Working Capital Management & Comparative Financial Analysis of Indian Oil With Its Major Competitors

Summer Training Report

on Working Capital Management And Comparative

Financial Analysis of IOCL with its Major Competito rs

At

Prepared by:-

Amit Kumar Shaw

09DM095

2009-11 Batch

Under the guidance of

Faculty Guide: Company Guide:

Prof. S. S. Ahmed Mr. Kapil Kumar Santra

Asst. Professor, Finance Deputy Manager, Finance

IMIS, BBSR IOCL, Dhanbad D.O.

As a partial fulfillment of PGDM program of IMIS, B hubaneswar

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11

TABLE OF CONTENTS

S. No. Content Page No. 1. Certificate

2. Declaration 3 3. Acknowledgement 4 4. Executive Summary 5 5. Chapter-1

Introduction………………………………………………………….. 1.1 Industry Overview…………………………………………………… 1.2 Company Overview

Introduction………………………………………………... Major Divisions…………………………………………….. Organization Structure…………………………………….. Management………………………………………………… Distinctions…………………………………………………. Product Profile………………………………………………

1.3 Major Competitors in Public Sector.………………………………... 1.4 SWOT Analysis……………………………………………………….

6 8

11 14 18 19 20 23 24 26

6. Chapter-2 Research Methodology

31

7. Chapter-3 3. Literature Review 3.1 Working Capital Management – Theoretical Underpinnings Working Capital

3.1.1 Meaning

3.1.2 Constituents

3.1.3 Determinants

3.2 Working Capital Management- Meaning & Objective

3.3 Dimensions of Working Capital Management

3.3.1 Estimating Investment in Working Capital

3.3.2 Financing of Working Capital

3.3.3 Managing Profitability, Risk & Liquidity

3.4 Managing Components of Working Capital

33 36

8. Chapter-4 Observation and Analysis

59

9. Chapter-5 Findings Limitations Conclusions and Recommendations

87

10. Terminology 91 11. Bibliography 92 12. Annexure 93


DECLARATION

It is hereby declared that, this project is being submitted as a partial fulfillment of the Post

Graduate Diploma in Management program of INSTITUTE OF MANAGEMENT &

INFORMATION SCIENCE, Bhubaneswar. It has been exclusively designed and prepared by

me. It has not been submitted to any other institute or organization except Indian Oil

Corporation Ltd., Dhanbad. It has also not been published elsewhere.

Amit Kumar Shaw

09DM095

IMIS, Bhubaneswar


Acknowledgement

Sometimes words fall short to show gratitude, the same happened with me during this project.

The immense help and support received from IOCL overwhelmed me during the project.

It was a great opportunity for me to work with IOCL, pioneers in the field of Oil and

Gas. I am extremely grateful to the entire team of IOCL at Dhanbad who have shared their

expertise and knowledge with me and without whom the completion of this project would

have virtually impossible.

My sincere gratitude to Mr. Kapil Kumar Santra, Deputy Manager, Finance (Dhanbad

Divisional Office) for providing me with an opportunity to work with IOCL as a company

project guide who has provided me with the necessary information and his valuable

suggestion and comments on bringing out this report in the best possible way.

I am highly indebted to Mr. Anjay Kumar, Deputy Manger (Consumer Sales), Mr.

Vikash, Sales Officer (Consumer Sales), Mr. Haranath Saha, Fleet Marketing Manager

(Retail Sales), Mr. P.P.Minz & Ms. Bharati Mishra, Engineer (Retail Sales) and last but not

the least Mr. Ashok Kumar, Depot In-charge who has given me a good support in

understanding the workings at IOCL.

In the end, a sincere thanks to everyone else professionally involved in my internship.

I believe my seven weeks tenure at IOCL was a very vivid experience that gave me a feel of

not just the PSU culture but also of private firms associated with IOCL.


Executive Summary The intended growth strategy demands a strong financial position to build and sustain the growth story. Any company whether industrial or trading requires the current assets for day to day working of the unit and these current assets are often referred as working capital of the company and is one of the major contributors in improving profitability of any organisation and is a vital component of success and survival i.e. both profitability and liquidity for the organisation. So looking at the importance of the working capital and working capital management, the project was aimed to assist the company to analyse its present efficiency in terms of managing working capital and assessing the future working capital requirement and assisting to identify the major loopholes in various processes which are having or can have an adverse effect on the working capital of the company and suggesting some of the important ways to handle those condition. The project started with understanding the company process and then reviewing the past financial performances and working capital efficiency with the help of ratio analysis. The next step was to see the operating cycles and the process of forecasting working capital and then finding out the sources the company uses to raise these funds. The project also focuses on the prevailing policies related to inventory, receivable, cash and payable management. The analysis resulted in assessing the working capital requirement problem in the system of recording and reporting of various data related to policy formulation and better working capital management. There is an urgent need to develop a formal process of credit analysis of the existing and more importantly the new customer to develop more specific credit terms and the most importantly a proper monitoring and controlling system for a better management of receivables. Managing working capital has always been a challenge for the big companies and IOCL is not an exception to this.


CHAPTER- 1

INTRODUCTION


Introduction

OBJECTIVE OF THE STUDY: The study is conducted with reference to IOCL. The main objective of the study is to have an idea of the practical application of the working capital management whose theoretical aspect is known. The study is conducted with the following objectives:

� To determine the managerial aspects of working capital in IOCL.

� To understand how efficiently the working capital is being managed in IOCL.

� To understand the short-term solvency as well as the effectiveness of working capital

in the operation of business.

� To study the policies and the procedures adopted by IOCL for managing the various

components of working capital.

� To comprehensively evaluate the inventory, receivables, creditors and cash

Management performances.

� To undertake a study of the various sources of working capital financing, employed

by IOCL.

� To suggest on the basis of findings, improvements in the management of working

capital, at IOCL.

SCOPE OF THE STUDY: The scope of this project work is confined to the Working Capital Management Practices at IOCL only for a past period of 5 years i.e. from 2005-06 to 2009-10 and at the same time a comparative financial analysis of IOCL with HPCL and BPCL for duration 2004-05 to 2008-2009. LIMITATIONS: � Time is definitely the main constraint. Time was not sufficient enough to assess all

processes and policies of an organization of the stature of IOCL. � Inadequacy of required data is another constraint. � Even if actual data was gathered, it is often against the company policy to disclose

many such data in the project report. In that case the actual data was then slightly modified and then utilized for the project.


INDUSTRY OVERVIEW : INDIA Introduction: Oil & Gas is one of the most important factors contributing to the economic development of a country. The production and consumption of oil & Gas in a country has become a barometer of its growth and prosperity. The origin of oil & gas industry in India can be traced back to 1867 when oil was struck at Makum near Margherita in Assam. At the time of Independence in 1947, the Oil & Gas industry was controlled by international companies. India's domestic oil production was just 250,000 tonnes per annum and the entire production was from one state - Assam. The foundation of the Oil & Gas Industry in India was laid by the Industrial Policy Resolution, 1954, when the government announced that petroleum would be the core sector industry. In pursuance of the Industrial Policy Resolution, 1954, Government-owned National Oil Companies ONGC (Oil & Natural Gas Commission), IOC (Indian Oil Corporation), and OIL (Oil India Ltd.) were formed. ONGC was formed as a Directorate in 1955, and became a Commission in 1956. In 1958, Indian Refineries Ltd, a government company was set up. In 1959, for marketing of petroleum products, the government set up another company called Indian Oil Company Ltd. In 1964, Indian Refineries Ltd was merged with Indian Oil Company Ltd. to form Indian Oil Corporation Ltd. During 1960s, a number of oil and gas-bearing structures were discovered by ONGC in Gujarat and Assam. Discovery of oil in significant quantities in Bombay High in February, 1974 opened up new avenues of oil exploration in offshore areas. During 1970s and till mid 1980s exploratory efforts by ONGC and OIL India yielded discoveries of oil and gas in a number of structures in Bassein, Tapti, Krishna-Godavari-Cauvery basins, Cachar (Assam), Nagaland, and Tripura. In 1984-85, India achieved a self-sufficiency level of 70% in petroleum products. In 1984, Gas Authority of India Ltd. (GAIL) was set up to look after transportation, processing and marketing of natural gas and natural gas liquids. GAIL has been instrumental in the laying of a 1700 km-long gas pipeline (HBJ pipeline) from Hazira in Gujarat to Jagdishpur in Uttar Pradesh, passing through Rajasthan and Madhya Pradesh. After Independence, India also made significant additions to its refining capacity. In the first decade after independence, three coastal refineries were established by multinational oil companies operating in India at that time. These included refineries by Burma Shell, and Esso Stanvac at Mumbai, and by Caltex at Visakhapatnam. Today, there are a total of 18 refineries in the country comprising 17 in the Public Sector, one in the private sector. The 17 Public sector refineries are located at Guwahati, Barauni, Koyali, Haldia, Mathura, Digboi, Panipat, Vishakapatnam, Chennai, Nagapatinam, Kochi, Bongaigaon, Numaligarh, Mangalore, Tatipaka, and two refineries in Mumbai. The private sector refinery built by Reliance Petroleum Ltd is in Jamnagar. It is the biggest oil refinery in Asia.


By the end of 1980s, the petroleum sector was in the doldrums. Oil production had begun to decline whereas there was a steady increase in consumption and domestic oil production was able to meet only about 35% of the domestic requirement. The situation was further compounded by the resource crunch in early 1990s. The Government had no money for the development of some of the then newly discovered fields (Gandhar, Heera Phase-II and III, Neelam, Ravva, Panna, Mukta, Tapti, Lakwa Phase-II, Geleki, Bombay High Final Development schemes etc. This forced the Government to go for the petroleum sector reforms which had become inevitable if India had to attract funds and technology from abroad into the petroleum sector. The government in order to increase exploration activity, approved the New Exploration Licensing Policy (NELP) in March 1997 to ensure level playing field in the upstream sector between private and public sector companies in all fiscal, financial and contractual matters. This ensured there was no mandatory state participation through ONGC/OIL nor there was any carried interest of the government. To meet its growing petroleum demand, India is investing heavily in oil fields abroad. India's state-owned oil firms already have stakes in oil and gas fields in Russia, Sudan, Iraq, Libya, Egypt, Qatar, Ivory Coast, Australia, Vietnam and Myanmar. Oil and Gas Industry has a vital role to play in India's energy security and if India has to sustain its high economic growth rate.

MAJOR OIL MARKETING COMPANIES

(in this sector)

(As on 1st April, 09)

Oil Marketing Companies Market Cap. Sales Net Profit Total Assets (Rs. cr.) Turnover

IOCL 85,949.52 305,527.05 2,949.55 88,975.32

BPCL 20,803.13 135,331.48 735.9 33,299.52

HPCL 12,312.49 124,752.42 574.98 33,485.80

Reliance 330,634.85 192,461.00 16,236.00 199,665.30

Essar Oil 14,532.18 37,652.00 -514 13,613.72

MRPL 11,882.62 32,287.94 1,112.38 6,716.19

Chennai Petro 3,721.30 24,927.26 603.22 4,615.15

(Source: www.moneycontrol.com)


Industry Overview

(Source: www.ibef.org)


COMPANY OVERVIEW

Introduction

Indian Oil Corporation Ltd., the India's largest company by sales was incorporated as Indian Oil Company Ltd. on 30th June, 1959. Later it was renamed as Indian Oil Corporation Ltd. on 1st Sept.,1964 following the merger of Indian Refineries Ltd.(established 1958) with it.

Indian Oil Corporation Ltd. is currently India's largest company by sales with a turnover of Rs. 2,71,074 crore and profit of Rs. 10,221 crore for fiscal 2009-10.

IndianOil is also the highest ranked Indian company in the prestigious Fortune 'Global 500' listing, having moved up 11 places to the 105th position in 2009. It is also the 20th largest petroleum company in the world.

IndianOil today

From a fledgling company with a net worth of just Rs. 45.18 crore and sales of 1.38 million tonnes valued at Rs. 78 crore in the year 1965, IndianOil has since grown over 3500 times with a sales turnover of Rs. 2,71,074 crore, the highest–ever for an Indian company, and a net profit of Rs. 10,221 crore for 2009-10.

Set up with the mandate of achieving self-sufficiency in refining and marketing operations for a nascent nation set on the path of economic growth and prosperity, IndianOil today accounts for nearly half of India’s petroleum consumption, reaching precious petroleum products to millions of people everyday through a countrywide network of around 35,600 sales points. They are backed for supplies by 140 bulk storage terminals and depots, 99 aviation fuel stations and 89 Indane LPG bottling plants. For the year 2009-10, IndianOil sold 69 MMT of petroleum products, registering 4.1% growth over previous year.

The IndianOil Group of companies owns and operates 10 of India’s 20 refineries with a combined capacity of over 60 MMTPA, accounting for 34% of national refining capacity, after excluding EOU refineries. Projects under execution will take the capacity further to 80 MMTPA by the year 2011-12. Besides setting up state-of-the-art facilities to raise product quality to global standards, IndianOil has undertaken chartering of ships for crude oil imports on its own and is expanding its basket of crudes and upgrading its refineries to handle a wider array of crudes, including high-sulphur types. As a pioneer in laying of cross-country crude oil and product pipelines, the Corporation crossed 10,540 km in pipeline length and about 65 MMTPA in throughput capacity with the commissioning of the 330-km Paradip-Haldia crude oil pipeline recently. Plans are under execution to add about 4,000 km more by the year 2012. In-house capabilities have enabled


the Corporation undertake all pipeline projects on its own and even offer turnkey expertise in techno-economic feasibility studies, design and detailed engineering, project execution, operations, maintenance and consultancy services. Set up in 1972, IndianOil's R&D Centre has blossomed into a world-class institution and Asia's finest. Besides its pioneering work in lubricants formulation, refinery processes, pipeline transportation and alternative fuels such as ethanol-blended petrol and bio-diesel, the Centre is also the nodal agency of the Indian hydrocarbon sector for ushering in Hydrogen fuel into the country. It has over 229 active patents to its credit, including 125 international patents. Its current R&D focus is on the future business needs of IndianOil in the areas of petrochemicals, including polymers, and alternative energy sources.

Having set up Its first petrol & diesel station (retail outlet) at Kochi in October 1962, IndianOil currently operates the country’s largest network of retail outlets numbering over 18,643 with focus on customer convenience.

Network Beyond Compare: � As the flagship national oil company in the downstream sector, Indian Oil reaches

precious petroleum products to millions of people everyday through a countrywide network of over 35,600 sales points. They are backed for supplies by 140 bulk storage terminals and depots, 99 aviation fuel stations and 89 Indane LPG bottling plants.

� IndianOil operates the largest and the widest network of petrol & diesel stations in the

country, numbering of 18,643 (47%). It reaches Indane cooking gas to the doorsteps of 56 million households with 5,096 (53%) LPG distributorship. It has 89 LPG Bottling Plants, 3,964 SKO/LDO Dealerships and 2,947 Kisan Seva Kendras

� IndianOil’s ISO-9002 certified Aviation Service continued to be the leader in aviation

fuel business with a 62.6% market share, meeting the fuel needs of the Army, Navy and 88% of the Air Force during the year. Marine sales grew by about 12%. IndianOil also enjoys a dominant share of the bulk customer business by providing 7,593 (89%) consumer pumps, encoding that of Railways, State Transport undertakings, industrial and agricultural sectors.

� Indian Oil’s world class R&D centre is perhaps Asia’s finest. Besides pioneering work in

lubricants formulation, refinery processes, pipeline transportation and alternative fuels such as Bio-diesel, the Centre is also the nodal agency of the Indane hydrocarbon sector for ushering in hydrogen fuel in the country.


VISION re-visited With a dream to explore new vistas and emerge as a global entity, riding on the wave of deregulation, IndianOil coined its first vision statement in the year 1999. Since then, the business landscape in the country has changed. During the year, a need was perceived to re-visit the vision statement and chart new targets to invigorate IndianOil. The process of re-visiting the vision captured the collective aspirations of the IndianOil People as well as other stakeholders so as to create a ‘Shared Vision’ rather than ‘Vision Shared’. The resultant new vision is a matrix of six cornerstone elements and is designed to serve as the bedrock of IndianOil’s future growth and transformation into a globally admired company.

(Source: www.iocl.com)

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR

MAJOR DIVISIONS

Refining

Born from the vision of achieving selfoil refining and marketing for the nation, IndianOil has gathered a luminous legacy of more than 100 years of accumulated experiences in all areas of petroleum refining by taking into its fold, the Digboi Refinery commissioned in 1901.

IndianOil controls 10 of India’s 20 refineries. The group refining capacity is 60.2 million metric tonnes per annum (MMTPA) or 1.2 million barrels per day -the largest share among refining companies in India. It accounts for

IndianOil Refineries: Installed Capacities (MMTPA)

Digboi Guwahati Barauni Koyali Haldia Mathura Panipat Bongaigaon Subtotal

Subsidiaries’ Refineries CPCL - Chennai Narimanam Subtotal Group Total Paradip upcoming

(MMTPA – Million metric tonnes per annum, equal to 20, 000 barrels per day) (Source: www.iocl.com)

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009

MAJOR DIVISIONS

Born from the vision of achieving self-reliance in oil refining and marketing for the nation, IndianOil has gathered a luminous legacy of

ccumulated experiences in all areas of petroleum refining by taking into

Refinery commissioned in

IndianOil controls 10 of India’s 20 refineries. The group refining capacity is 60.2 million metric tonnes per annum (MMTPA) or 1.2

the largest share among refining companies in India. It accounts for 33.8% share of national refining capacity.

Refineries: Installed Capacities (MMTPA)

Million metric tonnes per annum, equal to 20, 000 barrels per day)

/2009-11

33.8% share of national refining capacity.

0.65 1 6

13.7 6 8

12 2.35 49.7

9.5 1

10.5 60.2

15

Million metric tonnes per annum, equal to 20, 000 barrels per day)


Pipelines

inland refineries has been a very challenging task, especially so with the refineriestheir capacities as well as capability to process a variety of crude oils. All operating pipeline units have been accredited with ISO 9000 and ISO 14001 certificates.


BPCL, 17%

HPCL, 21%

Industry Capacity:-

62.34 MMT


Indian Oil Corporation network of 10540 km long crude oil and petroleum product pipelines with a capacity of 71.60 million metric tonnes per annum. Cross-country pipelines are globally recognised as the safest, costenergy-efficient and environmentmode for transportation ofpetroleum products. IndianOil’s crude oil pipelines registered thethroughput of 65 million tonnes.

Transportation of crude oil to IndianOil's inland refineries has been a very challenging task, especially so with the refineriestheir capacities as well as capability to process a variety of crude oils. All operating pipeline units have been accredited with ISO 9000 and ISO 14001 certificates.

IOCL, 54%

BPCL, 17%

HPCL, 21%

PIL, 8%

Products Pipeline-% share

/2009-11

Indian Oil Corporation Ltd. operates a km long crude oil and

petroleum product pipelines with a capacity of 71.60 million metric tonnes per annum.

country pipelines are globally recognised as the safest, cost-effective,

efficient and environment-friendly mode for transportation of crude oil and petroleum products. IndianOil’s crude oil pipelines registered the highest ever

million tonnes.

Transportation of crude oil to IndianOil's inland refineries has been a very challenging task, especially so with the refineries expanding their capacities as well as capability to process a variety of crude oils. All operating pipeline

IOCL

BPCL

HPCL

PIL


Marketing

IndianOil has one of the largest petroleum marketing and distribution networks in Asia, with over 35,600marketing touch points(about 55% of industry). Its ubiquitous petrol/diesel stations are located across different terrains and regions of the Indian sucontinent. From the icy heights of the Himalayas to the sun-soaked shores of Kerala, from Kutch on India's western tip to Kohima in the verdant North East, IndianOil is truly 'in every heart, in every part'. IndianOil's vast marketing infrastructure of plubricants & greases outlets and large volume consumer pumps are backed by bulk storage terminals and installations, inland depots, aviation fuel stations, LPG bottling plants and lube blending plants amongst others. The countrywide marketing operations are coordinated by 16 State Offices and over 100 decentralised administrative offices.



IndianOil has one of the largest petroleum marketing and distribution networks in Asia, with over 35,600

(about 55% of . Its ubiquitous petrol/diesel

stations are located across different terrains and regions of the Indian sub-continent. From the icy heights of the

soaked shores of Kerala, from Kutch on India's western tip to Kohima in the verdant North East, IndianOil is truly 'in every heart, in every part'. IndianOil's vast marketing infrastructure of petrol/diesel stations, Indane (LPG) distributorships, SERVO lubricants & greases outlets and large volume consumer pumps are backed by bulk storage terminals and installations, inland depots, aviation fuel stations, LPG bottling plants and lube

ants amongst others. The countrywide marketing operations are coordinated by 16 State Offices and over 100 decentralised administrative offices.

As on 1st

/2009-11

etrol/diesel stations, Indane (LPG) distributorships, SERVO lubricants & greases outlets and large volume consumer pumps are backed by bulk storage terminals and installations, inland depots, aviation fuel stations, LPG bottling plants and lube

ants amongst others. The countrywide marketing operations are coordinated by 16

st April, 10


Research & Development

up world-class facilities at its R&D Centre for building worldservices, engines, test rigs and pilot plants for all major refinery processes, catalyst characterisation & development, etc.areas of lubricants formulations, refinery process technologies and pipeline transportation, the thrust would now be on commercializing the developed technologies and initiating research in new frontier areas such as petrochemicals, residliquid, alternative fuels, synthetic lubricants, nano

IndianOil’s R&D continued to add value to different facets of the companies’ activities. During the year 2009-10, 181 lube formulations were commercialized.


The R&D Centre continues to provide significant support to the IndianOil Group refineries in product quality improvement, evaluation of catalysts and additives, health assessment of catalysts, material failure analysis, troubleshooting and inoverall efficiency of operations.R&D is also working on production, storage, transportation, distribution and commercialization of Hydrogen as an alternative fuel. IndianOil has, till date, invested close to Rs. 1,000 crore in setting

class facilities at its R&D Centre for building world-class capabilities in analytical services, engines, test rigs and pilot plants for all major refinery processes, catalyst characterisation & development, etc. While continuing with cutting edge R&D in the core areas of lubricants formulations, refinery process technologies and pipeline transportation, the thrust would now be on commercializing the developed technologies and initiating research in new frontier areas such as petrochemicals, residue gassification, coalliquid, alternative fuels, synthetic lubricants, nano-technology, etc.

IndianOil’s R&D continued to add value to different facets of the companies’ activities. , 181 lube formulations were developed and 75%(147)

/2009-11

The R&D Centre continues to provide significant support to the IndianOil Group refineries in product quality improvement, evaluation of catalysts and additives, health assessment of catalysts, material failure analysis, troubleshooting and in improving overall efficiency of operations. IndianOil R&D is also working on production, storage, transportation, distribution and commercialization of Hydrogen as an

IndianOil has, till date, invested close to Rs. 1,000 crore in setting

class capabilities in analytical services, engines, test rigs and pilot plants for all major refinery processes, catalyst

e R&D in the core areas of lubricants formulations, refinery process technologies and pipeline transportation, the thrust would now be on commercializing the developed technologies and initiating research

ue gassification, coal-to-liquid, gas-to-

IndianOil’s R&D continued to add value to different facets of the companies’ activities. (147) were


ORGANIZATION STRUCTURE


DIV.

OFFICE

AREA.

OFFICE

DIV.

OFFICE

AREA.

OFFICE

AREA.

OFFICE

AREA.

OFFICE

IOCL

REFINERIES

DIVISION

PIPELINE

DIVISION

MARKETING

DIVISION

R & D

DIVISION

• DIGBOI

• GUAHATI

• BARAUNI

• GUJRAT

• HALDIA

• MATHURA

• PANIPATH

W. B. STATE

OFFICE

BIHAR STATE

OFFICE

ORISSA STATE

OFFICE

NORTH EAST

OFFICE

WESTERN

REGION

NORTHERN

REGION

SOUTHERN

REGION

EASTERN

REGION

KOLKATA

SILIGURI

DURGAPUR

HALDIA

LPG BOTT.

PLANT

PATNA

DHANBAD

JAMSHEDPUR

RANCHI

MUZAFFARPUR

BEGUSARAI

LPG

BOTT.

PLANT

BHUBANESWAR

SAMBALPUR

LPG

BOTT.

PLANT

LPG

BOTT.

PLANT

GUAHATI

IMPHAL

SILCHAR

TINSUKIA

Installation Terminals Depots

DIV.

OFFICE

DIV.

OFFICE


Management – IOCL

B M Bansal Chairman & Director (Planning & Business Development)

S V Narasimhan Director (Finance)

V C Agrawal Director (Human Resources) & Director-in-charge (IBP Division)

G C Daga Director (Marketing)

B N Bankapur Director (Refineries)

Anand Kumar Director (Research & Development)

K K Jha Director (Pipelines)

P K Sinha Additional Secretary & Financial Advisor Ministry Of Petroleum & Natural Gas

Sudhir Bhargava Additional Secretary Ministry of Petroleum & Natural Gas

Prof.(Mrs.) Indira J. Parikh Independent Director

Anees Noorani Independent Director

Michael Bastian Independent Director

Dr.(Mrs.) Indu Shahani Independent Director

Prof. Gautam Barua, Independent Director

N.K. Poddar Independent Director

Raju Ranganathan Company Secretary


DISTINCTIONS

IndianOil leads India Inc. in Fortune's 'Global 500' listing for 2009

In a befitting acknowledgement of its ever-improving performance, and a crowning glory in its Golden Jubilee Year (1959-2009), IndianOil has moved up 11 places, in the Fortune 'Global 500' list of world's largest companies by sales for the year 2009. Placed at 105, IndianOil leads the pack of seven Indian companies appearing in the list that is based on the performance in of the year 2008. IndianOil has been consistently improving its position in the elite list published annually by the CNN-Time Warner group magazine, Fortune. In the ‘Global 500' club, IndianOil has steadfastly climbed from 226 in the year 2002 to 191 in 2003, 189 in 2004 to 170 in 2005, 153 in 2006, 135 in 2007, 116 in 2008 and now 105 in 2009. Fortune magazine has considered IndianOil’s revenue for the fiscal 2008-09 and has derived the same at US$ 62.993 billion (excluding excise duties). This is the 7th year in succession that IndianOil has improved its ranking.

IndianOil has also maintained its leadership status as India's numero uno corporate in the prestigious listing, followed by Tata Steel (258), Reliance Industries (264), Bharat Petroleum (289), Hindustan Petroleum (311), State Bank of India (363) and Oil & Natural Gas Corporation (402). Amongst the petroleum companies in the world, IndianOil’s rank is 20.


Other Distinctions in brief: • IndianOil in ‘Top 50’ Best Companies To Work For in India, 2010

• Tops ‘ET 500’ ranking 2009

• No.1 in ‘BW 500’ ranking 2009

• Award for ‘Global Impact by an Indian PSU’

• Among top five in Business India’s ‘Super 100’ ranking

• Place of pride in ‘Platts Ranking’ 2009

• Only PSU among India's 25 best employers

• Frontrunner in Oil & Gas category in ‘FE-500’ listing

• Top slot in Business Standard’s 'BS 1000' again

Refineries

• Owns and operates 10 of India's 20 refineries

• Combined refining capacity of 60.2 MMTPA

• Accounts for 34% national refining capacity

• Sales of 62.6 million tonnes of petroleum products

• Exports of 3.64 million tonnes of petroleum products

• Investments of Rs. 43,400 crore (US $10.8 billion) during 2007-12

• New projects worth Rs. 32,000 crore

Pipelines – Underground Highways

• 71% downstream sector pipelines capacity in India

• Pipelines network crossed 10,540 km mark

• Commissioned a record no. of pipeline projects

• Paradip-Haldia crude oil pipeline commissioned

• Commissioned Panipat-Jalandhar LPG pipeline

• First LPG Pipeline in North India from Panipat to Jalandhar

• Koyali-Ratlam product pipeline commissioned

• ATF Pipeline from CPCL (Manali) to Chennai AFS

• Highest ever operational throughput of 59.38 million metric tones


Marketing

• 48% petroleum products market share

• 35,600 sales points.

• 167 bulk storage terminals and depots

• 101 aviation fuel stations

• 89 Indane (LPGas) bottling plants

• 7,335 bulk consumer pumps

• Widest network of petrol & diesel stations - 18,278

• 5,000 Indane distributors

• ISO-9002 certified Aviation Service commands over 63% market share

• XTRAPREMIUM available at 6446 retail outlets

• XTRAMILE available at 9256 retail outlets

• 2545 Kisan Seva Kendras

• 5,849 retail outlets have XTRAPOWER fleet card transactions

Research & Development

• Forays into new areas of research - Petrochemicals, Polymers and

Nanotechnology

• 9 patents received approvals

• 153 lubricant formulations commercialised

• 47 lubricant formulations approved by OEMs

• India’s first commercial Hydrogen-CNG dispensing station at New Delhi

• Among the 6 worldwide technology holders for marine oils


PRODUCT PROFILE

Indian Oil accounts for approximately 48% petroleum products market share. Its products include liquefied petroleum gas(LPG), aviation turbine fuel, bitumen, high speed diesel, lubricating oils and greases, petrochemicals, and superior kerosene and crude oil. The company also offers special products, which comprise bcn’.cnc, carbon black feed stock, food grade hexane, jute batching oil, micro crystalline wax, mineral turpentine oil, paraffin wax, propylene, raw petroleum coke, sulphur, and toluene.

IndianOil’s Retail Brand template of XtraCare(Urban), Swagat(Highway) and Kisan Seva Kendras(Rural) are widely recognized as pioneering brands in the petroleum retail segment. IndianOil’s leadership extends to its energy brands - Indane LPG, SERVO Lubricants, Autogas LPG. XtraPremium Branded Petrol, Xtramile Branded Diesel, XtraPower Fleet Card, IndianOil Aviation and XtraRewards cash customer loyalty programme. Products:

� Auto Gas

� Bitumen

� High Speed Diesel

� Furnace Oil

� Light Diesel Oil

� LSHS

� Indane Gas

� Lubricants & Greases

� Marine Fuel & Lubricants

� MS/Gasoline

� Petrochemicals

� Superior Kerosene Oil

� Crude Oil


MAJOR COMPETITORS IN PUBLIC SECTOR

HPCL is a Fortune 500 company, with an annual turnover of Rs. 1,08,599 Crores and sales/income from operations of Rs 1,14,889 Crores (US$ 25,306 Millions) during FY 2009-10, having about 20% Marketing share in India and a strong market infrastructure. HPCL operates 2 major refineries producing a wide variety of petroleum fuels & specialties, one in Mumbai (West Coast) of 6.5 Million Metric Tonnes Per Annum (MMTPA) capacity and the other in Vishakapatnam, (East Coast) with a capacity of 7.5 MMTPA. HPCL holds an equity stake of 16.95% in Mangalore Refinery & Petrochemicals Limited, a state-of-the-art refinery at Mangalore with a capacity of 9 MMTPA. In addition, HPCL is constructing a refinery at Bhatinda, in the state of Punjab, as a Joint venture with Mittal Energy Investments Pvt.Ltd. HPCL also owns and operates the largest Lube Refinery in the country producing Lube Base Oils of international standards, with a capacity of 335 TMT. This Lube Refinery accounts for over 40% of the India's total Lube Base Oil production. HPCL's vast marketing network consists of 13 Zonal offices in major cities and 101 Regional Offices facilitated by a Supply & Distribution infrastructure comprising Terminals, Aviation Service Stations, LPG Bottling Plants, and Inland Relay Depots & Retail Outlets, Lube and LPG Distributorships. HPCL, over the years, has moved from strength to strength on all fronts. The refining capacity steadily increased from 5.5 MMTPA in 1984/85 to 13 MMTPA presently.


Bharat Petroleum Corporation Ltd. was formed on 24th January , 1976 when the Government of India took over the Burmah Shell Group of Companies. On 1st August , 1977 the company was renamed as Bharat Petroleum Corporation Limited (BPCL). It was the first refinery to process newly found indigenous Crude (Bombay High) in the country. The core business of BPCL is Petroleum Refining. Bharat Petroleum produces a diverse range of products, from petrochemicals and solvents to aircraft fuel and speciality 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.

The core strength of Bharat Petroleum Corporation Limited 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.

Opening up of the Indian economy in the nineties brought with it more competition and challenges, kindled by the phased dismantling of the Administered Pricing Mechanism (APM) and emergence of additional capacities in the region in refining and marketing.

In 1996, Bharat Petroleum went through a process of visioning, involving people at all levels, which evolved a shared vision and a set of shared values. Based on this, the company restructured itself, in a proactive move to adapt to the emerging competitive scenario. The function-based structure was carefully dismantled and replaced with a process-based one. This made the company more responsive to its customer needs.

Bharat Petroleum realises that, in the long run, success can only come with a total reorientation and change in approach with the customer as the focal point. Today, Bharat Petroleum is restructured into a Corporate Centre, Strategic Business Units (SBUs) and Shared Services and Entities. The organisational design comprising of five customer facing SBUs, viz. Aviation, Industrial & Commercial, LPG, Lubricants and Retail and one asset based SBU, viz. Refinery, is based on the philosophy of greater customer focus.


SWOT ANALYSIS OF IOCL

SWOT Analysis With Respect To Marketing Division Strengths:

(1) India’s highest ranked Fortune 500 Company and a market leader with 50% share of petroleum products.

(2) Possess the largest Pipeline Network; and thus has a vital competitive edge in

transportation costs and thus helps to access in deficit markets. (3) IOC controls 10 refineries, by virtue of which it has a total share of around 34% of

India’s overall refining capacity. (4) There are more than 35600 sale points all over India which is 55% of industry. (5) There are about 5096 distributors of Indane Cooking gas for catering 56 million

households. (6) Reaching the doors of bulk customers : Bulk Consumer Pumps 7,593 (89%) (7) Strong Brand name for its products (For example, SERVO which covers 42% market

shares, with more than 450 grades). (8) Excellent credibility and international corporate image for raising funds. (9) IOC also acquired management control of the marketing company IBP, thereby

strengthening its position in these activities. (10) There are around 229 active Patents which includes 125 international patents.

IOCL

46%

BPCL

19%

HPCL

18%

RIL

7%

Others

10%

IOCL

BPCL

HPCL

RIL

Others

Market Share In The Indian Petroleum Industry


(11) The company has already entered overseas markets such as Sri Lanka, Maldives, and Oman and is presently considering entering Turkey through a JV. The company is in talks with Caliak of’ Turkey to set up an I0 million TPA grassroots refinery with an investment of $2 billion and establish retail business. IOC is also weighing the possibility of entering Indonesia. IOC has also started exploring the overseas markets for increasing its scope of operations. Its interests include downstream activities in Sri Lanka, Maldives, Oman, and Nepal; interest in the lubes business in Maldives, Dubai, Bangladesh, Sri Lanka, etc; among others.

Weaknesses:

(1) The functioning of IOC is greatly influenced by the government policy and regulation. The government has 82% stake in the company, thus gaining the control of the company. There is always a risk of its proposals being rejected as there is uncertain political environment prevailing in the country.

(2) The Advertisement strategy of IOCL is not extremely effective. For example, Xtra Premium is the best petrol available in the market, but due to lack of effective advertisement, the sale of the product is not in the desired level, where as Castrol is known for its celebrity advertisement.

(3) Even though IOC controls most retail outlets it has market share of only 33.8% in the petrol and 39.6% in diesel registering an increase of 0.5% and 0.3% respectively over the last year. This is comparatively very small as compared to its size, reach and production. This is because of the fact that its retail outlets are concentrated more in semi-urban area and rural area.

Opportunities:

(1) Enhancement of the distribution network must be made especially in the deficit regions.

(2) Distribution / sale of alternative products through existing retail network can be chalked out.

(3) With gas emerging as an attractive alternative fuel due to the twin benefits of low pollution and better economics, IOCL has planed to quickly establish itself in the gas market also. The LNG and Hydrogen business offers an attractive environment for its future business. Gas is steadily growing into the most preferred fuel among utility providers such as power, fertilizers and transportation. IOC plans to set up a nationwide gas distribution network for serving major Indian cities to market CNG for automobiles and to import LNG.


(4) IOC signed a MOU with the National Iranian Oil Company (NIOC) for importing 2.5 MMTPA LNG and also for taking part in the LNG midstream projects in Iran. The initial efforts turned successful with IOC already becoming the lead supplier of LNG to Essar Steel and Gujrat State Petroleum Corp. IOC has procured Exxon Mobil’s regas from Qatar for a period of twenty five years from April 2004 to meet rising demand. All these efforts would stimulate the growth and profitability of the company in the near term.

(5) Improvement of customer management services at the retail end (a customer satisfaction has shown only 65% customer satisfaction level).

Threats:

(1) In the post APM scenario, IOC will face competition in the area of crude / product import. Consequently it has affected the margin of Rs.5000crore which it earns from trading operations.

(2) Increase in number of players, specialization in lube marketing (such as HPCL, BPCL, Reliance).

(3) Introduction of LNG / CNG in some metro cities (eg, Delhi) can reduce the demand of petrol or diesel in near future.

(4) Consumption of marine fuel procured by some major public sector shipping

companies is showing a decreasing trend. (5) Deregulation of Indian Petroleum sector: The deregulation of the petroleum sector in

India during 2002 abolished the monopoly stakes of IOC. The company is now facing stiff competition from several players, striving to gain market share. There exists a close competition between ONGC and IOC in the Indian oil market. RIL has also emerged as an important player competing in the upstream sector subsequent to the deregulation of the petroleum sector.

(6) Demographic issues are also posing some serious threats to IOCL. IOCL’s north east operations continue to suffer from certain constraints.


SWOT Analysis With Respect To Refineries Division Strengths:

(1) The refineries are designed in a flexible way, which gives over 100% efficiency, competitive cost and caters for variety of needs. About 34% of refining capacity in the country is owned by IOCL.

(2) 58% of IOC’s refining capacity is located in the Northern and Western regions, which are high demand and high growth areas.

(3) Pioneer in quality management with its Mathura Refinery as the 1st in Asia and 3rd in the world to earn ISO14001 Certification.

(4) High quality LOBS produced by refineries contribute to world class lubes. (5) No financial constraints in modernizing and improving facilities for refineries.

Weaknesses:

(1) Operating cost is comparatively higher than new refineries of competitors (e.g. Jamnagar Refinery of Reliance Petroleum).

(2) There is less flexibility option of handling various types of crude (both sweet & sour) unlike new refineries of competitors.

IOCL

34%

BPCL

13%HPCL

7%

ONGC

5%

RIL

41%

Refining Capacity in Indian Petroleum

Industry

IOCL

BPCL

HPCL

ONGC

RIL


Opportunities:

(1) Need for additional refining capacity to meet rising demand in petroleum product. (2) Installation of pipeline infrastructure for deficit regions and increased application of

pipelines as a preferred mode of transportation for lower logistics cost as compared to road / rail transport.

(3) Improvement / creation of new infrastructure – storage, transportation and distribution.

(4) Globalization in refining, pipeline and consultancy. Threats:

(1) The decontrol in Hydrocarbon sector is likely to bring in new players specially the MNC’s, with new refining capacity having the flexibility to improvise the product mix according to the nature of market demand.

(2) Growth of merchant refining can be a new source of competition. (3) Higher Capital needs to modernize existing infrastructure.


CHAPTER- 2

RESEARCH METHODOLOGY


RESEARCH METHODOLOGY The methodology followed in this project involves the following phases:

� Collection of data � Observation and Analysis � Conclusion & Recommendation

Research Design: In view of the objective of the study listed above, a descriptive research design has been adopted. I have tried to interpret already available information and it lays particular emphasis on analysis and interpretation of the existing and available information with both primary and secondary data. Collection of Data: There are two sources of collecting data (of both financial and non-financial in nature).

1) Primary Data 2) Secondary Data

Primary Data Collection: To collect the primary data I have visited the IOCL and collected the information by informal discussion held with various department heads. Information pertaining to receivables, cash, inventory and creditors were collected from the respective departments in the unit. Secondary Data Collection: Secondary financial data was collected ., Annual Reports of IOCL, BPCL, HPCL for the financial years 2004-05, 2005-06, 2006-07, 2007-08, 2008-09, 2009-10. Besides the report, intranet data, internet data, books, several magazines like several articles, along with internal records like manuals, brochures, magazines etc. were used for explanation. Analysis: For the comparative performance analysis among the companies, several working capital related ratios were used along with the graphs, charts and relevant diagrams. Conclusion & Recommendation: IOCL should try to reduce its high investment in current assets and the valuation of current assets like inventory, book debts etc. depends on international prices of raw materials, cost of processing and profit margin. So IOCL must try to concentrate on cost part because cost is only variable which is controllable by IOCL and there is a need of implementation of better pricing policies by the Govt. The full conclusion & recommendation are made after completion of the entire analysis on the basis of figures and diagrams.


CHAPTER- 3

LITERATURE REVIEW


Literature review

Importance of Working capital management has always been a topic of discussion and various previous studies had unanimously accepted its importance in improving the profitability and resulting improvement in return on investment or capital employed of the company. In the present scenario of credit crunch organizations are looking back at their working capital management to release unnecessary blocking of funds in gross working capital in form of investment in inventories or receivables.

As the global financial crisis deepens and banks tighten up on credit, working capital has become a pressing issue. Ralf Seifert and Daniel Seifert (Dec, 2008) and their studies confirms that In an average company, decreasing working capital by 30% leads to a 16% increase in after-tax returns on invested capital resulting in an increase in ROI.

The pioneer work of Shin and Soenen (1998) and the more recent study of Deloof (2003) have found a strong significant relationship between the measures of WCM and corporate profitability. Their findings suggest that managers can increase profitability by reducing the number of day’s accounts receivable and inventories. This is particularly important for small growing firms who need to finance increasing amounts of debtors.

Narasimhan and Murty (2001) stress on the need for many industries to improve their return on capital employed (ROCE) by focusing on some critical areas such as cost containment, reducing investment in working capital and improving working capital efficiency.

Though the working capital efficiency and working capital management is concern for all the business organization but its importance is more crucial for the success of the small firms.

Peel and Wilson (2000) studied the importance of working capital for small and growing businesses, and concluded that an efficient working capital management is a vital component of success and survival; i.e. both profitability and liquidity .Study undertaken reveals that small firms tend to have a relatively high proportion of current assets, less liquidity, exhibit volatile cash flows, and a high reliance on short-term debt. They further assert that smaller firms should adopt formal working capital management routines in order to reduce the probability of business closure, as well as to enhance business performance.

Ghosh and Maji (2003) in this paper made an attempt to examine the efficiency of working capital management during 1992 – 1993 to 2001 – 2002. For measuring the efficiency of working capital management, performance, utilization, and overall efficiency indices were calculated instead of using some common working capital management ratios.

The importance of cash flow is not new to the finance literature and so he cash conversion cycle. As maintaining an optimal balance of cash is important for the profitability of the organization, as an excess investment in cash is unproductive for the business.

Over twenty years ago, Largay and Stickney (1980) reported that the then-recent bankruptcy of W.T. Grant, a nationwide chain of department stores, should have been


anticipated because the corporation had been running a deficit cash flow from operations for 8 of the last 10 years of its corporate life.

Walker and Petty (1978); Deakins ( 2001) both stress on cash management as managing cash flow and cash conversion cycle is a critical component of overall financial management for all firms, especially those who are capital constrained and more reliant on short-term sources of finance

Eljelly (2004) elucidated that efficient liquidity management involves planning and controlling current assets and current liabilities in such a manner that eliminates the risk of inability to meet due short-term obligations and avoids excessive investment in these assets. The relation between profitability and liquidity was examined, as measured by current ratio and cash gap (cash conversion cycle) on a sample of joint stock companies in Saudi Arabia using correlation and regression analysis. The study found that the cash conversion cycle was of more importance as a measure of liquidity than the current ratio that affects profitability.

Apart from cash, accounts receivables, payables and inventory also accounts for the major investment in the current assets and liabilities of the firm. Thus managing this investment at the optimal level is necessary for an effective overall management of the working capital.

Deloof (2003) discussed that most firms had a large amount of cash invested in working capital. It can therefore be expected that the way in which working capital is managed will have a significant impact on profitability of those firms. Using correlation and regression tests he found a significant negative relationship between gross operating income and the number of days accounts receivable, inventories and accounts payable of Belgian firms. On basis of these results he suggested that managers could create value for their shareholders by reducing the number of days’ accounts receivable and inventories to a reasonable minimum. The negative relationship between accounts payable and profitability is consistent with the view that less profitable firms wait longer to pay their bills.

All the above studies provide a solid base and give an idea regarding importance of working capital, working capital management and its components.

Working capital management ensures effective and efficient cash flow in the business with the effective management of receivables, inventories and payables and helps in determining short term fund required by the firm.


WORKING CAPITAL MANAGEMENT

Introduction: In a perfect world, there would be no necessity for current assets and liabilities because there would be no uncertainty, no transaction costs, information search costs, scheduling costs, or production and technology constraints. The unit cost of production would not vary with the quantity produced. Borrowing and lending rates shall be same. Capital, labour and product market shall be perfectly competitive and would reflect all available information, thus in such an environment, there would be no advantage for investing in short term assets. However the world we live is not perfect. It is characterized by considerable amount of uncertainty regarding the demand, market price, quality and availability of own products and those of suppliers. There are transaction costs for purchasing or selling goods or securities. Information is costly to obtain and is not equally distributed, there are spreads between the borrowings and lending rates for investments and financing of equal risks. Similarly each organization is faced with its own limits on the production capacity and technologies it can employ. There are fixed as well as variable costs associated with production of goods. In other words, the markets in which real firm operated are not perfectly competitive. These real world circumstances introduce problem’s which require the necessity of maintaining working capital. For example, an organization may be faced with an uncertainty regarding availability of sufficient quantity of crucial input in future at reasonable price. This may necessitate the holding of inventory. Similarly an organization may be faced with an uncertainty regarding the level of its future cash flows and insufficient amount of cash may incur substantial costs. This may necessitate the holding of reserve of short term marketable securities, again a short term capital asset. In the management of working capital the time factor is not a crucial decision if the size of such assets is large, the liquidity position would improve, but profitability would be adversely affected because of idle funds. Conversely, if the holdings of such assets are relatively small, the overall profitability will increase, but it adversely affected on the liquidity position and makes the firm more risky. So the working capital management should aim at striking a balance such that there is an optimum amount of short term assets. Meaning Of Working Capital: Ordinarily, the term “working capital” stands for that part of the capital, which is required for the financing of working or current needs of the company. Working capital is the lifetime of every concern. Whether it is manufacturing or non-manufacturing one without adequate working capital, there can be no progress in the industry. Inadequate working capital means shortage of raw materials, labour etc., resulting in partial current assets less current liabilities-has no economic meaning in the sense of implying some type of normative behaviour. According to this line of reasoning, it is largely an accounting artefact. Working capital management, then, is a misnomer.


The working capital of the firm is not managed. The tem describes a category of managementdecisions affection specific types of current assets and current liabilities. In turn, those decisions should be rooted in the overall Valuation of the firm. Definitions: According to Western and Brigham,term assets- cash, short term securities, accounts receivables and inventories”. According to Hoagland, “working capital is descriptive of that capital which is not fixed. But the more common use of the working capital is to consider it as book value of the current assets and the current liability. 1.On the basis of Concept: There are two concepts that are currently accepted a) Gross working capital conceptb) Net working capital concept Gross working capital concept: This thought says that total investment in current assets is the working capital of the company. This concept does not consider current liabilities at all.

ON THE BASIS OF CONCEPT

GROSS WORKING CAPITAL

WORKING


The working capital of the firm is not managed. The tem describes a category of managementdecisions affection specific types of current assets and current liabilities. In turn, those decisions should be rooted in the overall Valuation of the firm.

According to Western and Brigham, “Working capital refers to a firm’s investmentcash, short term securities, accounts receivables and inventories”.

According to Hoagland, “working capital is descriptive of that capital which is not fixed. But the more common use of the working capital is to consider it as the difference between the book value of the current assets and the current liability.

re currently accepted about working capital. They are:

a) Gross working capital concept =Total of current assets b) Net working capital concept =Excess of current assets over current liabilities

Gross working capital concept:

This thought says that total investment in current assets is the working capital of the company. This concept does not consider current liabilities at all.

TYPES OF WORKING CAPITAL

NET WORKING CAPITAL

ON THE BASIS OF TIME

PERMANENTWORKING CAPITAL

REGULAR WORKING CAPITAL

RESERVE WORKING CAPITAL

TEMPORARY WORKING CAPITAL

SEASONAL WORKING CAPITAL

SPECIFIC WORKING CAPITAL

/2009-11

The working capital of the firm is not managed. The tem describes a category of management decisions affection specific types of current assets and current liabilities. In turn, those

Working capital refers to a firm’s investment in short cash, short term securities, accounts receivables and inventories”.

According to Hoagland, “working capital is descriptive of that capital which is not fixed. But the difference between the

capital. They are:

=Excess of current assets over current liabilities

This thought says that total investment in current assets is the working capital of the

TEMPORARY WORKING CAPITAL

SEASONAL WORKING CAPITAL

SPECIFIC WORKING CAPITAL


Reasons given for the concept is:

1) When we consider fixed capital as the amount invested in fixed assets. Then the amount invested in current assets should be considered as working capital.

2) Current asset whatever my be the sources of acquisition, are used in activities related

to day to day operations and their forms keep on changing. Therefore they should be considered as working capital.

Net working capital concept: It is narrow concept of working capital and according to this; the excess of current assets over current liabilities is called as working capital. This concept lays emphasis on qualitative aspect, which indicates the liquidity position of the concern/enterprise. The reasons for the net working capital method are:

1) The material thing in the long run is the surplus of current assets over current liability 2) Financial health can easily be judged by with this concept particularly from the view

point of creditors and investors. 3) Excess of current assets over current liabilities represents’ the amount which is not

liable to be returned and which can be relied upon to meet any contingency. 4) Intercompany comparison of financial position may be correctly done particularly

when both the companies have the same amount of current assets. Components of Working Capital: Current Assets Current Liabilities

• Cash in hand/bank • Bills receivable • Sundry Debtors • Prepaid expenses • Short term investment • Inventory • Accrued Income

• Bank overdraft • Bills Payable • Sundry Creditors • Outstanding Expenses • Advance Taken

2. On the basis of Time: On the basis of Time the working capital may be divided in to:

a) Permanent or Fixed working capital b) Variable or Temporary working capital


Amount of working capital Amount of working capital

(a) Permanent or Fixed Working Capital: It represents that part of capital which is permanently locked up in the current assets and carrying out business smoothly. It is permanent in nature and will increase as the size of business expands. In other words current assets required on a continuing basis over the entire year are permanent working capital. Permanent working capital can be further divided into: 1. Regular Working Capital 2. Reserve Working Capital 1. Regular Working Capital: It is the minimum amount of liquid capital needed to keep up the circulation of the capital form cash to inventories to receivables and again to cash. This would include sufficient minimum bank balance to discount all bills, maintain adequate supply of raw materials etc... 2. Reserve Working Capital: It is the excess over the needs or regular working capital that should be kept in reserve for contingencies that may arise at any time these contingencies include rising prices business depression strikes special operations such as experiments with new products. (b)Variable or Temporary Working Capital : Variable Working Capital changes with the increase or decrease in the volume of business. It may be sub-divided into.

1. Seasonal Working Capital 2. Special Working Capital

1. The working capital required to meet the seasonal needs of the industry is known as

seasonal working capital. 2. Special working capital is that part of the variable working capital with is required to

finance the special operations such as extensive marketing campaigns experiments with the products or methods of production carry of special job etc.

Time Time

Permanent

Permanent

Temporary

Temporary


Determinants of working capital:

1. Nature and Size of Business

2. Manufacturing cycle

3. Business fluctuation

4. Production policy

5. Firm’s credit policy

6. Availability credit

7. Growth of expansion

8. Profit margin and profit

appropriation

9. Price level Changes

10. Operating of efficiency

Advantage of adequate working capital:

ABILITY TO FACECRISIS

REGULARRETURN

ONINVEST-MENT

HIGHMORALE


Determinants of working capital:

and Size of Business

Profit margin and profit

Operating of efficiency

11. Cash requirements

12. Time

13. Volume of sales

14. Terms of purchases and sales

15. Inventory turnover

16. Inflation

17. Seasonal fluctuations

18. Re payment ability

19. Actives of firm

20. Demand of creditors

Advantage of adequate working capital:

ADVANTAGE OF

ADEQUATEWORKINGCAPITAL

SOLVENCY OF

BUSINESS

GOODWILL

EASY LOANS

CASHDISCOUNTS

CONSTANTSUPPLYOF

RAWMATERIAS

REGULARPAYMENT

OF EXPENSES

HIGHMORALE

/2009-11

Terms of purchases and sales

Seasonal fluctuations

Demand of creditors


Disadvantage of inadequate or excess working capital

Working Capital Management: Working capital management is the process of planning and controlling the level and mix of current assets of the firm as well as financing these assets. Thus this involves managing the relationship between a firm's shortworking capital management is and that it has sufficient cash flow to satisfy both maturing shortupcoming operational expenses. Why Working Capital Management?The dynamic business environment demands a framework for an efficient management system in order to be more competitive.Every business concern aims at having adequate or optimal amount of working capital to run its business operations. Both excess as well as shortage of working capital situations are bad for any business. Too much of working capital means that large sum of money is tied up in accounts receivable and inventory and inadequate working capital can adversely affect the production and business operation, which is more dangerous.Thus the working capital management is required to maintain an optimal working capital with a proper risk and return trade off

EXCESS WORKING CAPITAL

LOW RATE OF RETURN

LOSS OF GOODWILL

DECLINE IN EFFICIENCY

POOR TURNOVER RATIO

OVERCAPITALISATION



Working Capital Management:-

Working capital management is the process of planning and controlling the level and mix of current assets of the firm as well as financing these assets. Thus this involves managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing shortupcoming operational expenses.

Why Working Capital Management? The dynamic business environment demands a framework for an efficient management system in order to be more competitive. Every business concern aims at having adequate or optimal amount of working capital to run

h excess as well as shortage of working capital situations are bad Too much of working capital means that large sum of money is tied up in

accounts receivable and inventory and inadequate working capital can adversely affect the n and business operation, which is more dangerous.

Thus the working capital management is required to maintain an optimal working capital risk and return trade off .

DISADVANTAGES

EXCESS WORKING CAPITAL

LOW RATE OF RETURN

LOSS OF GOODWILL

DECLINE IN EFFICIENCY

POOR TURNOVER RATIO

EVIL OF OVERCAPITALISATION

INADEQUATE WORKING CAPITAL

LOSS OF CREDITWORTINESS

UNABLE TO USE OPPORTUNITIES

ADVERSE EFFECT ON

CREDIT OPPORTUNITIES

OPERATIONAL EFFICIENCY

EFFECT ON FINANCIAL CAPACITY

NON ACHIEVEMENT

OF PROFIT TARGET

/2009-11


Working capital management is the process of planning and controlling the level and mix of current assets of the firm as well as financing these assets. Thus this involves managing the

ilities. The goal of to ensure that the firm is able to continue its operations

and that it has sufficient cash flow to satisfy both maturing short-term debt and

The dynamic business environment demands a framework for an efficient working capital

Every business concern aims at having adequate or optimal amount of working capital to run h excess as well as shortage of working capital situations are bad

Too much of working capital means that large sum of money is tied up in accounts receivable and inventory and inadequate working capital can adversely affect the

Thus the working capital management is required to maintain an optimal working capital


This principle is based on the following assumptions: -

1. There is direct relationship between risk and profitability -- Higher is the risk, higher is the profitability, while lower is the risk, lower is the profitability.

2. Current assets are less profitable than fixed assets. 3. Short-term funds are less expensive than long-term funds.

Working capital meets the short term financial requirement of a business enterprise and ensures flow of fund in the business which is very necessary to maintain business same as the circulation of blood in human body. Poor financial planning or working capital management on the part of any company can lead to the business failure. An active working capital management is an extremely effective way to increase enterprise value by continuously improving cash flow, reducing inventory & resulting capital costs, without sacrificing the business of the company. Now need is for an integrated roadmap to better working capital management- one that shortens the cash conversion cycle and minimizes capital lockup, which can help the organization to face any favorable and unfavorable economic situation. A successful business functions like an olive tree. Olive trees are remarkable for their survival skills. Deeply rooted in Greek history, their branches crowned the heads of the first Olympic champions. Their longevity is a case study in adaptability- they require little water and easily uprooted and replanted. Like the olive tree, a business must weather the elements of any economic climate. Companies must adjust to macro business factors- economic activity, interest rates, stock market valuations, and regulatory changes- over which they have little control. Working capital performance is fundamental to a company’s ability to adapt in a challenging economy, because it is both independent of macroeconomic factors and firmly within an organization’s control. Reducing working capital fuels success by enhancing economic value added, regardless of environmental changes. Thus working capital optimization is a vital component of corporate strategy. Active working capital management is an extremely effective way to increase enterprise value. Optimizing working capital results in a rapid release of liquid resources and contributes to an improvement in free cash flow and to a permanent reduction in inventory and capital costs. In an average company, decreasing working capital by 30% leads to approx. 16% increase in after-tax returns on invested capital. A reduction of time span during which capital is tied up releases liquidity, has a direct impact on the company’s financial position. However return on capital will also increase, balance sheet structures will get optimized and company financial will get improved


Dimensions of Working Capital Management-:

1. Estimating Investment in Working Capital 2. Financing of Working Capital 3. Managing Profitability, Risk & Liquidity

Techniques used to forecast the working capital requirement: There are basically 3 approaches used to forecast the working capital requirement: 1. Estimation of components of working capital method: This method is based on the basic definition of working capital, excess of current assets over the current liabilities. In other worked the amount of different constituent of the working capital such as debtors, cash inventories, creditors etc are estimated separately and the total amount of working capital requirement is worked out accordingly. 2. Percent sales method: This is the most simple and widely used method in combination with other scientific methods. According to this method a ratio is determined for estimating the future working capital requirement. This is generally based on the past experience of management as the ratio varies from industry to industry. For example if the past experience shows that the amount of working capital has been 20% of sales and projected amount of sales for the next year is Rs. 10 lakhs, the required amount of working capital shall be Rs. 2 lakhs. As seen from above the above method is merely an estimation based on past experience. Their fore a lot depends on the efficiency of decision maker, which may not be correct in all circumstances. This method assumes a linear relationship of working capital and sales, however the relationship can also be curvilinear. 3. Operating cycle approach: The need of working capital arises mainly because of them gap between the production of goods and their actual realization after sales. This gap is technically referred as the “operating cycle” or the “cash cycle” of the business. If it were possible to complete the entire job instantaneously, there would be no need for current asset (working capital). Since it is not possible, every business organization is forced to have current asset and hence operating cycle.


Operating cycle and cash cycle are two important components of working capital management. Together they determine the efficiency of a firm regarding working capital management. Operating cycle: Operating cycle refers to the delay between the buying of raw materials and the receipt of cash from sales proceeds. In other words, operating cycle refers to the number of days taken for the conversion of cash to inventory through the conversion of accounts receivable to cash. It indicates towards the time period for which cash is engaged in inventory and accounts receivable. If an operating cycle is long, then there is lower accessibility to cash for satisfying liabilities for the short term. Operating cycle takes into consideration the following elements:

� Accounts payable, � Cash, � Accounts receivable, and � Inventory replacement.

The following formula is used for calculating operating cycle: Operating cycle = age of inventory + collection period

Finished Goods

Work in Progress Accounts

Receivable

Wages, Salaries,

Factory Overheads

Raw Materials

Cash Suppliers


Cash cycle: It is also termed as net operating cycle, asset conversion cycle, working capital cycle or cash conversion cycle. Cash cycle is implemented in the financial assessment of a commercial enterprise. The more the figure is increased, the higher is the period for which the cash of a commercial entity is engaged in commercial activities and is inaccessible for other functions, for instance investments. The cash cycle is interpreted as the number of days between the payment for inputs and getting cash by sales of commodities manufactured from that input. The fundamental formula that is applied for the calculation of cash conversion cycle is as follows:

Cash cycle = (Average Stockholding Period)

+(Average Receivables Period) –(Average Payables Period)

Or

(Operating cycle – Average Payable Period)

Here, Average Receivables Period (in days) = Accounts Receivable/Average Daily

Average Stockholding Period (in days) = Closing Stock/Average Daily Average Payable Period (in days) = Accounts Payable/Average Daily Credit

Purchases

A short cash cycle reflects sound management of working capital. On the other hand, a long cash cycle denotes that capital is occupied when the commercial entity is expecting its clients to make payments. There is always a probability that a commercial enterprise can face negative cash conversion cycle, in which case they are getting payments from the clients before any payment is made to the suppliers. Instances of such business entities are commonly those companies, which apply JIT or Just in Time techniques, for example Dell, as well as commercial enterprises, which purchase on terms and conditions of longer duration credits and perform sales against cash, for instance Tesco. The more the manufacturing procedure is extended, the higher the amount of cash should be kept engaged in inventories by the company. Likewise, the more time is taken for the clients for the purpose of bill payment, the more is the accounts receivable amount. From another viewpoint, if a company is able to detain the payment for its internal inputs, it can decrease the amount of money required. Put differently, the net working capital is diminished by accounts payable.


Different Sources of Financing Working Capital

Sources of Working Capital

Sources of Fixed portion of working

capital

Sources of Variable portion of working

capital

1. Loan from Bank or other Financial Institution.

2. Trade Credits & Payables.

3. Commercial Papers. 4. Advance from

Customers. 5. Public Deposits. 6. Govt. Aid.

1. Provision for Taxation. 2. Provision for Depreciation. 3. Ploughing back of profit.

Internal Sources External Sources

1. Disposal of Investments. 2. Issue of Debentures. 3. Ploughing Back of Profit. 4. Taking Long-term Loan from

Financial Institution.


Managing components of working capital Managing individual element of working capital plays an important role in integrated working capital management. The various component of working capital are:

1. Receivables Management 2. Cash Management 3. Inventory Management 4. Payable Management.

1. Receivables Management: Account receivables represent the amount due from its customer to whom the company has extended the credit. For most of the companies account receivables constitutes a major components as it account for approximately 30% of the current asset. When a company sells on credit, it does not get cash at the time of sale, while during the process of manufacturing it has already spent money to pay for labour, raw material, and other expenses. Therefore, the company has to find out source of financing which would provide funds to finance that transaction for the time period for which credit has been granted. Thus receivables imply investment and involve certain costs. Besides the cost of investment, there are two types of risks which are associated with the accounts receivables management. One is the risk of opportunity loss and the other liquidity risk. Thus management of receivables requires a proper tradeoff among different risks and cost. Thus, the management of receivables involves the following steps: • Management has to decide to whom the company should sell its products on credit. This

would require the development of the credit standard. • Determining what are the factors the company should take into account while analyzing

the potential customers who are interested in availing the credit facility of the company and what are the sources of information which one can use in credit analysis.

• The company has to determine the credit terms on which the company would be interested in selling the goods.

• Once the decision to grant the credit has been implemented, what should be the collection policy of the company? How should the company monitor its receivables and subsequently control them.

I. Credit Standard:

A pivotal question in the credit policy of a firm: what standard should be applied in accepting and rejecting an account for credit granting? Thus credit standard of a company lay down minimum requirement for the evaluation of credit to its customers. A liberal credit standard tends to push sales up by attracting more customers, however also results in higher incidence of bad debt losses, a larger investment in receivables, and a higher cost of collection and vice versa.


Thus a company may define their credit standard in a very conservative or a strict manner and thus restrain the marginal customers in getting credit. The companies generally use some of the following quantitative indicators for establishing credit standard. • Payment Period • Selected Financial Ratios • Rating based on financial ratios. The subjective assessment obtained through the market about the credit worthiness of the customer also helps in defining credit standard. Examining the effect of change in credit standards is done by comparing the profitability generated by lowering down the credit standards and added cost of accounts receivables. So long as the profitability is more than the added cost, the company can lower down the credit standard. II. Credit Terms:

The decision about the credit terns would involve the decision about the following variables: • Credit Period • Credit Limit • Cash Discount • Discount Rate and Discount Period Credit period is the time for which the company is willing to allow their customers not to pay their bills. Liberalizing the credit period means more investment in account receivables and would also result in increase sales. Thus a proper balance is required while deciding about the credit period and credit limit. Cash discounts is a mechanism through which company is giving some benefits to customers who opt to pay earlier and thus may influence its customers to pay promptly. Two important aspects of this policy are - Cash discount rate and Discount period. The cash discount policy would result into loss of revenue to the company. At the same time the company would experience a quick collection resulting into lower collection period; this in turn will affect the investment in receivables. Thus there will be need to find out whether the returns on funds released on account of reduction in investment in accounts receivable is more than the loss of revenue. Only if the returns completely offset the loss of revenue the cash discount policy can be introduced. III. Credit Analysis: The company must have to evaluate the capability of the customer and his strengths to fulfill the promise of paying the bills in time, they must analyze the risk of paying late or risk of default before extending credit.


The credit analysis involves the following three steps: • Getting financial and non-financial information about the customer • Analysing the credit worthiness of the customer and assessing the risks involved. • Deciding to grant the credit. With the help of financial and non financial information and other insights companies try to assess the following five C’s of credit worthiness:

i. Character It reflects the willingness of the customer to honor his obligations.

ii. Capacity It reflects the ability of the customer to meet credit obligations from the operating cash flows.

iii. Condition The market condition play an important role when one is doing credit analysis. The expected recessionary trends in the market, growing competition and other market factors should be taken into account when doing credit analysis of the customers. Given a particular set of conditions, the cost associated with extending the credit may sometimes be high.

iv. Capital It reflects the financial reserves or net worth of the customer, as when the customer face difficulty in meeting his credit obligations from its operating cash flow, the focus shifts to its capital.

v. Collateral The security offered by the customer in the form of pledged assets. The firm can use financial statements, bank references, experience of the firm, prices and yields on securities etc. to get information on the five C’s. Companies use more quantitative techniques in form of discriminant analysis to prepare credit rating index to base their judgment about the credit worthiness of a customer and can take decision regarding whether to grant credit or not. IV. Control and Monitoring of Accounts Receivables: It is important to design the collection policy and procedures so as to speed up the collections as and when become due. Once the company has set the credit standards, credit policy, and its collection policy, it is important for the company to watch and monitor the effectiveness of collections. In one of the methods for controlling and monitoring of accounts receivables, various targets in terms of average collection period and bad debts to sales ratio get defined and accounts receivables were monitored with reference to these ratios. One traditional method for monitoring collection pattern associated with credit sales and resulting accounts receivables is the aging schedule, which we use to observe the possible changes in account receivables. But in situation when the company is in a seasonal business, the aging schedule provides misleading signals. This would provide the appropriate signals only in a situation when the company has got stable sales throughout the period. In situation of seasonal business, receivables balance pattern or collection pattern is used to monitor the account receivables of the company and this is done by preparing a collection matrix which is concerned with the proportion of any month’s sales that remain outstanding


at the end of each following or subsequent month. Thus one can easily judge whether the collection is improving, stable or deteriorating. Another benefit is that it provides a historical record of collection percentage that can be useful in projecting monthly receipts for each budget period. 2. Cash Management: Cash is king- especially at a time when fund raising is harder than ever, as it is the most liquid asset and is of vital importance to the daily operations of business firms and so the cash management is one of the most critical aspects of working capital management to ensure solvency of the firm. Objectives of cash management There are two basic objectives of cash management:

� To meet the cash disbursement needs as per the payment schedule; � To minimize the amount locked up as cash balances.

Cash management involves the following four basic problems: • Controlling levels of cash • Controlling inflows of cash • Controlling outflows of cash • Optimum investment of surplus cash • Controlling Levels of Cash: One of the basic objectives of cash management is to minimize the level of cash balance with the firm. This objective is sought to be achieved by the means of cash budget and ensuring other sources of funds to provide for unpredictable contingencies. Cash budget is the most significant device for planning and controlling the use of cash. It involves a projection of future cash receipts and cash disbursements of the firm over various intervals of time. It reveals the timings and amount of expected cash inflows and outflows over a period studied. With this information, we can better determine the future cash needs of the firm, plan for the financing of these needs and exercise control over the cash and liquidity of the firm. These budgets or forecasts help in- • Estimating cash requirements. • Planning short term financing. • Scheduling payments in connection with capital expenditure projects. • Planning purchase of materials. • Developing credit policies. • Checking the accuracy of long term forecast


• Controlling inflows of cash Having prepared the cash budget, the finance manager should also ensure that there is no significant deviation between the projected cash inflows and the projected cash outflows. This requires controlling of both inflows as well as outflows of cash. Speedier collection of cash can be made possible by adoption of the following techniques, which have been found to be quite useful and effective: Concentration banking is a system of decentralizing collections of accounts receivables in case of large firms having their business spread over a large area. According to this system, a large number of collection centers are established by the firm in different areas selected on geographical basis. The firm opens its bank accounts in local banks of different areas where it has its collection centers. The collection centers are required to collect cheques from their customers and deposits them in the local bank account. Instructions are given to the local collection centers to transfer funds over a certain limit daily telegraphically to the bank at the head office. This facilitates fast movements of funds. The company’s treasurer on the basis of the daily report received from the head office bank about the collected funds can use them for disbursement according to needs. Lock-box system, According to this system, the firm hires a post-office box and instructs its customers to mail their remittances to the box. The firm’s local bank is given the authority to pick the remittances directly from the post-office box. The bank picks up the mail several times a day and deposits the cheques in the firm’s account. Standing instructions are given to the local bank to transfer funds to the head office bank when they exceed a particular limit. Thus it helps in further speeding up the collection of cash. • Controlling Outflow of Cash: An effective control over cash outflows or disbursements also helps a firm in conserving cash and reducing financial requirements. However, there is a basic difference between the underlying objective of exercising control over cash inflows and cash outflows. In case of the former, the objective is the maximum acceleration of collections while in the case of latter; it is to slow down the disbursements as much as possible. The combination of fast collections and slow disbursements will result in maximum availability of funds. Firms generally use the technique of “playing float” for maximizing the availability of funds. The term float refers to the period taken from one stage to another in the cash collection process. These floats can be Billing Float, Capital Float, Cheque Processing Float and Bank Processing Float. • Investing Surplus Cash: Managing surplus cash starts with determining the surplus cash and then identifying and analyzing various sources of investment. Surplus cash is the cash in excess of the firm’s normal cash requirements. While determining the amount of surplus cash, we must take into account the minimum cash balance that the


firm must keep to avoid risk or cost of running out of funds. Such minimum level may be termed a “safety level of cash”. The safety level of cash is determined separately both for normal periods and peak periods. During Normal period: Safety level of cash = Desired days of cash x average daily cash outflows During Peak Periods: Safety level of cash = (Desired days of cash at the busiest period) x (Average of highest daily cash outflows) Desired days of cash is the number of days for which cash balance should be sufficient to cover payments. Average daily cash outflows mean the average amount of disbursements, which will have to be made daily. The “desired days of cash” and “average daily cash outflows” are separately determined for normal and peak periods Once the surplus is projected, it has to be determined how it should be split between marketable securities and cash holdings. There are several outlets for short term investments like inter corporate advances, inter corporate bills financing, stock market operations, investment in units of mutual funds, treasury bills, commercial papers, etc. The return on such investments is different and depends on money market conditions, amount to be invested, period of investment and transaction cost. The risks associated with a certain investment determine its safety, marketability and hence, its yield. Thus there would be a need to maintain a trade-off between investment income and transaction costs of investing and disinvesting. Cash Management tools-There are certain optimization models that help in determining optimum cash balance and optimum strategies’ for investment and disinvestment when transaction costs play an important part. The two most popular models are as follows; a) Miller –Orr b)The Stone model These are discussed below: a)Miller –Orr cash management model is basically an application of control-limits theory to the cash/investment decision. When the firm’s total cash goes outside the upper control limit, investments are made to bring the cash balance back to the return point, when the firm’s cash balance goes below the lower control limit, disinvestment are made to bring the balance back to the return point. b)The Stone model uses two sets of control limits i.e. inner control limits and the outer control limits. The firm performs no evaluation until its cash balance fall outside the outer control limits. When this occurs, the firm looks ahead by adding the expected cash flows for


the next few days to the current balance. If the sum falls outside the inner control limits, a transaction is made; otherwise, the transaction is foregone. Investments are made to bring the cash balance back to the return point if the upper control limit is exceeded; corresponding disinvestments are made if the lower control limit is exceeded. 3. Inventory Management: Inventory means tangible property which is held: • For sale in the ordinary course of business; Or • In the process of production (i.e. WIP) for sale; Or • For consumption in the production of goods and services which will be used for sale in

the ordinary course of business. In short inventory includes raw material, finished goods, work in progress, spares, consumables etc. Managing inventory is crucial for the successful working capital management as the inventories constitute a major amount of investment in current assets. Working capital requirements are influenced by inventory holding- the period during which raw materials remain in store, that during which processing takes place and that during which finished goods lie in the warehouse prior to sale. The level of inventory affects the total investment in working capital. Inventory management i.e. ensuring that the optimum level of investment is made and avoiding unnecessary blockage of funds in inventory will make room for reduction in the investment and thus pave the way for a higher return on investment. Motives for holding inventories: There are three major motives for holding inventories: • Transaction motive- so that there are no bottlenecks in production and/or sales. • Precautionary motive- so that there is a cushion against unpredictable events. • Inventories may also be held so that advantage can be taken of price fluctuations By carrying inventories a firm can address to a large extent demand and lead time uncertainties, and certain advantages can be derived from holding a large inventory, such as economies in production and purchasing and flexibility in operations. However, there are several disadvantages and costs associated with carrying large inventories like ordering costs, cost of materials purchased, and carrying costs such as insurance charges, rent of the floor, heating & lighting of the space, cost of wastage and material losses etc. Thus, there are two basic questions relating to inventory management: • What should be the size of the order? • At what level should the order be placed? Thus the basic objective for inventory management is to ensure timely and adequate availability of material, promotion of manufacturing efficiency and minimizing the wastages, maintaining efficient production level, optimum investment and efficient use of capital, better service to customers, etc.


Now to answer these questions, economic order quantity models helps a lot as it helps in determining an order quantity, reorder quantity and safety level of inventory, thus ensuring uninterrupted production and minimum carrying and ordering cost of inventory. EOQ Model-: The basic purpose behind such modeling is to arrive at the level of optimum investment in inventories, which allow us to figure out the optimum lot size i.e. the number of units that should be ordered each time. There exist basically two kinds of models, deterministic and stochastic/ probabilistic. Deterministic models are built on the premise that there is no uncertainty associated with the demand and replenishment or lead times. The probabilistic models take cognizance of the fact that there is always some uncertainty associated with the demand pattern and lead times. EOQ is an important concept which helps us to arrive at determining the optimal order quantity of an item of inventory so that the total cost associated with the inventory will be the least. The EOQ model is useful in so far as it tells us the amount to order and the best timing of our orders in the case of raw materials. With respect to finished goods inventories it enables us to exercise better control over the timing and size of production runs. As a whole this model provides a decision rule regarding the replenishment of inventories indicating the time and the amount to be replenished. There are occasions when a firm is able to take advantage of quantity discounts provided the order size reaches a certain level. It’s necessary to analyze these cases as well as it can result in lower cost of inventory. Selective Inventory Management Technique: Selective inventory management techniques are: • A-B-C analysis • Pareto analysis • V-E-D analysis • F-S-N analysis These approaches are based on the logic that in any large number we usually have “significant few” and “insignificant many” In a study conducted sometimes ago, an automobile company found that it’s most expensive or “A” parts constitute only 9% of its total number of parts but account for 57% of the inventory value. Its next most expensive or “B” category items make up 10% of the total number of parts, but account of 18% of the inventory value. The “C” category items account for 20% in number and 15% in value terms. Thus economies will be attainable when stringent control is imposed on “A” items maintain bare minimum necessary level of inventories of these. Relatively larger quantities of the cheaper items may be maintained without compromising the goal of financial management. The F-S-N and V-E-D analysis are similar to A-B-C analysis is principle.


Under the F-S-N analysis goods are classified into fast-moving, slow moving and non-moving categories. Under the V-E-D analysis goods are classified into vital, essential and desirable categories. A firm according to the circumstances obtaining in it, can use combination of these techniques to control and monitor inventories and to achieve the goals of working capital management. 4. Payable management-: Payable constitute a current or short term liability representing the buyer’s obligation to pay a certain amount on a date in the near future for value of goods or services received. Trade credit is extended in connection with goods purchased for resale or for processing and resale, and hence excludes consumer credit provided to individuals for purchasing goods for ultimate use and installment credit provided for purchase of equipment for production purposes. They provide a spontaneous source of capital that flows in naturally in the course of business in keeping with established commercial practices or formal understandings. It constitute major segment of current liabilities. Types of trade credit-: Trade credit or payable could be of three types:

� Open accounts, � Promissory notes, and � Bills payable.

Open account or open credit operates as an informal arrangement wherein the supplier, after satisfying himself about the credit worthiness of the buyer, dispatches the goods as required by the buyer and sends the invoice with particulars of quantity dispatched, the rate and total price payable and payment terms. The buyer records his liability to the supplier in his books of accounts and this is shown as payable on open account. The buyer is then expected to meet his obligation on the due date. The promissory note is a formal document signed by the buyer promising to pay the amount to the seller at a fixed or determinable future time. The promissory note is thus an instrument of acknowledgment of debt and a promise to pay. The supplier may even stipulate an interest payment for the delay involved in payment. Bills payable or commercial drafts are instruments drawn by the seller and accepted by the buyer for payment on the expiry of the specified duration. The bill or draft will indicate the banker to whom the amount is to be paid on the due date, and the goods will be delivered to the buyer against the acceptance of the bill. Documents against payment and documents against acceptance are methods of deferring payments vide release of documents against endorsement on the commercial drafts leading to delivery of goods without payment, in case of documents against acceptance.


Determinants of trade credit: The various determinants of trade credit are as follows: • Size of the firm • Industrial categories • Nature of product • Financial position of seller • Financial position of the buyer • Cash discount • Degree of risk • Nature and extent of competition. Trade credit is a built-in source of financing that is normally linked to the production cycle of the purchasing firm. If payments are made strictly in accordance with credit terms, trade credit can be regarded as a cost free, non discretionary source of financing. But where the buyer takes the privilege of delaying payment beyond the due date, it assumes the form of discretionary financing and if this becomes a regular feature resulting in delinquency, trade credit will cease to be cost free. The supplier may stop credit or may charge a higher price for the product, to cover the risk. Effective management of payables: The salient points to be noted on effective management payables are: 1. Negotiate and obtain the most favorable credit terms consistent with the prevailing

commercial practice pertaining to the concerned product line 2. Where cash discount is offered for prompt payment, take advantage of the offer and

derive the saving there from. 3. Where cash discount is not provided, settle the payables on its date of maturity and not

earlier 4. Do not stretch payable beyond due date, except in inescapable situation, as such delay in

meeting obligations have adverse effects on buyer’s credibility and may result in more stringent credit terms, denial of credit or higher prices on goods and services procured.

5. Sustain healthy financial status and a good track record of past dealings with the supplier such as would maintain his confidence.

6. In highly competitive situations, supplier may be willing to stretch credit limits and period. Assess your bargaining strength and get the best possible deal

7. Avoid the tendency to divert payables. Maintain the self liquidating character of payables and do not use the funds obtained there from for acquiring fixed assets.

8. Provide full information to suppliers and concerned credit agencies to facilitate a frank and fair assessment of financial status and associated problems

9. Keep a constant check on incidence of delinquency. Delays in settlement of payables with reference to due dates can be classified into age groups to identify delays exceeding one month, two months, three months etc.


POLICIES REGARDING WORKING CAPITAL MANAGEMENT 1. Conservative Policy: Conservative policy includes large investment in current asset. This policy yields low rate of return but it also bears the lowest amount of risk i.e. there is a very low rate of probability of running out of working capital. 2. Aggressive Policy: Aggressive policy includes small investment in current asset. This policy yields high rate of return but it also carries a huge amount of risk interrupted production & sales because of frequent stock outs, inability to pay the creditors in time. 3. Average Policy: Average policy is a middle way between conservative way & aggressive policy. It yields a moderate rate of return with a moderate amount of risk. It is also to be noted that, under perfect certainty Current asset holding is minimum. Graphical Representation of various Policies of Working Capital Management: Asset Level Policy: A Policy: B Policy: C

Current asset Output


Table Showing Interrelation between Liquidity, Profitability & Risk under Three Situations

Policy Type Liquidity Profitability Risk A Conservative HIGH LOW LOW B Average AVG AVG AVG C Aggressive LOW HIGH HIGH

•••• Profitability varies inversely with liquidity •••• Profitability and risk go hand in hand i.e. Risk & Return

These are the primary issues that a firm may face while determining its working capital requirements. It is up to the firm to decide which policy it will adopt depending upon circumstances.


CHAPTER- 4

OBSERVATION & ANALYSIS


ANALYSIS OF WORKING CAPITAL MANAGEMENT OF

The first part of the project deals with the analysis of working capital requirement of IOCL. I have tried to analyze the working capital statement as well as schedules provided, subject to various constraints. The first part of my analysis deals with the working capital statement of IOCL; a comparative analysis of worki10, 2008-09, 2007-08, 2006-0requirement over the five years and analyzed the reasons for such variances. My study includes all components, the reasons for these variances and provides suggestions to improve over every aspect so that the variances can be minimized. Relative Positions of Current Assets, Current Liabilities and Net Working Capital:

2005-06 Total CA 36482.56 Total CL 25676.36 Net Working Capital

10806.20

0

10000

20000

30000

40000

50000

60000

70000

2005-06 2006


ANALYSIS OF WORKING CAPITAL MANAGEMENT OF IndianOil

The first part of the project deals with the analysis of working capital requirement of IOCL. I have tried to analyze the working capital statement as well as schedules provided, subject to

raints. The first part of my analysis deals with the working capital statement of IOCL; a comparative analysis of working capital of IOCL over the five financial years

07, 2005-06. I have studied the differences in working years and analyzed the reasons for such variances. My study

includes all components, the reasons for these variances and provides suggestions to improve over every aspect so that the variances can be minimized.

Positions of Current Assets, Current Liabilities and Net Working Capital:

(Rs. in Crore)

2006-07 2007-08 2008-09 39057.17 52,931.30 44812.1729705.87 34,580.98 35551.729351.30 18,350.32 9260.45

CA

2006-07 2007-08 2008-09 2009-10

CL

NWC

/2009-11

ANALYSIS OF WORKING CAPITAL MANAGEMENT OF

The first part of the project deals with the analysis of working capital requirement of IOCL. I have tried to analyze the working capital statement as well as schedules provided, subject to

raints. The first part of my analysis deals with the working capital statement of financial years: 2009-

. I have studied the differences in working capital years and analyzed the reasons for such variances. My study

includes all components, the reasons for these variances and provides suggestions to improve

Positions of Current Assets, Current Liabilities and Net Working Capital:

2009-10 44812.17 59388.80 35551.72 44751.73

14637.07

10

CA

CL

NWC

NWC


Items 2005Inventories 24277.79

Debtors 6698.03

Cash & Bank 744.17

Loans & Adv. 4731.02

Other CA 31.55

Analysis:

� Here inventory increased in last fiveso current assets also increased in last f

� Sundry debtors are in de

periods given to the debtors.

� Cash & Bank balance is also inyear, which is a good sign for the company.

� Loans & advances in 2009

company to the employees for housing purpose, car loan, education, etc.

0.00

5000.00

10000.00

15000.00

20000.00

25000.00

30000.00

35000.00

40000.00

2005-06 2006


CURRENT ASEETS (Rs. in Crore)

2005-06 2006-07 2007-08 2008-09 24277.79 24702.69 30,941.48 25149.6

6698.03 6736.06 6,820.54 5937.86

744.17 925.97 824.43 798.02

4731.02 5917.1 13,554.71 11875.11

31.55 775.35 790.14 1051.58

increased in last five years due to oil price rise in international market, so current assets also increased in last five years.

in decreasing trend in the last two years due to periods given to the debtors.

Cash & Bank balance is also in increasing trend due to more cash receipt during the year, which is a good sign for the company.

Loans & advances in 2009-10 was the most due to more advance given by the company to the employees for housing purpose, car loan, education, etc.

2006-07 2007-08 2008-09 2009-10

/2009-11

2009-10 36404.08

5799.28

1315.11

11875.11 14728.83

1141.5

years due to oil price rise in international market,

years due to decrease in credit

increasing trend due to more cash receipt during the

0 was the most due to more advance given by the company to the employees for housing purpose, car loan, education, etc.

Inventory

Debtors

Cash & Bank

Loans & Adv.

Other CA


CURRENT LI

Items 2005

Current Liabilities

23697.85

Provisions 1978.51

Analysis:

� Among the two components of the liabilities account for contributed by provisions whereas in 2009provisions. Current Liabilities increased10 where as provisions has increased by 420

� The sundry creditors are the highest contributor in the block of

the last five years.

� Sundry creditors have shows that the company is getting fair amount of credit from its suppliers and creditors.

� In case of Provisions the block of proposed dividend accounts for most towards the

block of provisions.

0

5000

10000

15000

20000

25000

30000

35000

2005-06 2006


CURRENT LI ABILITIES & PROVISIONS (Rs. in Crore)

2005-06 2006-07 2007-08 2008-09 23697.85 26576.76 32896.39 32754.58

1978.51 3129.11 1684.59 2603.46

Among the two components of the block of current liabilities & provisions approximately 90% over the five years, where the balan

contributed by provisions whereas in 2009-10, it is approx. 80% and the rest is Current Liabilities increased nearly 45% from the year 2005

s provisions has increased by 420% from the year 2005-0

The sundry creditors are the highest contributor in the block of current liabilities over

ditors have increased from the year 2005-06 to 2009-1shows that the company is getting fair amount of credit from its suppliers and

In case of Provisions the block of proposed dividend accounts for most towards the

2006-07 2007-08 2008-09 2009-10

Current Liabilities

Provisions

/2009-11

2009-10 32754.58 34480.17

2603.46 10271.56

block of current liabilities & provisions, current years, where the balance is

10, it is approx. 80% and the rest is from the year 2005-06 to 2009-

06 to 2009-10.

current liabilities over

10. Creditors figure shows that the company is getting fair amount of credit from its suppliers and

In case of Provisions the block of proposed dividend accounts for most towards the

Current Liabilities

Provisions


Findings: The increasing cost of crude oil in the international market is the main reason behind the increasing trend of amount of inventory in the current asset block. On the other hand, the steady increase in the block of sundry debtors indicates that the sales (credit) of IOCL are increasing over the years. Conclusion of the study: At the conclusion of the study we can say that, the working capital management in IOCL is quite impressive & management has a strong control over the various aspect of working capital management such as working capital cycle period, ratios regarding working capital, etc. But some scopes are still present for further improvement, such as:- � Control over the increasing cash & bank balance, � Increasing the credit sales of the firm because the growth of credit sales in IOCL is very

low over the years, � The amount of credit sales & credit purchase in IOCL needs to e disclosed separately in

the annual reports of the firm.


COMPARATIVE FINANCIAL ANALYSIS OF IndianOil

A firm would like to know its financial standing vis-à-vis its major competitors and the industry group. The analysis of financial performance of all firms in an industry and their comparison at a given point of times is referred to the cross-section analysis or the inter-firm analysis. To ascertain the relative financial standing of a firm, its financial ratios are compared either with its immediate competitors or with the industry average. We have used the data from annual reports of the companies to illustrate the inter-firm comparison. The financial statements of Indian Oil Corporation Ltd. over last five years can be analyzed by applying the Ratio analysis method. The financial statements of IOCL over last five years is also compared with its close competitors like Bharat Petroleum Corporation Ltd. and Hindustan Petroleum Corporation Ltd.


Comparative Financial Statement

Comparison with Competitors Balance Sheet ------------------- in Rs. Cr. ------------------- IOC Reliance BPCL Essar Oil HPCL Mar '09 Mar '09 Mar '09 Mar '09 Mar '09 Sources Of Funds: Total Share Capital 1,192.37 1,573.53 361.54 1,218.13 339.01 Equity Share Capital 1,192.37 1,573.53 361.54 1,218.13 339.01 Share Application Money 21.6 69.25 0 91.03 0 Preference Share Capital 0 0 0 0 0 Reserves 42,789.29 112,945.44 11,766.57 2,272.85 10,391.62 Revaluation Reserves 0 11,784.75 0 0 0 Networth 44,003.26 126,372.97 12,128.11 3,582.01 10,730.63 Secured Loans 17,565.13 10,697.92 3,661.60 9,419.15 698.49 Unsecured Loans 27,406.93 63,206.56 17,509.81 612.56 22,056.68 Total Debt 44,972.06 73,904.48 21,171.41 10,031.71 22,755.17 Total Liabilities 88,975.32 200,277.45 33,299.52 13,613.72 33,485.80 Application Of Funds: Gross Block 62,104.64 149,628.70 22,522.33 13,364.74 20,208.63 Less: Accum. Depreciation 27,326.19 49,285.64 10,556.54 758.9 8,554.08 Net Block 34,778.45 100,343.06 11,965.79 12,605.84 11,654.55 Capital Work in Progress 18,186.05 69,043.83 2,037.48 1,913.90 5,001.27 Investments 32,232.13 20,268.18 16,715.19 103.05 14,196.47 Inventories 25,149.60 14,836.72 6,823.92 2,250.93 8,793.24 Sundry Debtors 5,937.86 4,571.38 1,425.67 1,165.35 2,240.91 Cash and Bank Balance 796.56 500.13 440.62 155.44 604.43 Total Current Assets 31,884.02 19,908.23 8,690.21 3,571.72 11,638.58 Loans and Advances 13,348.99 13,375.15 8,584.04 2,865.17 4,620.23 Fixed Deposits 1.46 23,014.71 0.93 1,019.19 3.88 Total CA, Loans & Advances 45,234.47 56,298.09 17,275.18 7,456.08 16,262.69 Deffered Credit 0 0 0 0 0 Current Liabilities 38,890.28 42,664.81 12,981.68 8,439.81 12,411.59 Provisions 2,603.46 3,010.90 1,712.44 25.34 1,217.59 Total CL & Provisions 41,493.74 45,675.71 14,694.12 8,465.15 13,629.18 Net Current Assets 3,740.73 10,622.38 2,581.06 -1,009.07 2,633.51 Miscellaneous Expenses 37.96 0 0 0 0 Total Assets 88,975.32 200,277.45 33,299.52 13,613.72 33,485.80 Contingent Liabilities 26,317.31 36,432.69 5,862.61 6,430.35 5,588.88 Book Value (Rs) 368.86 727.66 335.45 29.05 316.23


1. Liquidity Ratios:

1.1 Current Ratio:

2005

IOCL 0.84

BPCL 0.77

HPCL 0.89

Analysis: This ratio shows the relationship between the current assets and the current liabilities. This ratio is important in analyzing the firm’s ability to payoff its current obligation out of its short term resources.

Current Ratio Current ratio of IOCL is in between the threeliquidity position of the firm. It is an important measure of the firm’s ability in meeting its current obligations out of its short term resources.Significance:

� It measures short-term solvency of a firm. It means that the ability of a firm to meet its short term obligations.

� The higher the current ratio, the larger is the amount of rupees available per rupee of

current liability, the more is the ability to meet the curr

0

0.2

0.4

0.6

0.8

1

1.2

2005


Ratio Analysis

2006 2007 2008

0.83 0.79 0.84

0.67 0.61 0.74

0.91 0.82 1.03

relationship between the current assets and the current liabilities. This ratio is important in analyzing the firm’s ability to payoff its current obligation out of its short

Ratio = Current Assets : Current Liabilities

ratio of IOCL is in between the three oil companies. This ratio analyzes the current liquidity position of the firm. It is an important measure of the firm’s ability in meeting its current obligations out of its short term resources.

term solvency of a firm. It means that the ability of a firm to meet its short term obligations.

The higher the current ratio, the larger is the amount of rupees available per rupee of current liability, the more is the ability to meet the current obligation.

2006 2007 2008 2009

/2009-11

2009

0.61

0.5

0.93

relationship between the current assets and the current liabilities. This ratio is important in analyzing the firm’s ability to payoff its current obligation out of its short

oil companies. This ratio analyzes the current liquidity position of the firm. It is an important measure of the firm’s ability in meeting its

term solvency of a firm. It means that the ability of a firm to meet

The higher the current ratio, the larger is the amount of rupees available per rupee of ent obligation.

IOCL

BPCL

HPCL


Comments:

� Here current ratios shonorm). So the company does

� The company should maintain at least constant rate of current ratio over thegain trust from investors and creditors.

� IOCL need to improve its liquidity position. It can be achieved by either increasing

the current assets or by decreasing current liabilities. It can convert a part of its investments into high liquidity marketable securities offering the same or better returns compared to long term investments, after analyzing risk factor.

1.2 Quick Ratio:

2005IOCL 0.56BPCL HPCL 0.45

Analysis: Quick ratio, also called acid-assets and current liabilities. An asset is liquid if it can be converted into cash immediately or reasonably soon without a loss of value. Inventories are consi

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

2005


Here current ratios show a decreasing trend and it is not at all nearernorm). So the company does not have a sound liquidity position.

The company should maintain at least constant rate of current ratio over thegain trust from investors and creditors.

need to improve its liquidity position. It can be achieved by either increasing the current assets or by decreasing current liabilities. It can convert a part of its investments into high liquidity marketable securities offering the same or better

compared to long term investments, after analyzing risk factor.

2005 2006 2007 2008 0.56 0.5 0.47 0.54 0.4 0.39 0.45 0.61

0.45 0.34 0.29 0.51

-test ratio, establishes a relationship between quick, or liquid, assets and current liabilities. An asset is liquid if it can be converted into cash immediately or reasonably soon without a loss of value. Inventories are considered to be less liquid.

2006 2007 2008 2009

/2009-11

not at all nearer to 2:1 (general

The company should maintain at least constant rate of current ratio over the years to

need to improve its liquidity position. It can be achieved by either increasing the current assets or by decreasing current liabilities. It can convert a part of its investments into high liquidity marketable securities offering the same or better

compared to long term investments, after analyzing risk factor.

2009 0.47 0.67 0.53

test ratio, establishes a relationship between quick, or liquid, assets and current liabilities. An asset is liquid if it can be converted into cash immediately or

dered to be less liquid.

IOCL

BPCL

HPCL


Inventories normally require some time for realizing into cash; their value also has a tendency to fluctuate.

Quick Ratio = (Current assets - Inventories) : Current Liabilities Generally, a quick ratio of 1 to 1 is considered to represent a satisfactory current financial condition. Although quick ratio is a more penetrating test of liquidity than the current ratio, yet it should be used cautiously. A quick ratio of 1 to 1 or more does not necessarily imply sound liquidity position. In IOCL, the quick ratios are comparatively lower than other companies in oil sector and the there is also a decreasing trend which is a not a good sign for the company. IOCL should look after its quick asset position in near future.


2. Solvency Ratios:

2.1 Debt-Equity Ratio:

2005

IOCL 0.67

BPCL 0.61

HPCL 0.26

Analysis: It measures the contribution of lenders relativeshould generally be less than one since it will show that the claims of the owners are greater than those of the lenders. This ratio is important in determining the share price of the company. Debt-Equity for IOCL is less than one for all the years except last year but for BPCL and HPCL it is more than one for three years, so for IOCL it shows healthier position in terms of solvency.

0

0.5

1

1.5

2

2.5

2005 2006


2006 2007 2008

0.9 0.78 0.86

0.92 1.05 1.29

0.76 1.1 1.59

It measures the contribution of lenders relative to the contribution of owners. This ratio should generally be less than one since it will show that the claims of the owners are greater than those of the lenders. This ratio is important in determining the share price of the

is less than one for all the years except last year but for BPCL and HPCL it is more than one for three years, so for IOCL it shows healthier position in terms of

2006 2007 2008 2009

/2009-11

2009

1.02

1.75

2.12

to the contribution of owners. This ratio should generally be less than one since it will show that the claims of the owners are greater than those of the lenders. This ratio is important in determining the share price of the

is less than one for all the years except last year but for BPCL and HPCL it is more than one for three years, so for IOCL it shows healthier position in terms of

IOCL

BPCL

HPCL


2.2 Long Term Debt Equity Ratio:

2005

IOCL 0.27

BPCL 0.2

HPCL 0.02

Analysis: The debt equity ratio is also maintained less than 1 by all the above companies, which is a good indication, off- course.

In this case IOCL wins the race as it has a

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2005


Long Term Debt Equity Ratio:

2005 2006 2007 2008

0.27 0.49 0.39 0.35

0.18 0.21 0.34

0.02 0.51 0.9 1.19

The debt equity ratio is also maintained less than 1 by all the above companies, which is a

In this case IOCL wins the race as it has a stable rate of figure maintained during the years.

2006 2007 2008 2009

/2009-11

2009

0.43

0.31

1.79

The debt equity ratio is also maintained less than 1 by all the above companies, which is a

stable rate of figure maintained during the years.

IOCL

BPCL

HPCL


3. Management Efficiency Ratios 3.1 Inventory Turnover Ratio:

2005 IOCL 7.19 BPCL 9.32 HPCL 10.63

Inventory turnover ratio indicates the efficiency of the firm in producing and selling its products. It is calculated by dividing the cost of goods sold by the average inventory.

Inventory Turnover The average inventory is the average of opening and closing inventory. Here inventory of finished goods is used to calculate inventory turnover.

We see that the inventory turnover ratios of the above three companies are more or less close to each other. BPCL has the hilow inventory turnover among other companies through othe inefficient inventory managementinventory management amongst the three.Thus we can see that value of inventories mainly depend on two factors: international oil prices and the cost of holding inventory. IOC has no control over the international oil prices as it is determined by the external check on their inventory holding period.

0

5

10

15

20

25

2005


Management Efficiency Ratios:

Inventory Turnover Ratio:

2006 2007 2008 20097.26 8.84 9.09 13.988.4 11.24 11.64 21.919.18 11.14 9.47 15.31


Turnover Ratio = Cost of goods sold : Average inventory

ge inventory is the average of opening and closing inventory. Here inventory of finished goods is used to calculate inventory turnover.

We see that the inventory turnover ratios of the above three companies are more or less close

the highest inventory turnover in 2009. IOCL has maintained the low inventory turnover among other companies through out last five years, which indicates

inventory management among the well off companies. Bmanagement amongst the three.

Thus we can see that value of inventories mainly depend on two factors: international oil prices and the cost of holding inventory. IOC has no control over the international oil prices as it is determined by the external market forces. However IOCL should keep an accurate check on their inventory holding period.

2006 2007 2008 2009

/2009-11

2009 13.98 21.91 15.31


inventory

ge inventory is the average of opening and closing inventory. Here inventory of

We see that the inventory turnover ratios of the above three companies are more or less close . IOCL has maintained the

years, which indicates among the well off companies. BPCL has a good

Thus we can see that value of inventories mainly depend on two factors: international oil prices and the cost of holding inventory. IOC has no control over the international oil prices

market forces. However IOCL should keep an accurate

IOCL

BPCL

HPCL


Significance:

� It shows the rapidity with which the inventory transforms into receivables through sales.

� A highly inventory turnover ratio implies low inventory level and quick conversion of inventory into sales. It is the sign of efficient inventory management.

� A low inventory turnover ratio indicates maintenance of a high level of inventory, slow rotation of inventory in the operating cycle process. It is indicative for poor management.

� A too low inventory turnover ratio indicates holding of excessive inventory i.e., blocking of funds which increase cost and reduce profit.

� It is always desirable for a firm to maintain a balanced level of inventory. So a firm must fix up an optimum inventory turnover level and try to maintain it.

Comments:

� From the graph, we see that the firm’s utilization of inventory in generating sales has improved marginally.

� Synchronization between production department and marketing division should be there to avoid over or under stock situation. For e.g., like ABC analysis can be taken as tools to reduce the excess working capital blockage.

Inventory Holding Period: The manufacturing firm’s inventory consists of two more components: raw materials and work-in-progress. As the IOCL, BPCL and HPCL are not manufacturing concern, they treat only the finished goods as inventory. These are basically processing company. So an analyst should also look after to the inventory holding period.

Days of Inventory Holding = 365 / Inventory Turnover (Days)

2005 2006 2007 2008 2009 IOCL 50.76495 50.27548 41.28959 40.15402 26.10873 BPCL 39.16309 43.45238 32.47331 31.35739 16.65906 HPCL 34.33678 39.76035 32.76481 38.54277 23.84063

From the above table, we can see that the inventory holding period of IOCL is the highest among other companies for last five years which indicates high inventory blockage. So, IOCL should control the cost of capital and measures should be taken.


3.2 Debtor Turnover Ratio:

2005IOCL 28.81BPCL 69.08HPCL 58.73

Normally debtors of an organization are analyzed using two instruments here:

1. Debtors turnover ratio.2. Average collection period.

Debtors turnover ratio shows how many times account receivables turnover during the year and is calculated by

Debtors Turnover Higher the ratio, the greater is the efficiency of credit On the other hand the average collection period is defined as the number of days worth of credit that is locked in debtors and is calculated as:

Average Collection Analysis: Debtors turnover ratio indicates received and collected during the year. While receivables turnover measures the speed of collection and is used for the comparison purposes, it is not directly comparable to the terms

0

10

20

30

40

50

60

70

80

90

100

2005


2005 2006 2007 2008 28.81 28.23 32.23 36.5 69.08 69.6 68.13 70.48 58.73 58.53 60.42 63.44

Normally debtors of an organization are analyzed using two instruments here:Debtors turnover ratio.

collection period.

Debtors turnover ratio shows how many times account receivables turnover during the year

Turnover Ratio = Net credit sales/average debtors.

Higher the ratio, the greater is the efficiency of credit management.

On the other hand the average collection period is defined as the number of days worth of credit that is locked in debtors and is calculated as:-

Collection Period = 365 / Debtors Turnover

Debtors turnover ratio indicates on how often on average receivables revolve, that is, are received and collected during the year. While receivables turnover measures the speed of collection and is used for the comparison purposes, it is not directly comparable to the terms

2006 2007 2008 2009

/2009-11

2009 48.15 88.37 63.23

Normally debtors of an organization are analyzed using two instruments here:-

Debtors turnover ratio shows how many times account receivables turnover during the year

debtors.

On the other hand the average collection period is defined as the number of days worth of

on how often on average receivables revolve, that is, are received and collected during the year. While receivables turnover measures the speed of collection and is used for the comparison purposes, it is not directly comparable to the terms

IOCL

BPCL

HPCL


of trade the company extends to its customers. This later comparison is made by converting the turnover ratio into “days of sales tied up in receivables”. The receivables collection period measures the number of days it takes on average to collect accounts and note receivables. Accounts receivables turnover rates and collection periods are usefully compared to the credit terms given by the company. When collection period is compared with the terms of sales allowed by the company we could assess the extent of customers paying on time. For e.g., if usual credit terms of 15-20 days then the average collection period of 40-45 days reflect one or more of the following conditions:-

•••• Poor collection efforts •••• A receivable turnover may imply a strict credit policy or a reluctance or inability to

extent credit. •••• Delay in customer payments. •••• Customers in financial distress.

Average Collection Period:

(Days)

2005 2006 2007 2008 2009 IOCL 12.66921 12.92951 11.32485 10 7.580478 BPCL 5.283729 5.244253 5.357405 5.178774 4.130361 HPCL 6.214882 6.236118 6.041046 5.753468 5.772576

The average collection period measures the quality of debtors since it indicates the speed of their collection. The shorter the average collection period, the better the quality of debtors since a short collection period implies the prompt payments by debtors. The average collection period should be compared against the firm’s credit terms and policy to judge its credit and collection efficiency. We can see in the above table that the average collection periods of IOCL are the highest among the others, which is not a good sign for the company. It has mainly three types of debtors:-

� DGS & D (Directorate General Suppliers & Distributors) � Non-DGS & D (Other than DGS & D) � OMC (Oil Marketing Companies)

DGS & D: This category consists of Railways, Army, Air Force and Navy. IOCL sells its products from any location as per supply order to these specified customers. For this type of customers,


sales challans are prepared by the location and collection is made at regional office. Normally the entire process with this type of customers takes 7 to 10 days.Non DGS & D: Non DGS & D sales can be divided into two categories : Cash sales (88%) & credit sales (12%). For cash sales, the custoreceipt is prepared. With these documents, account also called PAD (Party Account at Depot) is credited. The entire activity for this segment of customers is decentralized and controlled at the Location level. OMC: The bills along the joint accounts are sent to the Head Office for receiving payment from HPCL and BPCL. For IBP payment is received in the Eastern Region only. 3.3 Fixed Assets Turnover Ratio:

2005

IOCL 4.7

BPCL 7.34

HPCL 8.15

0

1

2

3

4

5

6

7

8

9

2005 2006


sales challans are prepared by the location and collection is made through centralized system at regional office. Normally the entire process with this type of customers takes 7 to 10 days.

Non DGS & D sales can be divided into two categories : Cash sales (88%) & credit sales (12%). For cash sales, the customer first deposits cheques/demand drafts to IOCL & cash receipt is prepared. With these documents, account also called PAD (Party Account at Depot) is credited. The entire activity for this segment of customers is decentralized and controlled at

The bills along the joint accounts are sent to the Head Office for receiving payment from HPCL and BPCL. For IBP payment is received in the Eastern Region only.

Fixed Assets Turnover Ratio:

2005 2006 2007 2008

5.26 6.01 4.38

7.8 8.47 5.15

8.23 7.92 5.35

2006 2007 2008 2009

/2009-11

through centralized system at regional office. Normally the entire process with this type of customers takes 7 to 10 days.

Non DGS & D sales can be divided into two categories : Cash sales (88%) & credit sales mer first deposits cheques/demand drafts to IOCL & cash

receipt is prepared. With these documents, account also called PAD (Party Account at Depot) is credited. The entire activity for this segment of customers is decentralized and controlled at

The bills along the joint accounts are sent to the Head Office for receiving payment from HPCL and BPCL. For IBP payment is received in the Eastern Region only.

2009

4.98

5.98

6.22

IOCL

BPCL

HPCL


Analysis: In case of fixed assets turnover ratio, it happens to be the same thing.

High trend is maintained by the BPCL & HPCL during the initial years but eventually it decreases towards the end.

3.4 Total Assets Turnover Ratio:

2005

IOCL 3.22

BPCL 5.64

HPCL 5.68

Analysis: IOCL has always shown low figures as compared to its rivals.

On the other hand, BPCL and HPCL have registered a low rate of growth in the given tenure.

It clearly indicates the sales of the various companies are high than IOCL.

0

1

2

3

4

5

6

2005


In case of fixed assets turnover ratio, it happens to be the same thing.

High trend is maintained by the BPCL & HPCL during the initial years but eventually it

Total Assets Turnover Ratio:

2006 2007 2008

3.15 3.51 3.24

4.32 4.59 4.14

4.65 4.47 3.83

IOCL has always shown low figures as compared to its rivals.


It clearly indicates the sales of the various companies are high than IOCL.

2006 2007 2008 2009

/2009-11

High trend is maintained by the BPCL & HPCL during the initial years but eventually it

2009

3.47

4.04

3.74


IOCL

BPCL

HPCL


3.5 Investments Turnover Ratio:

2005

IOCL 8.21

BPCL 10.3

HPCL 11.84

Analysis:

HPCL has the highest figure in the emerging trends.

Whole IOCL registers the lowest amount of growth which defines that their Sales have been much more less than its competitors.

On the other hand, we can define the investments are pretty less on the other side for IOCL.

0

5

10

15

20

25

2005 2006


Investments Turnover Ratio:

2005 2006 2007 2008

8.26 10.1 9.09

9.58 12.58 11.64

11.84 10.14 12.31 9.47

HPCL has the highest figure in the emerging trends.

Whole IOCL registers the lowest amount of growth which defines that their Sales have been competitors.


2006 2007 2008 2009

/2009-11

2009

13.98

21.91

15.31

Whole IOCL registers the lowest amount of growth which defines that their Sales have been


IOCL

BPCL

HPCL


4. Profitability Ratios:

4.1 Net Profit Margin:

2005IOCL 3.48BPCL 1.65HPCL 2.11

Analysis: Net profit is obtained when operating expenses, interest and taxes are subtracted from the gross profit. The Net Profit margin sales.

Net It is used to measure the overall profitability and the efficiency of the management in generating additional revenue over and above the total operating cost. it doesn’t make any difference between operating and nonprofit and net sales. The comparison of net profit margin is shown by the graph below:

0

0.5

1

1.5

2

2.5

3

3.5

2005


Profitability Ratios:

Net Profit Margin:

2005 2006 2007 2008 3.48 2.78 3.43 2.78 1.65 0.38 1.85 1.42 2.11 0.56 1.74 1.08

Net profit is obtained when operating expenses, interest and taxes are subtracted from the Net Profit margin ratio is measured by dividing profit after tax (PAT) by

Profit Margin = Profit after tax / Sales

It is used to measure the overall profitability and the efficiency of the management in generating additional revenue over and above the total operating cost. it doesn’t make any difference between operating and non-operating expenses and shows the relation between net

The comparison of net profit margin is shown by the graph below:

2006 2007 2008 2009

/2009-11

2009 0.95 0.54 0.45

Net profit is obtained when operating expenses, interest and taxes are subtracted from the ratio is measured by dividing profit after tax (PAT) by

It is used to measure the overall profitability and the efficiency of the management in generating additional revenue over and above the total operating cost. it doesn’t make any

d shows the relation between net

IOCL

BPCL

HPCL


Significance: During the year 2008-09 profit decreases. This is mainly due to •••• Increasing crude oil prices in the global oil •••• Pressure from Ministry of Finance, Govt. of India to keep the retail prices of SKO &

LPG low to avoid situation of sky•••• Increase in manufacturing expenses and other expenses over the years has been another

reason for decrease in profit.•••• In the year 2006-07 every company’s net profit increases. This has resulted in the

increase in the market price/share (MPS), which is highly influential for the company.•••• Dependence on government bonds (special oil bonds) has The other reason behind decreasing profit areGovernment is reluctant to pay higher subsidy year after year.But if we compare between the three oil companies we can say that IOCL has the two.

4.2 Gross Profit Margin(%):

2005

IOCL 5.66

BPCL 3.41

HPCL 3.75

0

1

2

3

4

5

6

2005


profit decreases. This is mainly due to

Increasing crude oil prices in the global oil market especially from 2004.Pressure from Ministry of Finance, Govt. of India to keep the retail prices of SKO & LPG low to avoid situation of sky- rocketing inflation. Increase in manufacturing expenses and other expenses over the years has been another reason for decrease in profit.

07 every company’s net profit increases. This has resulted in the increase in the market price/share (MPS), which is highly influential for the company.Dependence on government bonds (special oil bonds) has been another reason.

behind decreasing profit are- Government is reluctant to pay higher subsidy year after year. But if we compare between the three oil companies we can say that IOCL has

Margin(%):

2005 2006 2007 2008 5.66 4.68 5.09 3.47

3.41 1.73 4.11 1.86

3.75 1.33 2.85 0.95

2006 2007 2008 2009

/2009-11

market especially from 2004. Pressure from Ministry of Finance, Govt. of India to keep the retail prices of SKO &

Increase in manufacturing expenses and other expenses over the years has been another

07 every company’s net profit increases. This has resulted in the increase in the market price/share (MPS), which is highly influential for the company.

been another reason.

But if we compare between the three oil companies we can say that IOCL has fared well than

2009 3.46

2.58

1.84

IOCL

BPCL

HPCL


Analysis: IOCL has revealed high amount of gross profits as compared to BPCL & HPCL.

This is mainly due to the high

It also shows a trend that it definitely will earn a high amount of net profit.

Other companies might not be able to incur high profits due to the higher amount of operating expenses, trading expenses.

4.3 Operating Profit Margin(%):

2005

IOCL 5.32

BPCL 2.92

HPCL 3.49

Analysis: In the data given, it clearly shows that IOCL has the highest amount of operating compared to the other companies.

It reveals the profit making ability of the organization as well as efficiency within the company.

0

1

2

3

4

5

6

2005


IOCL has revealed high amount of gross profits as compared to BPCL & HPCL.

This is mainly due to the high rise in sales as well as the good amounts in gross profits.


Other companies might not be able to incur high profits due to the higher amount of operating

Operating Profit Margin(%):

2005 2006 2007 2008

5.32 4.46 4.97 4.56

2.92 1.45 3.85 2.85

3.49 1.14 2.8 1.77

In the data given, it clearly shows that IOCL has the highest amount of operating compared to the other companies.

It reveals the profit making ability of the organization as well as efficiency within the

2006 2007 2008 2009

/2009-11

IOCL has revealed high amount of gross profits as compared to BPCL & HPCL.

rise in sales as well as the good amounts in gross profits.


Other companies might not be able to incur high profits due to the higher amount of operating

2009

4.4

3.38

2.63

In the data given, it clearly shows that IOCL has the highest amount of operating profit

It reveals the profit making ability of the organization as well as efficiency within the

IOCL

BPCL

HPCL


4.4 Return on Capital Employed

2005

IOCL 14.92

BPCL 14.94

HPCL 15.89

Analysis:

It is the relationship between EBIT and Capital employed. The shareholders and long term fund providers are very much concerned about return on capital employed (ROCE). It measures how well the firm is using all of its assets. The higher the ratio the more favourable the interpretation of the firm’s ability to use the available resources to generate income.

We see that IOCL has a constant return from 2005three times are in single digit.

IOCL has shown a good return as compared to industry average which is a good sign for the shareholders.

0

2

4

6

8

10

12

14

16

18

2005 2006


Return on Capital Employed:

2006 2007 2008

12.6 15.97 14.06

4.53 16.97 11.37

2.75 11.41 6.23

It is the relationship between EBIT and Capital employed. The shareholders and long term fund providers are very much concerned about return on capital employed (ROCE). It

firm is using all of its assets. The higher the ratio the more favourable the interpretation of the firm’s ability to use the available resources to generate income.

We see that IOCL has a constant return from 2005-2009, whereas BPCL one time and HPCL

IOCL has shown a good return as compared to industry average which is a good sign for the

2006 2007 2008 2009

/2009-11

2009

14.64

14.88

9.48

It is the relationship between EBIT and Capital employed. The shareholders and long term fund providers are very much concerned about return on capital employed (ROCE). It

firm is using all of its assets. The higher the ratio the more favourable the interpretation of the firm’s ability to use the available resources to generate income.

2009, whereas BPCL one time and HPCL

IOCL has shown a good return as compared to industry average which is a good sign for the

IOCL

BPCL

HPCL


4.5 Return on Networth

2005

IOCL 18.82

BPCL 15.12

HPCL 15.13

Analysis: It is the ratio of net profit after tax to networth. It measures the ratio of return on resources provided by the shareholders. The higher the ratio the more it is favourable in the interpretation of the company’s use of its resources contributed by the equity shareholders.Here we see that IOCL has highest return on Networth in the past five years as compared to BPCL and HPCL. In 2006, BPCL and HPCL has a return of 3.19 and 4.64 respectively whereas IOCLreturn of 16.77 which itself shows the strong position of IOCL in the industry and healthy return to the equity shareholders.

0

5

10

15

20

25

2005 2006


Return on Networth:

2006 2007 2008

16.77 21.51 16.99

3.19 17.57 13.53

4.64 16.37 10.74

It is the ratio of net profit after tax to networth. It measures the ratio of return on resources provided by the shareholders. The higher the ratio the more it is favourable in the

company’s use of its resources contributed by the equity shareholders.Here we see that IOCL has highest return on Networth in the past five years as compared to

In 2006, BPCL and HPCL has a return of 3.19 and 4.64 respectively whereas IOCLreturn of 16.77 which itself shows the strong position of IOCL in the industry and healthy return to the equity shareholders.

2006 2007 2008 2009

/2009-11

2009

6.71

6.06

5.35

It is the ratio of net profit after tax to networth. It measures the ratio of return on resources provided by the shareholders. The higher the ratio the more it is favourable in the

company’s use of its resources contributed by the equity shareholders. Here we see that IOCL has highest return on Networth in the past five years as compared to

In 2006, BPCL and HPCL has a return of 3.19 and 4.64 respectively whereas IOCL has a return of 16.77 which itself shows the strong position of IOCL in the industry and healthy

IOCL

BPCL

HPCL


4.5 Earnings Per Share:

2005

IOCL 41.88

BPCL 32.19

HPCL 37.64

Analysis: IOCL has given the highest amount of EPS during the mentioned years, might be due to the reasons that it has up going market shares price as it is concerned.

It wants to give high rate of long term

This also shows the liquidity position of the business and the faith of the investors to a particular company

Where, BPCL and HPCL are not able to attain much good response from its investors, in terms of returns.

0

10

20

30

40

50

60

70

2005


Earnings Per Share:

2005 2006 2007 2008

41.88 42.08 64.21 58.39

32.19 9.72 49.94 43.72

37.64 11.95 46.3 33.44

IOCL has given the highest amount of EPS during the mentioned years, might be due to the reasons that it has up going market shares price as it is concerned.

It wants to give high rate of long term return to its investors.

This also shows the liquidity position of the business and the faith of the investors to a

Where, BPCL and HPCL are not able to attain much good response from its investors, in

2006 2007 2008 2009

/2009-11

2009

24.74

20.35

16.94

IOCL has given the highest amount of EPS during the mentioned years, might be due to the

This also shows the liquidity position of the business and the faith of the investors to a

Where, BPCL and HPCL are not able to attain much good response from its investors, in

IOCL

BPCL

HPCL


4.6 Dividend Per Share:

2005

IOCL 14.5

BPCL 12.5

HPCL 15

Analysis: It can be defined as the dividend given to its shareholders on the basis of total no. of equity shares.

In the initial years, it has the company were able to pay out a higher amount of dividend, which showed they distributed profit.

In the end the company wants hold back the money might be due to less profit or project financing.

0

2

4

6

8

10

12

14

16

18

20

2005


Share:

2005 2006 2007 2008

14.5 12.5 19 5.5

12.5 2.5 16 4

3 18 3

It can be defined as the dividend given to its shareholders on the basis of total no. of equity

has the company were able to pay out a higher amount of dividend, which showed they distributed profit.

In the end the company wants hold back the money might be due to less profit or project

2006 2007 2008 2009

/2009-11

2009

7.5

7

5.25

It can be defined as the dividend given to its shareholders on the basis of total no. of equity

has the company were able to pay out a higher amount of dividend,

In the end the company wants hold back the money might be due to less profit or project

IOCL

BPCL

HPCL


5. Debt Coverage Ratios 5.1 Interest Cover

Analysis: It mainly defines the net profit before interest & taxes and the interest which is charged i.e. on loan and income tax.

If we see the provided data HPCL has the highest interest coverage ratio cumulatively among all the years that means the organization’s profit is less than the interest paid on loans or as income tax.

On the other hand BPCL maintains he lowest interest coverage all throughout the years.

Lastly, IOCL is on an average position where it tries to maintain the ratio.

0

5

10

15

20

25

2005 2006


Debt Coverage Ratios:

Interest Coverage:

It mainly defines the net profit before interest & taxes and the interest which is charged i.e.

If we see the provided data HPCL has the highest interest coverage ratio cumulatively among e organization’s profit is less than the interest paid on loans or as


Lastly, IOCL is on an average position where it tries to maintain the ratio.

2006 2007 2008 2009

/2009-11

It mainly defines the net profit before interest & taxes and the interest which is charged i.e.

If we see the provided data HPCL has the highest interest coverage ratio cumulatively among e organization’s profit is less than the interest paid on loans or as


IOCL

BPCL

HPCL


CHAPTER- 5

CONCLUSIONS & RECOMMENDATIONS


FINANCING OF WORKING CAPITAL IN IOCL: The working capital requirement of IOCL as in most public sector enterprises are generally met through cash credits and advances arranged with the State Bank of India and other nationalized banks. Besides this short term borrowings against securities is taken from nationalized and foreign banks and Collateralized Borrowings and Lending Obligation (CBLO) from Clearing Corporation of India. On day to day basis. This process of taking term loans is undertaken at the Corporate Office. RECOMMENDATION ON THE WORKING CAPITAL POLICY OF IOC L: � It is evident from the above analysis that IOCL follows a conservative policy i.e. a greater

amount of investment in current assets. � As per the latest results of March 2010 the total current assets of IOCL stood at Rs.

59388.80. � Thus it is evident that though IOCL maintains a high liquidity but at the same time it

incurs a loss. � This is also due to discrepancies between the international market price of crude oil and

government controlled domestic prices. � As IOCL being a public enterprise, it has to follow the government’s orders and can not

increase the prices of its products to international market rates. � Hence, it should focus on improving its working capital condition by reducing

investments in current assets thereby reducing its losses. � Thus IOCL should follow an average policy that provides the optimum combination of

the three issues of working capital management liquidity, profitability and return.


CONCLUSION OF THE STUDY: The requirement of oil is every where. All talk everywhere trickles down to nothing else, but crude. Even as the man on the streets frets over the snowball effect of rising prices, number-crunchers work at a hypnotic pace to figure out its next milestone. And governments across the world, options at their disposal to deal with a catch-22 situation. The current spike in the crude oil prices is hurting the industry and the economy. Crude prices are rising at a soaring pace over the past 24 months. While the government’s not to pass on rising costs to the retail consumers has shielded them against the run-away inflation, it has encouraged wasteful consumption of petroleum products and left oil marketing companies without money. The India’s biggest marketer and refiner is facing an acute liquidity crunch which has forced to put all new projects on hold. If not checked in time, this can seriously jeopardize the government’s capital expenditure and in turn India’s future economic growth. Thus, although only the public sector oil companies and their shareholders are bearing the burnt of the alarming spike in oil prices, currently investors in general may have to pay for rising crude oil prices, through slower growth and resultant bearish trend on the bourses. Crude oil represents nearly 35% of India’s energy basket. India imports 75% of crude requirement, which add to its woes. The above situation is reflected in the company’s recent working capital. But still it has a better position than any other public sector oil company. IndianOil supplies its oil to other companies in the eastern region like HPCL which do not have any refinery in the eastern region. In way it has taken a part of its inventory in this respect. The inventory management of IOCL can be improved upon because it is seen by the analysis that it’s inventory management has scope for further improvement in comparison to the industry. Moreover, most of the product of the other companies like BPCL and HPCL goes to the retail outlets which are generally on cash and carry system and thus has high debtors turnover whereas IOCL’s most of its product goes to other consumers which are mostly on credit basis. After having done the analysis of working capital of IndianOil it is seen that working capital is decreasing in last three years. The main reason for this decrease is the increase in liabilities. It is increasing year after year. The private companies on the other hand are away from this danger because they exports their products. They are not impelled to sell their products at low prices and thus their progress is not hindered and they proceed without incurring high losses.


RECOMMENDATION: From the entire analysis what Indian Oil can do is simply strengthening their marketing efforts and creates more demand for their product and also tries to use optimum level of inventory. Besides they can implement certain plans so as to develop their business in future. After doing the project the recommendation to IOCL may be to sustain with dignity as discussed below:

� It should increase sales so that inventory turnover ratio is improved and better return achieved.

� IOCL should concentrate on Brand Building and make all brands as successful

as Servo.

� IOCL should approach Government to allow it to increase the prices of regulated products especially LPG (Domestic) has to be marginally increased so that loss on account of that is reduced. This is because loss per unit of LPG (Domestic) is highest among the other products.

Besides that Government of India should also consider the better pricing policies to prevent loss of Indian oil companies. The recommended policies may be:

� By introducing differential rates to different income groups in the society for same product. For e.g. high rate of LPG cylinder (domestic) to high income groups and subsidized rate to low income groups.


TERMINOLOGY:

MMTPA - Million Metric Tonne per Annum

KL - Kiloliters

LSHS - Low Sulphur High Speed

FO - Furnace Oil

MS - Motor Spirit

SKO - Superior Kerosene Oil

LDO - Light Diesel Oil

LPG - Liquefied Petroleum Gas

ATF - Aviation Turbine Fuel

AFS - Aviation Fuel Stations

KSK - Kisan Seva Kendras

JV - Joint Venture

NELP - New Exploration Licensing Policy

E&P - Exploration & Production

R&D - Research and Development


BIBLIOGRAPHY Besides valuable inputs and suggestions from Finance Managers in Indian Oil Corporation Ltd., following books and journals help me a lot in preparing this project report:- � Annual Reports of IndianOil : 2004-05 to 2009-10 � Annual Reports of BPCL : 2004-05 to 2008-09 � Annual Reports of HPCL : 2004-05 to 2008-09 � Bibliography:

• IOCL Manual • Financial Management by Brigham and Houston • Financial Management by Prasanna Chandra • Financial Management by I.M. Pandey • Essentials of Financial Management by George E. Pinches • ‘Business Standard’ magazine

� Webliography:

IOCL Intranet www.iocl.com www.hindustanpetoleum.com www.bpcl.com www.ibef.org/industry/oilandgas.aspx www.domain-b.com www.moneycontrol.com www.mapsofindia.com www.wikipedia.org www.indiainfoline.com www.investopedia.com


ANNEXURE : Key Financial Ratios of Indian Oil Corporation

Financial Ratios ------------------- in Rs. Cr. -------------------

Particulars Mar '05 Mar '06 Mar '07 Mar '08 Mar '09

Investment Valuation Ratios:

Face Value 10 10 10 10 10

Dividend Per Share 14.5 12.5 19 5.5 7.5

Operating Profit Per Share (Rs) 63.47 66.86 92.14 94.73 113.42

Net Operating Profit Per Share (Rs) 1,191.89 1,497.37 1,853.57 2,074.51 2,575.73

Free Reserves Per Share (Rs) 207.99 231.37 279.23 324.13 343.01

Bonus in Equity Capital 91.29 91.29 91.29 89.42 89.42

Profitability Ratios:

Operating Profit Margin(%) 5.32 4.46 4.97 4.56 4.4

Profit Before Interest And Tax Margin(%) 3.8 3.18 3.74 3.43 3.43

Gross Profit Margin(%) 5.66 4.68 5.09 3.47 3.46

Cash Profit Margin(%) 4.96 4.03 4.62 3.61 3.5

Adjusted Cash Margin(%) 4.89 3.65 3.73 3.61 3.5

Net Profit Margin(%) 3.48 2.78 3.43 2.78 0.95

Adjusted Net Profit Margin(%) 3.41 2.4 2.49 2.78 0.95

Return On Capital Employed(%) 14.92 12.6 15.97 14.06 14.64

Return On Net Worth(%) 18.82 16.77 21.51 16.99 6.71

Adjusted Return on Net Worth(%) 18.47 14.49 15.71 14.83 17.4

Return on Assets Excluding Revaluations 6.51 5.36 7.36 5.95 --

Return on Assets Including Revaluations 6.51 5.36 7.36 5.95 --

Return on Long Term Funds(%) 19.62 16.18 20.59 19.54 20.72

Liquidity And Solvency Ratios:

Current Ratio 0.84 0.83 0.79 0.84 0.61

Quick Ratio 0.56 0.5 0.47 0.54 0.47

Debt Equity Ratio 0.67 0.9 0.78 0.86 1.02

Long Term Debt Equity Ratio 0.27 0.49 0.39 0.35 0.43

Debt Coverage Ratios:

Interest Cover 11.08 7.24 6.75 6.94 3.3

Total Debt to Owners Fund 0.67 0.9 0.78 0.86 1.02

Financial Charges Coverage Ratio 14.13 9.28 8.42 8.63 4.04


Financial Charges Coverage Ratio Post Tax

12.53 8.16 7.82 7.23 2.53

Management Efficiency Ratios: Mar '05 Mar '06 Mar '07 Mar '08 Mar '09 Inventory Turnover Ratio 7.19 7.26 8.84 9.09 13.98

Debtors Turnover Ratio 28.81 28.23 32.23 36.5 48.15

Investments Turnover Ratio 8.21 8.26 10.1 9.09 13.98

Fixed Assets Turnover Ratio 4.7 5.26 6.01 4.38 4.98

Total Assets Turnover Ratio 3.22 3.15 3.51 3.24 3.47

Asset Turnover Ratio 3.5 4.02 3.97 4.38 4.98

Average Raw Material Holding 52.5 49.57 38.7 48.65 22.88

Average Finished Goods Held 28.6 27.21 22.26 21.49 16.43

Number of Days In Working Capital 14.52 13.35 6.7 18.93 4.38

Profit & Loss Account Ratios:

Material Cost Composition 88.52 90.91 89.28 90.23 89.12

Imported Composition of Raw Materials Consumed

75.68 80.46 84.09 84.46 82.7

Selling Distribution Cost Composition 4.21 3.84 3.57 3.53 3.15

Expenses as Composition of Total Sales 2.55 3.21 4.21 4.63 4.87

Cash Flow Indicator Ratios:

Dividend Payout Ratio Net Profit 39.47 33.87 34.83 10.51 36.11

Dividend Payout Ratio Cash Profit 27.72 23.35 25.6 7.39 17.32

Earning Retention Ratio 59.72 60.73 52.06 87.96 86.08

Cash Earning Retention Ratio 71.88 74.2 67.96 91.89 90.19

AdjustedCash Flow Times 2.52 4.09 3.32 3.94 4.15

Earnings Per Share 41.88 42.08 64.21 58.39 24.74

Book Value 222.47 250.88 298.22 344.58 368.86


Key Financial Ratios of Bharat Petroleum Corporation


Particulars Mar '05 Mar '06 Mar '07 Mar '08 Mar '09 Investment Valuation Ratios Face Value 10 10 10 10 10 Dividend Per Share 12.5 2.5 16 4 7 Operating Profit Per Share (Rs) 56.41 36.71 102.83 87.15 125.59 Net Operating Profit Per Share (Rs) 1,929.25 2,517.78 2,670.69 3,048.28 3,708.38 Free Reserves Per Share (Rs) 194.39 277.22 273.74 312.56 316.74 Bonus in Equity Capital 92.33 92.33 76.61 76.61 76.61 Profitability Ratios Operating Profit Margin(%) 2.92 1.45 3.85 2.85 3.38 Profit Before Interest And Tax Margin(%)

1.87 0.43 2.89 1.84 2.55

Gross Profit Margin(%) 3.41 1.73 4.11 1.86 2.58 Cash Profit Margin(%) 2.67 1.39 2.78 2.2 2.65 Adjusted Cash Margin(%) 2.68 1.57 3.13 2.2 2.65 Net Profit Margin(%) 1.65 0.38 1.85 1.42 0.54 Adjusted Net Profit Margin(%) 1.65 0.56 2.2 1.42 0.54 Return On Capital Employed(%) 14.94 4.53 16.97 11.37 14.88 Return On Net Worth(%) 15.12 3.19 17.57 13.53 6.06 Adjusted Return on Net Worth(%) 15.14 4.74 20.92 11.58 20.85 Return on Assets Excluding Revaluations

4.71 1.02 5.3 3.67 1.53

Return on Assets Including Revaluations

4.71 1.02 5.3 3.67 1.53

Return on Long Term Funds(%) 20.03 7.4 28.81 19.46 31.19 Liquidity And Solvency Ratios Current Ratio 0.77 0.67 0.61 0.74 0.5 Quick Ratio 0.4 0.39 0.45 0.61 0.67 Debt Equity Ratio 0.61 0.92 1.05 1.29 1.75 Long Term Debt Equity Ratio 0.2 0.18 0.21 0.34 0.31 Debt Coverage Ratios Interest Cover 10.98 3.21 7.5 4.51 2.29 Total Debt to Owners Fund 0.61 0.92 1.05 1.29 1.75 Financial Charges Coverage Ratio 15.24 6.32 9.4 6.15 2.78 Financial Charges Coverage Ratio Post Tax

12.17 5.28 6.68 4.98 1.84


Management Efficiency Ratios Mar '05 Mar '06 Mar '07 Mar '08 Mar '09 Inventory Turnover Ratio 9.32 8.4 11.24 11.64 21.91 Debtors Turnover Ratio 69.08 69.6 68.13 70.48 88.37 Investments Turnover Ratio 10.3 9.58 12.58 11.64 21.91 Fixed Assets Turnover Ratio 7.34 7.8 8.47 5.15 5.98 Total Assets Turnover Ratio 5.64 4.32 4.59 4.14 4.04 Asset Turnover Ratio 4.57 4.36 4.98 5.15 5.98 Average Raw Material Holding 21.69 22.38 12.43 27.65 10.14 Average Finished Goods Held 34.05 31.28 25.74 20.66 12.79 Number of Days In Working Capital 1.52 12.15 7.02 15.05 6.93 Profit & Loss Account Ratios Material Cost Composition 94.28 94.6 91.9 92.31 90.98 Imported Composition of Raw Materials Consumed

55.18 71.52 72.14 70.99 --

Selling Distribution Cost Composition

2.57 2.16 1.94 1.86 1.8

Expenses as Composition of Total Sales

3.35 5.67 5.78 6.75 4.89

Cash Flow Indicator Ratios Dividend Payout Ratio Net Profit 44.21 35.33 37.12 9.72 38.66 Dividend Payout Ratio Cash Profit 27.34 9.72 24.73 5.74 15.7 Earning Retention Ratio 55.87 76.08 68.82 88.64 88.75 Cash Earning Retention Ratio 72.69 91.41 78.05 93.73 92.11 AdjustedCash Flow Times 2.48 6.99 3.55 6.13 5.87 Earnings Per Share 32.19 9.72 49.94 43.72 20.35 Book Value 212.95 302.6 284.16 322.97 335.45


Key Financial Ratios of Hindustan Petroleum Corporation


Particulars Mar '05 Mar '06 Mar '07 Mar '08 Mar '09 Investment Valuation Ratios Face Value 10 10 10 10 10 Dividend Per Share 15 3 18 3 5.25 Operating Profit Per Share (Rs) 61.96 24.02 74.23 54.42 96.99 Net Operating Profit Per Share (Rs) 1,773.04 2,105.05 2,644.18 3,074.09 3,681.81 Free Reserves Per Share (Rs) 238.76 247.31 272.74 301.17 306.11 Bonus in Equity Capital 78.01 78.01 78.01 78 78 Profitability Ratios Operating Profit Margin(%) 3.49 1.14 2.8 1.77 2.63 Profit Before Interest And Tax Margin(%)

2.39 0.17 2.01 0.94 1.83

Gross Profit Margin(%) 3.75 1.33 2.85 0.95 1.84 Cash Profit Margin(%) 3.2 1.52 2.52 1.31 1.42 Adjusted Cash Margin(%) 2.9 1.18 2.07 1.31 1.42 Net Profit Margin(%) 2.11 0.56 1.74 1.08 0.45 Adjusted Net Profit Margin(%) 1.81 0.22 1.29 1.08 0.45 Return On Capital Employed(%) 15.89 2.75 11.41 6.23 9.48 Return On Net Worth(%) 15.13 4.64 16.37 10.74 5.35 Adjusted Return on Net Worth(%) 12.98 1.87 12.2 5.01 7.61 Return on Assets Excluding Revaluations

6.7 1.63 4.94 2.73 --

Return on Assets Including Revaluations

6.7 1.63 4.94 2.73 --

Return on Long Term Funds(%) 19.54 3.22 12.6 7.38 10.59 Liquidity And Solvency Ratios Current Ratio 0.89 0.91 0.82 1.03 0.93 Quick Ratio 0.45 0.34 0.29 0.51 0.53 Debt Equity Ratio 0.26 0.76 1.1 1.59 2.12 Long Term Debt Equity Ratio 0.02 0.51 0.9 1.19 1.79 Debt Coverage Ratios Interest Cover 20.69 2.67 5.43 2.15 1.53 Total Debt to Owners Fund 0.26 0.76 1.1 1.59 2.12 Financial Charges Coverage Ratio 28.39 6.92 7.04 3.22 2 Financial Charges Coverage Ratio Post Tax

24.41 7.81 6.34 3.5 1.75


Management Efficiency Ratios Mar '05 Mar '06 Mar '07 Mar '08 Mar '09 Inventory Turnover Ratio 10.63 9.18 11.14 9.47 15.31 Debtors Turnover Ratio 58.73 58.53 60.42 63.44 63.23 Investments Turnover Ratio 11.84 10.14 12.31 9.47 15.31 Fixed Assets Turnover Ratio 8.15 8.23 7.92 5.35 6.22 Total Assets Turnover Ratio 5.68 4.65 4.47 3.83 3.74 Asset Turnover Ratio 4.87 5.32 5.76 5.35 6.22 Average Raw Material Holding 20.4 26.06 19.07 32.6 18.05 Average Finished Goods Held 26 27.98 23.65 27.93 18.31 Number of Days In Working Capital 6.81 8.42 -0.3 18.18 7.59 Profit & Loss Account Ratios Material Cost Composition 90.44 95.11 92.36 96.28 91.75 Imported Composition of Raw Materials Consumed

73.25 81.74 82.32 77.3 79.39

Selling Distribution Cost Composition

3.22 3.06 2.88 2.11 2.01

Expenses as Composition of Total Sales

2.68 3.94 5.29 6.1 4.81

Cash Flow Indicator Ratios Dividend Payout Ratio Net Profit 45.41 28.61 45.09 10.47 36.17 Dividend Payout Ratio Cash Profit 29.97 10.6 31.14 5.98 13.36 Earning Retention Ratio 47.08 29.25 39.5 77.57 74.54 Cash Earning Retention Ratio 66.94 86.4 62.22 91.4 88.44 AdjustedCash Flow Times 1.25 7.81 5.61 12.16 12.65 Earnings Per Share 37.64 11.95 46.3 33.44 16.94 Book Value 248.75 257.44 282.87 311.3 316.23

Working Capital Management & Comparative Financial Analysis of Indian Oil With Its Major Competitors

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Transcript of Working Capital Management & Comparative Financial Analysis of Indian Oil With Its Major Competitors