shipping areas.

International Product Quality

BHEL offers customers worldwide a wide range of products and

services that conform to the highest international quality standards and
specifications with the added advantages of shorter delivery periods and
competitive prices.

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The R&D Advantage

BHEL's Tiruchirapalli Complex is the leading centre for coal-based

research and development in India with hundreds of man-years of expertise in
designing boilers for optimum performance using even low grade fuels. 

In-house R&D facilities include a 6.2 MWe Integrated Gasification

Combined Cycle (IGCC) Demonstration Plant, Asia’s Largest Fuel Evaluation
Text Facility (FETF), FBC and CFBC test rigs, comprehensive test facilities
for test firing of solid and liquid fuels, metallurgical and chemical laboratories,
etc.

Proven Capability

BHEL has supplied boilers and auxiliaries accounting for nearly 70%
of the total installed thermal power generation capacity in India.

BHEL has successfully executed boiler projects in Malaysia and the

Middle East and continues to secure repeat orders from overseas customers for
servicing and renovation of boilers.

PRODUCTS:

 Utility boilers

 Industrial Boilers

 Circulating Fluidised Bed Combustion Boilers

 Heat Recovery Steam Generators

 Atmospheric Fluidised Bed Combustion Boilers

SERVICES:

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  Supply of spares
 Residual Life Assessment
 Thermal Performance Assessment
 Design Updates
 Load Regain
 Fuel Conversion
 Efficiency Improvement
 Stoker to fluid bed conversion
 Recommendations on chemical cleaning
 Electrostatic Precipitator retrofits

FACILITIES

BHEL’s Tiruchirapalli Complex is the

largest engineering andmanufacturing
complex in Tamilnadu spread over 2900
acres at Tiruchirapalli and 1250 acres at
Ranipet.
The High Pressure Boiler Plant and the Asia’s largest Incremental Pipe
Bending Machine 
Seamless Steel Tube Plant at 

Tiruchirapalli have a total covered

area of over 200,000 sq metres
while the Boiler Auxiliaries Plant
at Ranipet has a covered area of

8000 Tonne Hydraulic Press around 45,000 sq metres.

The manufacturing plants are equipped with sophisticated state-of-the-art

facilities for material preparation, handling, heat treatment, welding,
fabrication and testing.

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Some of the unique facilites include…

Asia’s largest Incremental Pipe Bending

Machine, an 8000-tonne hydraulic press,
panel processing machines, flatfin welding
machines, a tandem arc SAW machine for
drum long seam welding, a high productive
drum drilling machine, sophisticated tube-
to-tube-sheet welding machines, bore Flat Fin Welding Machine
cladding machines,

CNC milling, drilling, boring and

machining facilities, tube and
panel bending machines, spiral fin
and stud welding machines,
plasma cutting systems, CNC gas
cutting machines
 
HRSG module welding

QUALITY

International Recognition

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BHEL was the first Indian company to obtain
authrisation to use the prestigious ‘S’ stamp on
equipment manufactured to ASME standards. BHEL
now also has the authorization to use the ASME ‘R’,
‘U’ and ‘U2’ stamps. Calibration Centre

The quality systems of BHEL’s manufacturing plants have also been certified
in accordance with are ISO9000 standards.

Unique Facilities

BHEL’s manufacturing plants are equipped with state-

of-the-art analytical, mechanical and non-destructive
testing facilities. Unique facilities include the
sophisticated Calibration Centre which is a nationally
accredited laboratory and the Central Laboratory
4MeV Linear which houses a wide range of equipment for
Accelerator mechanical testing and analysis.

PRODUCT CERTIFICATIONS:

 ASME “S”, “U”& “U2” certificates of authorisation

 National Board “R” certificate of authorisation
 API “5L”, “6A”, “6D”, “16C”, “17D” monograms

ACCREDITATION:

16
  National Accreditation for Calibration Centre by NABL, India
 National Accreditation for Plant Laboratory by NABL, India

ISO CERTIFICATION:

 ISO 9001 : 2000 by BVQI

 ISO 14001 by DNV
 ISO 18001 by DNV
 ISO 27001 for ISMS

INTERNATIONAL PROFESSIONAL AGENCIES:

 EVT, Germany
 Germanischer Lloyds
 Lloyds Register of Shipping
 Bureau Veritas
 American Bureau of Shipping
 TUV
 SGS
 Det Norse Veritas
 Indian Boiler Inspectorate
 EIL
 PDIL
 LLB, Germany

BUSINESS GROWTH PLAN:

BHEL, Trichy has set an ambitious target to reach a turnover of

Rs.10,000 Crores by 2011-12 from Rs.2304 Crores in 2004-05 based on
Business Strategy 2012 0f BHEL Trichy. A growth plan with CAGR of 24%
has been projected

The following chart explains the growth planned

17
 Growth in turnover
in Rs. ‘000 Crores

The core business of BHEL Trichy is in Power Boiler with the robust growth
of Indian Economy, The Government of India plans to add 100000 MW by
2012 expected to add at the same rate in 12th and future plans. Corporate
Management has assessed that there is an immediate need for all BHEL units
to revaluate their manufacturing and material handling facilities to identify
gaps if any, taking into account the projected loading in view of anticipated
orders during the 11th & 12th 5 year plan.

EXPORTS:s

BHEL Tiruchi has exported boilers and boiler components to Indonesia,

Malaysia, Singapore, Japan, Egypt, Libya, Syria, Malta, Cyprus and the USA.

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 BHEL boilers in Malaysia

ENVIRONMENT

BHEL’s Environment Management System gets coveted ISO14001

certification

19
 BHEL’s High Pressure Boiler Plant, Seamless Steel Tube Plant, R&D
Complex and Welding Research Institute located at Tiruchirapalli in the
southern state of Tamilnadu in India, have been awarded the ISO 14001
certification by an independent international certifying authority.

Environment-friendly CFBC boiler technology from BHEL

BHEL supplies a range of Circulating Fluidised Bed Combustion

(CFBC) boilers for burning low grade fuels with significantly reduced
emissions. This technology is now becoming increasingly popular worldwide
particularly in developed nations. 

BHEL Fabric  Filter Technology for Pollution Control

BHEL Fabric Filters for a variety of applications can filter the finest
particulate matter from flue gases before they are released into the atmosphere.
Fabric Filters offer several advantages including compact design and can be
used to achieve emission levels of 10 mg/Nm3 or less.

BHEL Electrostatic Precipitators - Over 99.9% Efficiency

BHEL has unmatched expertise in dust precipitation in utility and

industrial boilers including AFBC and CFBC boilers, co-generation plants,
pulp and paper mills, cement and steel industries. BHEL ESPs are designed
for as low as 20 mg/Nm3 emission rate, operate at collecting efficiencies as
high as 99.98+% and can be used for gas flow rates of up to 37,00,000 m3/hr. 

BHEL offers complete turnkey solutions from problem analysis and

design to erection and commissioning including carrying out feasibility studies
for ESP installation in existing plants and rendering assistance in carrying out
renovation work on existing precipitators.

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BHEL also provides solutions for a wide range of industrial and utility
particulate emission problems. 

BHEL Desalination Plants - Potable water from sea water

BHEL offers turnkey solutions for setting up Desalination Plants from

raw water sourcing to delivery of processed water. Desalination plants of any
capacity for both drinking and industrial water requirements can be supplied.
BHEL has vast experience in building small, medium & large capacity plants
with around 40 such plants currently in operation throughout India. 

BHEL has also set up India’s first Reverse Osmosis process based
open sea intake desalination plant of one million gallons per day capacity and
has been in charge of operation and maintenance of the plant since 1999.

BHEL Wind Electric Generators - Renewable source of energy

BHEL has been in the forefront of developing systems for harnessing

non-conventional energy sources to meet the growing demand for power.
BHEL supplies a wide range of Wind electric Generators with technology
from NORDEX of Denmark. 

Pollution-free public utility vehicle from BHEL - Zero fuel costs!

BHEL's ElectraVan is an environment-friendly smokeless, noiseless,

oil-free battery powered vehicle. BHEL ElectraVans are similar in all other
respects to conventional diesel or petrol vehicles except that it they are run by
an electric motor powered by a pack of rechargeable traction batteries. Ideally
suited for public transport in congested areas, hospitals, factories, wildlife
sanctuaries, airports, schools and heritage sites, BHEL ElectraVans also offer
the added advantage of low maintenance and zero fuel cost. Buyers of BHEL
ElectraVans are also eligible for a cash subsidy from the Ministry of Non-
Conventional Energy Sources, Government of India, gives a cash subsidy to

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the buyers. 

BHEL Solar Water Heaters

BHEL is the pioneer in the field of design, manufacturing and

installation of solar water heating systems in India and has installed systems
adding up to over 74,000 sq m of absorber area and a heating capacity of over
3.7 million litres per day. The largest unit commissioned for space heating has
a capacity of 40000 litres per day.

BHEL Portable Solar Lanterns

BHEL Solar Lanterns are user-friendly, portable, easy to operate,

attractive and of compact design. They are easy to assemble and dismantle,
provide light in all directions and re-charge in 4 hours on sunny days. 

EVENTS

BHEL’S ENVIRONMENT MANAGEMENT SYSTEM

RECEIVES ISO14001 CERTIFICATION FROM

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INTERNATIONAL CERTIFYING AUTHORITY

BHEL’s High Pressure Boiler Plant, Seamless Steel Tube

Plant, R&D Complex and Welding Research Institute located at
Tiruchirapalli, have been awarded the ISO 14001 certification
by an independent international certifying authority. The
certificate was received by Mr KG Ramachandran, Chairman &
Managing Director, BHEL, at a function held at Tiruchirapalli
on December 9.

“Eco-efficiency : A business link to sustainable

development”

Presiding over the function, Mr Ramachandran said

that, “World over there has been a strong shift from
environmental issues being seen as a problem and risk factor by
businesses, to a situation where it is seen as an opportunity
today, leading to efficiency improvement and competitive
advantage. Progressive companies have understood this and are
grabbing the opportunity to demonstrate that they are operating
to high standards like the ISO14000 to gain access to the global
markets. International corporate customers are under pressure
to report their environmental and social performance and they
in turn place demands on their suppliers to document that they
are also meeting high standards. Thus ‘Eco-efficiency’ as a
concept has become a business link to sustainable
development.”

Mr Ramachandran added that continuous improvement

of eco-efficiency of processes, conservation of materials and
other resources and product improvement for better
environmental performance were the need of the hour and the

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 focus should be on resource efficiency, waste minimisation and
improved financial performance. He emphasisied that these
shifts were necessary as companies achieved a competitive
edge by improving environmental performance. 

Speaking on the occasion, Shri VK Gopinath, Executive

Director, BHEL Tiruchirapalli Complex said, “At BHEL, we
have always been alive to the concerns of society about cleaner
environment and sustainable development. We have been
continuously making conscious efforts to reconcile
developmental goals with ecological responsibility. We
earnestly believe that our adoption of ISO 14001 standards is
not just a passing fad or a flavour of the month, but is the
reflection of an abiding faith born out of deep conviction
that this award is a definite milestone in our journey towards
business excellence.” In this context, Mr Gopinath observed
that in the future, the CEO of every organisation also has to see
himself as a ‘Chief Environmental Officer’.

As part of BHEL’s efforts towards Environment Management, over

100,000 trees have been planted on its campus and as many as 300 large trees
were transplanted to avoid felling during the year. BHEL also designed and
created a garden for the Erumbeeswarar Rock Temple located at Tiruverumbur
near the BHEL Complex.

CAPITAL BUDGETING PRACTICES IN BHEL

Capital Budget Analysis - Process Flow

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 Market/Customer Infrastructure Investment Plan & Proposal,
need analysis analysis capacity, Cost details Financial
Layouts Analysis

Feasibility report
to Corporate

Yes
Review by
>Rs 100 Cr?
External Agency

No

Submitted to Board Recommendations

for approval / Comments

Post Investment Procurement, Co-ordination

analysis & Monitoring

UNIT CORPORATE

PLANNING AND BUDGET APPROVALS:

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 Investment opportunities have to be identified or created; they do not
occur automatically. Investment proposals originate at different levels within a
firm. Most proposals, in the nature of cost reduction or replacement or process
or product improvements take place at plant level. The top management’s
contribution in generating investment ideas is confined to expansion or
diversification projects. The proposal for adding a new plant may arise from
the plant manager who thinks of a better way of utilising idle capacity.
Suggestions for replacing an old machine or improving the production
techniques arise at the factory level.

In BHEL, Trichy proposals for asset are invited from various

departments. The departmental heads pose their requirements in consultation
with the employees under them. The proposals from various department is
collected by the Capital Budgeting Co-Ordination Committee (CBC). The
proposal form is then presented for approval to the appropriate authority. The
purchase of asset involves either small investment or large investment or both.
The Trichy unit is entrusted with an annual amount of Rs. 5 Crore and minor
capital.

Small investment include

 Revenue Chargeable Fixed Assets (RCFA) and

 Minor capital

Revenue Chargeable Fixed Assets involves capital less than Rs.

10,000. It is a decentralised system of decision making. There is no
limit in the purchase. It is decided by the Industrial Engineering
Department.

Minor Capital means capital ranging from Rs. 10,000 to Rs. 20,00,000
fall under this category. It is owned by the Capital Budgeting Co-
ordination Committee approved by the Executive Director locally. The
Executive Director is the head of the Trichy Unit.

Large investment involves capital beyond Rs. 20,00,000. It may be

either modernisation or reconditioning or scheme of assets. It is
approved by the Corporate Office.

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Purchase Requisition is raised by Capital Budgeting Committee. The real need
for the asset is identified and justified by a group of members and the
requisition is made if the approving committee is fully satisfied with the
purchase. Then the procurement activity is done by the capital purchase
department. In the process of procurement of the asset the technical part is
referred to the user as he has a better knowledge in its operations. The
Ordering proposal by the Capital purchase is sent to the Capital Budgeting
Committee for budget clearance. For the Budget clearance the proposal is sent
to the Finance Department there they cross check the estimated amount with
the list of assets which were approved at the time of planning and check that
the estimated amount does not exceed. In case if the amount exceeds, upto
10% of the estimated amount is relaxable beyond that they should again get
capital budget approval. Then the purchase order is released and the asset is
being procured and is supplied to the concerned department or the user.

Below is a typical project application form example:

27
The next presents an advice of project change form:
 

28
A capital expenditure appropriation request form shown below:

29
ASSET MANAGEMENT PRACTICES:

30
ADDITION:-

Asset management deals with the addition, maintenance and deletion

of Fixed Assets. The need for asset arises when the production capacity has
increased and there is limited machines to produce or replacement of worn out
machines. The asset may have a life period of 10 to 20 years depending upon
the asset and its usage and after which it should be replaced. The asset should
be replaced when it has lost its capacity and the breakage is high or the power
consumed is high or the number of output is reduced. List of Assets are being
recorded with the Industrial Engineering Department. The department should
justify the real need for the asset. After the real need for the asset is
ascertained, the assets are prioritised based on the need and importance with
the limited capital. This type of prioritising the asset based on the capital is
called capital rationing. The Proposal form which is with the finance
department is cross checked with the purchase order. Then purchase is done in
the form of tendering.

The tender may be either:-

 Open
 Limited
 Single

Open tender is

Limited tender is

Single tender is

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 After deciding on tendering options, quotations from various suppliers
are received. The supplier who provides the best quality, cheap rate and who
satisfies all the requirements are selected. The technical part is verified and
then th supplier is finalised. Then the purchase order is released. The order is
made to the supplier and the asset is now procured. The receipt is obtained on
the procurement of the asset. After which the erection and the commissioning
of the asset takes place by the Maintenance and Service Department in the
presence of the vendor’s representative. Then the asset is verified by the user.
He then gives his acceptance that the machine is ready for use and it is as per
the required specifications of the user.

MAINTENANCE:

BHEL deals with machines that are costly. So higher the value of
machinery more the importance of its maintenance. It is not only the
machineries that need maintenance but also the building walls, compound,
outside garden, stair cases, fans, lighting system, electricity generator sets etc.
all needs maintenance to create a good work ability and work atmosphere. All
this costs money and hence the chief of maintenance has to give priorities.

IMPORTANCE AND NECESSITY OF MAINTENANCE:

 Equipment breakdown leads to stoppage of production and hence loss

of man hours and machine hours
 Many times if the first stage machine is non-operative next ‘n’ number
of machines will be idle due to no feeding of material due to
operational sequence need.
 Some of the breakdown losses are quantifiable and some are not
quantifiable.
 Due to lack of maintenance product quality will be poor and
inconsistent.

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 The losses and inconvenience created due to equipments breakdown
are summed up as under.

 Rescheduling of production plan causing delay in supply.

 Rejection, damage to components due to faulty machines.
 Loss of production and man hours.
 Increasing sub-contracting and hence more cost and
 Shortfall is also taken care by over time and hence increases
costs.

A D

B C

Warranty Ageing

Phase Phase

Newly installed equipment shows a very high rate of failure.

Greater failure rate is common during the initial phase. Once this phase
is over, the failure rate dips relatively. This behaviour comes close to
hyper-exponential distribution. It is a result of poor design and poor
installation. The equipment’s initial run allows those failures which
were inherent in it.

The other extreme is that of wear and tear on ageing of the

equipment. There may be a failure, a total failure or death which comes
about at ‘mean’ or ‘average’ time, may be a little earlier or later. The
ageing failure comes close to a bell-shaped normal distribution pattern.

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 Now between these two equipments also equipment do fail, but
reasons for these failures are neither inherent design or installation anomalies
or ageing wear out. The cause hear is external to the equipment, and so the
possibility of failing is constant. These graphs are available so that we can
compute Mean Time Between Failures (MTBF), thus indicating system
reliability, availability, anticipated life etc.

Planned maintenance avoids the possibilities of breakdown. It is a

planned activity of oiling, lubricating, cleaning and taking corrective action. It
is a periodical inspection and service activities which are aimed to detect
potential failures and perform minor adjustments or repairs which will prevent
major operating problems in the future. This is a precautionary measure and
ensures continuous use of machines after attending the work. It identifies the
wear out parts, bent or deviated components, loose joints oiling and lubricants
needs bearing wear and tear.

Breakdown down maintenance is the repair which is generally done

after the equipment has attained down state. When any sudden breakdown
occurs in any machine or plant service, the repair maintenance staff
endeavours to locate any mechanical, electrical or some such fault and to
correct it immediately. It is often an emergency nature which will have
associated penalty in terms of expediting cost of maintenance and down time
cost of equippments.

DELETION:

The Asset is either condemned or disposed off. Asset Condemnation

Committee is a group comprising of 6 members from various departments
who are usually the second heads of the department. The committee views the
users report for condemnation. Then the committee visits the asset to be
condemned in the department checks and then declares the asset condemned.
After which the company will fix its resale value.

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 When there is a surplus of asset the assets are disposed off. Surplus
occurs when the machine is no longer in use or it is outdated. The reserve
prices for assets are fixed. Then the assets is let for auction. The taker with the
highest bid is selected.

ACCOUNTING FOR ASSETS:

ADDITIONS:

The user who requires the asset is responsible for the

asset. It is because on his request the asset is procured. The asset is procured
by purchase from outside suppliers through tenders or it is transferred in from
other units. Transfer in means if one unit of BHEL has a surplus machine then
it gives notification to all other units. If any other units require the machine
they can procure the machine from that unit at a price without profit. ie, at cost

MAINTENANCE:

Inter departmental movement of assets should be

updated in the registers. The transfer of assets between the departments should
be properly registered so that all the assets are accountable and to avoid any
mis-appropriations.

DELETION:

Disposal of the surplus assets is a form of deletion. It

may be also in the form of transfer out to other units. Transfer out means if a
machine is used by one unit of BHEL for 5 years and the depreciation is also
calculated then the unit purchasing the machine has accumulated depreciation
then the purchasing unit should charge depreciation only from when they are
procuring.

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