8/7/2019 p1 fm

1/9

PART 1

INTRODUCTION

Good financial management and financial governance are at the core of good management. They help

to drive performance by supporting effective decision making, aiding the efficient running of

organisations and maximising the effective use of resources. Good financial management is also

essential to maintain the stewardship and accountability of public funds. The way government bodies

collect, analyse and utilise financial management information directly impacts on the performance of

their organisations and the delivery of their objectives

COMPANY PROFILE

Indian Oil Corporation (IOC) is India's largest downstream oil company. The IndianOil Group ofcompanies owns and operates 10 of India's 19 refineries with a combined refining capacity of 60.2

million tonnes per annum (1.2 million barrels per day). IOC operates through two business divisions:

petroleum products and other businesses.

The petroleum products division engages in refining of crude oil and sale of refined and processed oil

products. IOC engages in limited upstream activities. Mostly, it procures its requirements of crude oil

from the international energy market. The company operates refineries and a retail network for sale of

processed oil.

IOC operates a network of 16,607 petrol and diesel stations. It reaches Indane cooking gas to over

47.5 million households in 2,671 markets through a network of 4,990 Indane distributors.

IOC owns and operates 10 of India's 19 refineries, with a combined refining capacity of 60.2 million

tons per annum (1.2 million barrels per day). These include two refineries of subsidiary ChennaiPetroleum Corporation Limited (CPCL) and one of Bongaigaon Refinery & Petrochemicals Limited

(BRPL). The company's cross-country crude oil and product pipeline network spanning over 9,300

kms.

The company accounts for 47% petroleum products market share among public sector undertaking

(PSU) companies, 40.4% national refining capacity and 67% downstream sector pipeline capacity in

India. IOC exports a part of its products to Bangladesh, Nepal, Sri Lanka and Pakistan.

The company has overseas marketing ventures with two subsidiaries in Sri Lanka and Mauritius, and

a regional office at Dubai. It also provides technical support services to Emirates National Oil

Company, Dubai.

Financial Analysis Snapshot

The company recorded revenues of INR 2,703.5 billion (approximately $54.07 billion) during the

fiscal year ended March 2010, compared to INR 2,382.9 billion for the previous year; an increase of

13.45% over 2009.The operating profit of the company was INR 143.8 billion (approximately $2.88

billion) during fiscal year 2010, compared to INR 146.11 billion for the previous year; a decrease of

1.58% over 2009. The net profit was INR 69.62 billion (approximately $1.39 billion) in fiscal year

8/7/2019 p1 fm

2/9

2009, compared to INR 74.99 billion for the previous year; a decrease of 7.16% over 2007. The

profitability has clearly suffered in the previous fiscal.

For IOCL, in the fiscal year ended 2010, the NOPAT as per the P & L sheet of exhibit 2 is Rs 8550.56

crores. The cost of capital is 12.59%. The total capital employed is the sum of total debt and equity,

which is obtained from the Balance sheet of exhibit 3. It is 76609.42 crores. Hence EVA is Rs

1094.56 crores. Hence there is negative EVA for IOCL. This is common for all the firms in theindustry.

Strengths of EVA

Because it is a residual performance metric, it conveniently summarizes into a single statistic the

value created above and beyond all financial obligations

By applying a capital charge, it corrects the key deficiency of earnings and earnings per share (EPS):

they do not incorporate the balance sheet. Economic profit explicitly recognizes - by way of the

capital charge - that capital is not free and, if growth is purchased with capital, economic profit

recognizes that the growth is not free and assigns a charge for the capital used to purchase the

growth.

As an operational metric, it helps managers clarify how they create value. Generally, they do it either

by investing additional capital that produces returns above WACC, by reducing capital employed in abusiness, by improving returns by growing revenues or reducing expenses or by reducing the cost of

capital.

PART 2

1 Concept of investment

Risk, Return and Diversification is the three main base of concept of investment

Investment Concept

Individual benchmarks for different investment goals

The company strongly believes in a combination of an active and passive investment management

process. By applying a systematic and coherent investment method using a refined capital asset

pricing model the company is in a position to calculate qualified return expectations for any kind of

investment portfolio (i.e. income, balanced, capital gain.). As a result we construct individual

benchmarks for different investment goals in order to define the strategic and tactical investment

concept.

IndianOil has ambitious investment plans of Rs. 43,250 crore in the next five years. Further new

project of the corporation are as Panipat-Jalandhar LPG Pipeline cost of Rs.186.72 crore, which will

be commissioning on August 2010, Project consists of laying a 10" diameter 275 KM long LPG

pipeline from Kohand (near Panipat refinery) in Haryana to Jalandhar via Nabha in Punjab. Another

one new project namely Koyali -Ratlam Product Pipeline with cost of Rs. 322.92 crore expected to be

commissioning on October 2010. The pipeline will facilitate effective evacuation of products from

Koyali refinery and ensure cost-effective and reliable transportation of products to Central India and

8/7/2019 p1 fm

3/9

northwest UP and the project consists of laying 16-inch diameter 274 km long product pipeline from

Koyali refinery to Ratlam, where a new terminal is to be constructed on re-sitement basis. The

corporation plans to expand its Panipat Refinery from 12 Mmtpa To 15 Mmtpa costing Rs. 806 crore

on December 2008 and also in the same period plans to augmentation of Mundra - Panipat Crude Oil

Pipeline with project cost of Rs. 204.74 crores

IOCL, the flagship national oil company in the downstream sector is currently implementing a master

plan envisaging by the year 2011-12 in petrochemicals, which covers Rs.30000 crore (US$ 6.8

billion) of investment. Through the world-scale Linear Alkyl Benzene (LAB) plant set up at its

Gujarat Refinery, the corporation has already captured a significant market share in India besides

exporting the product to Indonesia, Turkey, Thailand, Vietnam, Norway and Oman. IndianOil is also

committed to the Global Compact Programme of the United Nations and endeavours to abide by the

10 principles of the programme initiative under CSR.

STRATEGIC DRIFT

Strategic Drift is the gap between the external environment and the progress of the organisation.When the organisation is unable to cope with the changes in the environment and gets fit by itself, it

creates a strategic drift. So, when in the flux phase, the organisation adopts various strategies to bridge

the gap (Johnson et.al, 2009)

8/7/2019 p1 fm

4/9

2 ANSOFF MATRIX FOR CONSIDERATION BEFOR MAKING NEW INVESTMENTS

Products

M

A

R

K

E

T

S

Existing New

Existing

Market Penetration & Consolidation

- This particularly, should be themain focus and strategy of IOCLi.e. to consolidate existing routes

and increase market share.

Product Development

- A perfect example of goodstrategic fit: Expansion in sellingancillary products

New

Market Development

Opening new destinations can be a

very profitable strategy.

Should not look to expand outside

of ASIA PACIFC

-

Diversification

- Should not look to engage in longhaul refiners as it is not in syncwith the strategy fit of theorganisation.

8/7/2019 p1 fm

5/9

3 Strategy Clock competitive strategy options

The above diagram explains the various competitive options available and which ones to be adopted.

4 CONCLUSION

After Analysing the Internal and External environment and the culture and Competitive context, the

Strategic Position of Market leader and a promise to expand was established and then the strategies

were assessed using various tools to learn that IOCL operates around a low cost culture in every

aspect; be it organisational culture, relations with buyers or customers and even suppliers. This has

become a brand name in itself and whenever there is a talk of giant oil refineries , IOCL example will

pioneer.

8/7/2019 p1 fm

6/9

y These strategies also seem to be sustainable in the near future as Low Cost is its core competency.

The size of the market is also enormous which is an advantage when execising low cost policy.

The leadership capabilities at IOCL is unquestionable and has been a prime force in developing

and sustaining a cost control culture. Drawing from these, the experience of the organisation over

a period of 25 years will help it sustain its strategies for the future as well and does not contain

any flaw.

5 RECOMMENDATIONS

A few recommendations can be made for OICL to improve its functions:

IOCL should look into hedging for Oil prices so that fluctuation in the prices and a sudden increase

will not hampler its profis. Also as oils istraded in U.S. currency, hedging for that too will be

profitable and eliminate the risks of sudden change in conversion rate.

IOCL can also look forward for some innovative technology for its refinery it would help them for

more production at low cost.

IOCL should encourage and at the same time carefully handle the marketing of ancillary products.

Index

Stock holder analysis

The shareholding pattern of Indian Oil Corporation is shown

Ownership Pattern as on 31-12-2010 No of Shares % Share Holding Share Holder Demat ShareForeign (Promoter & Group) 0 0 0 0

Indian (Promoter & Group) 958077855 80.3504 1 0

Total of Promoter 958077855 80.3504 1 0

Non Promoter (Institution) 76681644 6.431 238 75322250

Non Promoter (Non-Institution) 157595271 13.2169 112974 149881492

Total Non Promoter 234276915 19.6479 113212 225203742

Total Promoter & Non Promoter 1192354770 99.9983 113213 225203742

Custodians(Against Depository Receipts) 19536 0.0016 1 0

Grand Total 1192374306 100 113214 225203742

Dividend Policy

Year End Dividend Dividend(%) Div Yield(%)

200803 655.81 55 1.23200703 2250.89 190 4.75

200603 1460.02 125 2.14200503 1693.62 145 3.31

200403 2452.83 210 4.23200303 2258.16 290 18.73

200203 856.54 110 8.25

200103 739.74 95 8.73

200003 584.01 75 5.97199903 506.14 130 13.38

199803 194.67 50 2.51

199703 154.93 40 1.92199603 155.59 40 1.6

8/7/2019 p1 fm

7/9

199503 104.69 40 0199403 49.31 40 0

Average (99-010) 142.5 7.072

As per balance sheet as per 31st

march 2010

APPLICATION OF FUNDS (Contd.):Less: Current Liabilities and Provisions "L"

Current Liabilities 35,165.80 33,390.10Provisions 10,361.23 2,669.0645,527.03 36,059.16Net Current Assets 19,468.90 11,413.61Miscellaneous Expenditure(to the extent not written off or adjusted) 18.49 38.32(Rs.0.32 crore {2009 : Rs.0.36 crore} towards share of jointly controlled entities)TOTAL 109,184.87 100,397.70

PROFIT BEFORE PRIOR YEAR ITEMS & TAX 15,134.76 3,258.96Income/(Expenses) pertaining to prior years (Net) "P" (86.16) 390.15

PROFIT BEFORE TAX 15,048.60 3,649.11Less: Provision for TaxCurrent Tax 4,652.97 1,348.28

[includes Rs. 786.57 crore (2009 : Rs. 14.33 crore) relating to prior years]

MAT Credit (52.09) 0.00Fringe Benefit Tax 1.13 47.22

Deferred Tax (552.09) (142.23)[includes (Rs. 654.80) crore (2009 : Rs. Nil) relating to prior years]PROFIT AFTER TAX 10,998.68 2,395.84

Less: Share of Minority Interest 285.49 (203.56)PROFIT FOR THE GROUP 10,713.19 2,599.40Balance brought forward from last year's account 5,064.39 5,484.91PROFIT AVAILABLE FOR APPROPRIATION 15,777.58 8,084.31

Note:Total Income includes Rs. 2,551.68 crore (2009 : Rs. 2,636.95 crore)share of jointly controlled entities.

Total Expenditure includes Rs. 2,314.94 crore (2009 : Rs. 2,466.67 crore)share of jointly controlled entities.

Cash flow

Information regarding Primary Segment Reporting as per AS-17 for the year ended March 31, 2010 is as under:

(Rs. in Crore)March-10 March-09

Petroleum Other Elimi- Total Petroleum Other Elimi- Total

Products Businesses nationsProducts Businesses nationsRevenue

External Revenue 225479.05 28485.05 - 253964.10 257587.05 29948.20 - 287535.25Inter-segment Revenue 1378.19 359.29 - 1737.48 1423.88 459.43 - 1883.31Total Revenue 226857.24 28844.34 - 255701.58 259010.93 30407.63 - 289418.56ResultSegment Results 15051.82 359.21 - 15411.03 6701.21 48.06 - 6749.27Less: Unallocated Expensesnet of unallocated Income - - - - - - - -Operating Profit 15051.82 359.21 - 15411.03 6701.21 48.06 - 6749.27Less:Interest Expenditure 1726.16 4207.64Provision for diminution in Investments 1499.48 670.26Loss for Diminution in IBP Trust - 75.39

Loss on Investments w-off/sold 646.44 1947.96Add:Interest/Dividend Income 2645.31 2039.12

Interest Income on Customer Outstandings (141.24) (75.37)Provision for Investments Written back 718.91 393.88Profit on sale of GOI Bonds / Investments 106.92 1053.31

Provision for diminution in Trust Written back 265.91 -Prior year Income/(Expenditure) net (86.16) 390.15Profit Before Tax 15048.60 3649.11

Less: Income Tax (including

8/7/2019 p1 fm

8/9

Deferred Tax & FBT) 4049.92 1253.27Profit After Tax 10998.68 2395.84

Other InformationSegment Assets 114738.99 18461.47 - 133200.46 95410.79 9615.64 - 105026.43Corporate Assets 21489.02 31408.01

Total Assets 154689.48 136434.44Segment Liabilities 37946.54 1708.26 - 39654.80 31711.18 2974.41 - 34685.59Corporate Liabilities 60761.80 54694.61Total Liabilities 100416.60 89380.20

Capital EmployedSegment Wise 76792.45 16753.21 - 93545.66 63699.61 6641.23 - 70340.84Corporate (39272.78) (23286.60)54272.88 47054.24

References and bibliography

Financial management, E J Mclaney, pp 286-288, 19

Principle of corporate finance, Brealey Myers, international edition, pp 441-444.

Business finance, E J mclaney, international edition, pp 294-305

Class notes

Principles of corporate finance, Brealey Myers, pp 416-430

Corporate Finance, second edition, Aswath Damodarn, p 667@2001

Principals of corporate finance, Richard A. Brealey and stewart C. Mye, p444

Principle of corporate finance, Richard A. Brealey and Stewart C. Myers, page 441-442

financial theory and corporate policy,third edition, thomas E.copeland and J.fred

weston,p570, may 1992

corporate finance, Aswath Damodaran,p 720,2001

corporate finance, Aswath Damodaran,p 720,2001

corporate finance, Aswath Damodaran,p 723,2001

Principles of corporate finance, Stewart C. Myers and Richard A. Brealey, p432, 2004

Principles of corporate finance, Stewart C. Myers and Richard A. Brealey, p434, 2004

Corporate finance, Jonathan Berk and Petet DeMarzo, p532, 2007

Corporate finance, Jonathan Berk and Petet DeMarzo, p555, 2007

8/7/2019 p1 fm

9/9