36 Capital Expenditure Policies and Practices of BHEL An Analytical Study Dr. Ch. Satyanarayana, Assistant Professor of Commerce, Nagarjuna Government College (Autonomous), Nalgonda ABSTRACT Capital expenditure decision is an important financial decision as it affects the financial health of the enterprise for a long period of time. No business enterprises can survive without investment of funds in fixed assets. Fixed assets are the assets of a relatively permanent nature and provide productive facilities to attain the set goals of the firm. Erratic capital expenditure decisions in public sector can lead to heavy capital erosion. This implication as a back drop was the motive for an analytical study of the capital expenditure decision in BHEL. The main objective of the study is to examine the capital expenditure policies and practices in BHEL. The paper further analyzed a view to examine the extent to which the capital expenditure decisions in public sector undertakings were responsible for their success or failure. Keywords Capital Expenditure, PSUs, BHEL, India INTRODUCTION The expenditure incurred in the acquisition of fixed assets the benefits of which are expected to receive beyond a period of one year in future is capital expenditure. Thus, any expenditure incurred which tends to extend or improve existing fixed assets, so as to increase the profitability of a concern by increasing production or reducing cost of production beyond one year, may rightly be called capital expenditure. Capital expenditure involves non-flexible long-term commitment of funds. Thus, money spent in the acquisition, installation or development of fixed assets and research and development projects fall under the category of capital expenditure. Capital expenditure decisions are made by management within the scope and framework of capital expenditure policy. A capital expenditure policy refers the determination of the nature, purpose, size and planning horizon of the expenditure involved with reference to each department of the organization. For example, approval of major machinery by plant manager: a decision for installation of a new computer system by the top management etc. Decision concerning commitment of funds to acquire production facilities whose benefits are reaped over a larger time span than the current accounting year is a capital expenditure decision. Capital expenditure decisions necessitate investment in current assets in relation to the sale of products/product lines taken up. Capital expenditure decisions are also called as capital budgeting or fixed assets management. Capital expenditure decision is an important financial decision in as much as it affects the financial health of the enterprise for a long period of time. Capital expenditure decision involving the acquisition of major assets is not a routine process and whatever decision is taken can be reserved only at considerable cost to the company. This necessitates a careful job of planning and evaluation. Another factor contributing to the significance of the capital expenditure decision is the risk exposure of burgeoning funds committed the effect of which will be felt by the company over extended period of time. OBJECTIVES OF THE STUDY The following are the objectives of the study: To analyze the capital expenditure policies and practices in BHEL with a view to examine the extent to which the capital expenditure decisions in public sector undertakings were responsible for their success or failure To present conclusions for effective capital expenditure management of the select unit. NEED FOR THE STUDY The changing scenario of erosion of a major portion of capital of public enterprises through cash losses and accumulated deficits has drawn the attention of the globe and policy makers in India. It also cast doubts on the bleak future for survival of public sector. Erratic capital expenditure decisions in public sector can also contribute heavily for capital erosion. These implications as a back drop was opined the need for an analytical study of the capital expenditure decision in public sector undertakings and assess the extent to which these decisions have contributed for their success/failure.
37 METHODOLOGY The study is based on purposive random sampling of a Public Sector Undertaking which is located in Telangana State. The selected public enterprise produces goods involving heavy capital expenditure namely Bharat Heavy Electricals Limited (BHEL) is a public enterprise earning good profits. Available information/data about capital expenditure decisions are collected from the annual reports of the company for the financial year from 2006-07 to 2015-16.The sources of data for the study are both primary and secondary. CAPITAL EXPENDITURE DECISIONS IN BHEL - AN ANALYSIS The purpose of this paper is to examine the capital expenditure decisions of BHEL in aggregate terms with reference to growth and utilization of fixed assets investments, the source used to finance the fixed assets, return on fixed assets, the investment made and revenue realized through additions and sale of fixed assets and related aspects of capital expenditure decisions. Growth Rate in Total Fixed Assets The data relating to growth rates in total fixed assets is presented in Table 1. It reveals that during the year 2006-07 the total fixed assets recorded at Rs. 1,291 crores and it increased to Rs. 4,278.55 crores in the year 2015-16. There has been an increasing trend in the fixed assets during the period from 2006-07 to 2011-12 and decreased during the years 2012-13 to 2015-16. The continuous increase in the fixed assets investment is on account of holistic modernization of ageing facilities for enhancing the competitiveness of the company products and services. The decline in the fixed assets during the years 2012-13 to 2015-16 was due to sale of fixed assets. It has been observed that the highest growth rate in the fixed assets during the year 2011-12 registering at 437.25 percent whereas the growth rate in fixed assets recorded at 100 percent during the year 2006-07, which is considered to be the lowest. The average growth rate is accounted at 311.256 percent during the review period. Thus, it can be concluded that there is a fluctuating trend in the growth of fixed assets investment during the period under review. Table 1: Growth Rate in Total Fixed Assets of BHEL Year Fixed Assets Percentage 2006-07 1291 100.00 2007-08 1639 126.95 2008-09 2628 203.56 2009-10 3945 305.57 2010-11 5134 397.67 2011-12 5645 437.25 2012-13 5630 436.09 2013-14 5335 413.24 2014-15 4658.32 360.82 2015-16 4278.55 331.41 Average 4,018.385 311.256 Structure of Fixed Assets The information relating to components of fixed assets in BHEL is presented in Table 2. Table 2: Structure of Fixed Assets of BHEL Year Fixed Assets Total Fixed Capital Assets Net Block Work in Progress 2006-07 989 (76.60%) 302 (23.40%) 1291(100) 2007-08 981 (59.85%) 2008-09 1471 (55.97%) 2009-10 2415 (61.25%) 2010-11 3401 (66.24%) 2011-12 4297 (76.12%) 2012-13 4458 (79.18%) 2013-14 4693 (87.96%) 2014-15 3982.20 (88.83%) 2015-16 3825.03 (92.57%) Average 72224 (90.00%) 658 (40.15%) 1639 (100) 2257 (44.03%) 1530 (38.79%) 1733 (33.76%) 1348 (23.88%) 1172 (20.82%) 2628 (100) 3945 (100) 5134 (100) 5645 (100) 5630(100) 642 (12.04%) 5335 (100) 500.50 (11.14%) 306.98 (7.43%) 8369 (10.00%) 4658.32(100) 4278.55(100) 4,018.387(100)
38 Fixed assets in this organisation consist of Net Block and Capital work-in-progress. Net block includes investment on factory complex assets and township assets etc., the major components of fixed assets i.e., net block occupies a lion s share varying in between Rs. 981 crores (59.85%) and Rs. 4693 crores (87.96%) during the study period. The other components of fixed assets i.e., capital work-inprogress varying between Rs. 302 crores (23.40%) and Rs. 1733 crores (38.79%). Thus, it can be observed that in the total fixed assets investment the net block occupies a major share and followed by capital work-in-progress in this company. Fixed Assets as a Percentage of Total Assets The fixed asset as a percentage of total assets is presented in Table 3. We observed that there has been a fluctuating trend in the fixed assets and an increasing trend in total assets throughout the study period except in the years 2014-15 and 2015-16. The fixed assets as a percentage of total assets is found as 5.56% in the year 2006-07 and increased to 6.41% in the year 2015-16 due to the purchase of fixed assets. The proportion of fixed assets investment in total assets varied in between 5.30% to 8.66% over a period of 10 years. The average fixed assets to total assets investment is observed at 7.27% during the entire study period, which is lower than average of 12.65. Thus, it can be construed that the fixed assets as a percentage of total assets ratio is more than the industry average, as it is evident from the data presented. Table 3: Fixed Assets as a Percentage of Total Assets of BHEL Years Fixed Assets Total Assets Ratio s s (%) 2006-07 1291 23,214 5.56 2007-08 1639 30,892 5.30 2008-09 2628 41,421 6.34 2009-10 3945 48,467 8.14 2010-11 5134 59,260 8.66 2011-12 5645 66.776 8.45 2012-13 5630 70,128 8.02 2013-14 5335 72,791 7.32 2014-15 4658.32 68,467.13 6.80 2015-16 4278.55 66,690.10 6.41 Average 4,018.385 48,140.00 7.27 Industry Average 12.65 Additions to Fixed Assets Additions to existing fixed assets and facilities are required to improve production, productivity, and remove production bottleneck. In order to know this aspect, the information with regard to additions to fixed assets as a percentage of total fixed assets is presented in Table - 4, discloses that additions to fixed assets have shown ups and downs trend alternatively in all the years of the study. Later on there was a continuous increase in the years 2009-10, 2010-11 and 2011-12. The increase is on account of additions to existing fixed assets to improve production facilities of the organisaion. The additions to fixed assets as a percentage of total fixed assets was registered highest at 35.09% in 2011-12 and it was the lowest in the year 2008-09 at 12.29%. TABLE 4: Additions to Fixed Assets as a Percentage of Total Fixed Assets of BHEL Years Additions to Fixed Assets Fixed Assets Ratio (%) 2006-07 327.07 1,291 25.33 2007-08 327.87 1,639 20.00 2008-09 323.07 2,628 12.29 2009-10 1,384.46 3,945 35.09 2010-11 1,517.90 5,134 29.56 2011-12 1,700.00 5,645 30.11 2012-13 1,132.66 5,630 20.11 2013-14 1,287.67 5,335 24.13 2014-15 820.67 4,658.30 17.61 2015-16 750.67 4,278.60 17.54 Average 957.204 4018.385 23.17 Thus, it can be noticed that on an average the additions to fixed assets as a percentage of total fixed assets stood at 23.17 percent over a decade period of the study. Sale of Fixed Assets With a view to examine the extent of cash generated through sale of existing fixed assets either die to expiry of the normal life of the assets or due to change in the technology which has rendered the assets as a percentage of total fixed assets in exhibited in Table -5. It reveals that the sale of fixed assets stood at Rs.14.08 crores in 2006-07 and increased to Rs. 93.22 crores in 2014-15, which increased 6 times over a period of 10 years.
39 Only during 2014-15 the sale of fixed assets as a percentage of total assets constitute more than one percent i.e., 2.01, where as in all the remaining years of the study period the ratio is less than two percent. On an average it accounted for 0.69. if we observe the data meticulously the sale of fixed assets have been on the increasing side, this might be on account of the fixed assets becoming obsolete, out dated, and also due to wear and tear. Thus, it can be concluded that the sale of fixed assets as a percentage of total fixed assets has been on the increasing side during the study period. Table 5: Sale of Fixed Assets as a Percentage of Total Fixed Assets of BHEL Years Sale of Fixed Assets Ratio (%) Fixed Assets 2006-07 14.08 1291 1.09 2007-08 14.85 1639 0.90 2008-09 47.75 2628 1.81 2009-10 29.19 3945 0.73 2010-11 48.30 5134 0.94 2011-12 43.04 5645 0.76 2012-13 49.48 5630 0.87 2013-14 77.31 5335 1.44 2014-15 93.22 4658.32 2.01 2015-16 83.29 4278.55 1.94 Average 50.051 40,183.85 1.248 Table 6: Net-worth to Fixed Assets Ratio of BHEL Years Net Worth Fixed Assets Ratio 2006-07 8,788 1291 6.80 2007-08 10,775 1639 6.57 2008-09 12,939 2628 4.92 2009-10 15,917 3945 4.03 2010-11 20,154 5134 3.92 2011-12 25,373 5645 4.49 2012-13 30,344 5630 5.40 2013-14 33,047 5335 6.19 2014-15 34,206.6 4658.32 5.19 2015-16 33,172.5 4278.55 7.75 Average 22472 40,183.85 5.007 Industry Average 1.24 Fixed Assets to Long-term Funds One of the principles of financial management is that the log-term funds should be used for non-current assets and short-term funds must be used for current assets. With a view to examine this principle in BHEL fixed assets to log-term funds ratio is presented in Table 7. Table 7: Fixed Assets to Long-term Funds Ratio of BHEL Years Fixed Assets Long term Ratio Liabilities 2006-07 1291 23,214 0.06 2007-08 1639 30,892 0.05 2008-09 2628 41,421 0.06 2009-10 3945 48,487 0.08 2010-11 5134 59,260 0.09 2011-12 5645 66,776 0.08 2012-13 5630 70,128 0.08 2013-14 5335 72,491 0.07 2014-15 4658.32 46,306.74 0.10 2015-16 4278.55 45,753.56 0.09 Average 40,183.85 50473 0.08 Industry Average 0.20 Long-term liabilities in this company include equity share capital, reserves and surplus and loan funds. It reveals that the long-term funds have been increasing from Rs. 23,214 crores to Rs. 72,491 crores indicating more than three-fold increase. The fixed assets to long-term funds ratio varied in between 0.05 to 0.10. In all the 10 years study period, it is observed that the investment in fixed assets is less than 0.10. On an average the investment in fixed assets is found to be 0.08 which is lower than the industry average of 0.20 per every rupee of long-term liabilities, which means the fixed assets have been financed by log-term funds throughout the study period. Thus, it can be concluded that fixed assets have been financed by using long-term funds which indicates the BHEL is followed the matching concept as its capital expenditure policy. Fixed Assets Turnover Fixed assets provide productive facilities to productive and sell goods. In public enterprises it is assumed that all goods produced are sold. Efficient utilization of fixed assets should generate maximum sales. The sales generated by the capital expenditure incurred in fixed assets in BHEL, i.e., fixed assets turnover during the decade is presented in Table - 8.
40 Table 8: Fixed Assets Turnover Ratio of BHEL Years Sales Fixed Assets Ratio 2006-07 18739 1291 14.51 2007-08 21401 1639 13.05 2008-09 28033 2628 10.66 2009-10 34154 3945 8.65 2010-11 43337 5134 8.44 2011-12 49510 5645 8.77 2012-13 50156 5630 8.90 2013-14 40338 5335 7.56 2014-15 29542 4658.32 6.34 2015-16 25138 4278.55 5.87 Average 34034.8 4,018.39 9.275 Industry Average 5.12 An analysis of the data reveals that the in the fixed assets turnover in BHEL showed a decreasing trend up to 2015-16. For example, every rupee of investment in fixed assets which generated a sale of Rs.14.51 in 2006-07 decreased to Rs. 5.87 by 2015-16. From 2009 onwards, it showed a slightly downward trend from Rs. 6.33 to Rs. 5.87 by 215-16. Thus, during the ten years period from 2006 to 2016 the fixed assets turnover averaged to Rs. 9.27 sales per rupee of investment in fixed assets, which is higher than the industry average turnover at 5.12. The highest fixed assets turnover was 14.51 in 2006-07. Return on Fixed Assets An analysis of return on fixed assets ratio is presented in Table 9. Table 9: Return on Fixed Assets of BHEL Years Profit/Loss Fixed Assets (Before Tax) Ratio (%) 2006-07 3736 1291 289.38 2007-08 4430 1639 270.28 2008-09 4849 2628 184.51 2009-10 6591 3945 167.07 2010-11 9006 5134 175.41 2011-12 10302 5645 182.50 2012-13 9432 5630 167.53 2013-14 5014 5335 93.88 2014-15 2150.12 4658.32 46.15 2015-16 (1470.83) 4278.55 (34.37) Average 5404 40,183.85 154.2 Industry Average 119.30 The above data in Table - 11 reveals that the net profit before tax showed an increasing trend from 2006-07 to 2011-12 and declined during the latest periods of study i.e. from 2012-13 to 2015-16. The return on fixed assets was the lowest and negative during 2015-16 at (34.37%) and was the highest at 289.38% during 2006-07. The average return on fixed assets stood at 154.2% during the study period, which is more than industry average 119.30%. Thus, it can be understood that the return on fixed assets of the company has been on the decreasing side. CONCLUSIONS The following are the conclusions drawn from the study: There is a fluctuating trend in the growth of fixed assets investment during the period under review In the total fixed assets investment the net block occupies a major share and followed by capital work-in-progress in this company The fixed assets as a percentage of total assets ratio is more than the industry average, as it is evident from the data presented The additions to fixed assets as a percentage of total fixed assets was registered highest at 35.09% in 2011-12 and it was the lowest in the year 2008-09 at 12.29% The sale of fixed assets as a percentage of total fixed assets has been on the increasing side during the study period Fixed assets have been financed by using long-term funds which indicates the BHEL is followed the matching concept as its capital expenditure policy During the ten years period from 2006 to 2016 the fixed assets turnover averaged to Rs. 9.27 sales per rupee of investment in fixed assets, which is higher than the industry average turnover at 5.12. The highest fixed assets turnover was 14.51 in 2006-07 The return on fixed assets of the company has been showing on the decreasing side REFERENCES [1] Chandra Prasanna, Risk analysis in capital expenditures, Indian Management, October 1975 [2] Porwal L.S., Capital Budgeting in India, Sultan Chand & Sons
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