IOCL Internship

PROJECT REPORT INDIAN OIL CORPORATION LIMITED (IOCL), PIPELINE HEAD OFFICE (PLHO), NOIDA
A Report on Financial Analysis of IOCL and DFR on Proposal for Investment Approval of Branch Pipeline from BKPL to Motihari and Baitalpur
Submitted by: Arpit Verma A1802012113 MBA-IB(2012-14) AIBS, Amity University, Noida.
Under the Guidance of: Ms. Navleen Kaur Assist. Professor Amity University Noida.
ARPIT VERMA/ A1802012113/ AIBS, AMITY UNIVERSITY, NOIDA
Report on Financial Analysis of Indian Oil Corporation Limited and DFR on Proposal for Investment Approval Of Branch Pipeline From Barauni-Kanpur Pipeline to Motihari and Baitalpur for leveraging the transportation tariff
Submitted By: Arpit Verma Enrollment No. : A1802012113 Faculty Guide: Ms. Navleen Kaur Company Guide: CA Gaurav Gupta A report submitted in partial fulfillment of the requirements of MBA-IB Program of Amity University, Noida
Authorization
The making of this report has been authorized by CA Gaurav Gupta, Senior Accounts Officer at Pipelines Division Head office, Noida (Indian Oil Corporation Limited). I hereby declare that all the work shown in my project is true to my knowledge and has been completed at IOCLs office. The research study was conducted over a span of 45 days from June 2013 to July 2013. This project is meant for a partial fulfillment of the MBA-IB program at Amity International Business School, Amity University, Noida.
Acknowledgements
I take this opportunity to express my heartfelt thanks to CA Gaurav Gupta, Senior Accounts Officer at Pipelines Division, Head Office, Noida (IOCL). He has been the guiding light in the organization right from first day of my joining. He has always had trust in my abilities and has appreciated the same. The project would not have been complete without his immense guidance and support. I would also like to thank Ms Navleen Kaur, Assistant Professor, AIBS, Amity University , Noida, who has been available at all time to help and support me whenever I needed during the course of my internship. I am extremely indebted to Ms. Deepti Goel , Senior Accounts Officers at Pipelines Division, Head Office, Noida (IOCL) and the Technical Department for providing me with valuable inputs that helped me in my study.
TABLE OF CONTENTS Authorization..............................................................................Error! Bookmark not defined. Acknowledgement ......................................................................Error! Bookmark not defined. Executive Summary ...................................................................Error! Bookmark not defined. Introduction to the report............................................................................................................. 8 Capital Investment Analysis in IOCL ....................................................................................... 43 Objective of the study ................................................................Error! Bookmark not defined. Methodology ..............................................................................Error! Bookmark not defined. Limitations ................................................................................................................................ 57 Introduction about Oil & Gas sector ..........................................Error! Bookmark not defined. History of Oil and Gas sector In India .......................................Error! Bookmark not defined. Economic Analysis of the Sector ...............................................Error! Bookmark not defined. Trend Analysis ...........................................................................Error! Bookmark not defined. Oil Reserves ...................................................................................Error! Bookmark not defined. Price build-up for petrol in India an example using Delhi city ............. Error! Bookmark not defined. Downstream Players in India .....................................................Error! Bookmark not defined. Company Overview....................................................................Error! Bookmark not defined. IOCLs dominance in downstream Oil sector ............................Error! Bookmark not defined. Corporate History .......................................................................Error! Bookmark not defined. Major Proven Track Record of IOCL ........................................Error! Bookmark not defined. Subsidiaries and Joint Ventures .................................................Error! Bookmark not defined. Highlights of Beyond Boundaries Subsidiaries .........................Error! Bookmark not defined. Core operations ..........................................................................Error! Bookmark not defined. Board Structure &Shareholding Pattern .....................................Error! Bookmark not defined. Project Proposal..........................................................................Error! Bookmark not defined. Brief Description of the Proposal ...............................................Error! Bookmark not defined. Completion Schedule .................................................................Error! Bookmark not defined. Need and Justification of the Proposal .......................................Error! Bookmark not defined.
Estimation of Capital Cost .........................................................Error! Bookmark not defined. Estimation of Operating Cost .....................................................Error! Bookmark not defined. Phasing of Expenditure ..............................................................Error! Bookmark not defined. Calculation of Interest on Capital Cost ......................................Error! Bookmark not defined. Analysis of Financial Viability ..................................................Error! Bookmark not defined. Conclusion..................................................................................Error! Bookmark not defined. Analysis of Risk and Assessment...............................................Error! Bookmark not defined. Conclusion..................................................................................Error! Bookmark not defined. Recommendations ......................................................................Error! Bookmark not defined. Benefits to the Organization.......................................................Error! Bookmark not defined. Learning from the SIP ................................................................Error! Bookmark not defined. Attachments ................................................................................Error! Bookmark not defined. References ............................................................................................................................... 121
Executive Summary
The project proposed is to study the financial ratio analysis of IOCL for last six to eight years and making a comparative study for it and also studying the financial feasibility of a major capital intensive project in the Pipelines Division of Indian Oil Corporation Limited. With an aim to optimize the transportation tariff, actions have been initiated to put up a branch pipeline from Barauni-Kanpur Pipeline to Motihari and Baitalpur, which is developed indigenously by the Companys Research & Development department. The project involved learning the functioning of the Finance department in the pipelines in analyzing the financial viability of such proposals by the Technical department. The project is then aimed towards developing an understanding the various guidelines that the company follows to determine the feasibility of Capital Budgeting decisions. These understanding formed the basis for conducting the future study necessary to go ahead with the project. The first step in exercise was to have a brief idea about the background and process description of the technology, reviewing the need and justification established by the technical department and the consequences if the project is not implemented. The analysis of available alternatives to fulfill the same need is also very important. The current throughput of the 3 products i.e. Motor Spirit (MS), Superior Kerosene Oil (SKO) and High Spirit Diesel (HSD) were compared with their future throughputs and demands. The next part of the project involved identifying and bifurcating the details and basis of the project cost, compare the cost with similar projects and determine the phasing of expenditures. Finally, the financial analysis of the proposed project was done to determine its viability and profitability. This analysis is basically required in the pipelines to analyze the financial aspects of any capital investment project along with its technical feasibility. It is very important for capital intensive companies to determine the return for every project because an unprofitable venture might prove disastrous for the growth and survival of the company.
Along with the above mentioned on site project, the report comprises of industry and company analysis. It focused on building on an understanding of the oil and gas sector in India, in terms of size of the market, production consumption and other relevant information. This is followed by an introduction to IOCL, its history and progress, revenues and profitability analysis and financial ratio analysis.
CHAPTER 1
INTRODUCTION
Introduction about Oil & Gas sector The energy sector in India is one of the key economic drivers in India. Fulfilling the need for energy for both domestic and commercial consumption, the sector has emerged as the 4th largest energy consumer in the world, after the United States, China and Japan. As per the Ministry of Petroleum and natural Gas, oil in India accounts for close to 30% of the total energy consumed. To satisfy demand, Indian upstream oil companies have acquired stakes in overseas assets. Existing domestic oil reserves and production is insufficient to meet the demand in India. More than 80% of Indias crude oil demand was met through imports as of FY12.Economic growth witnessed by India, has led to more economic activity across states thus resulting in high demand for oil and gases to continuous fuel the growth further. Employing more than 1.3 lakhs individuals and with a favorable policy environment the sector has emerged as one of the key
core sectors driving the economy. The sector is primarily dominated by state owned firms like ONGC and IOCL. The sector also acts as a major source of tax revenue generation for Indias central and state governments. Prices of many oil, natural gas and petroleum products are controlled by the central government. This sometimes forces downstream companies to sell finished products at unprofitable prices. Government subsidies partially cover the shortfall, but this puts a strain on central government finances and bloats the fiscal deficit. In FY13, the government instituted a slew of reforms geared toward reducing the subsidies, such as limiting the number of subsidized cylinders and incremental decontrol of diesel prices. These moves are expected to improve the earnings of industry operators in coming quarters As per the BP statistics report published in 2013, India has proved oil reserves of about 9.0 billion barrels, with an average production of about 826,000 barrels/day. Indian Oil & Gas sector has two levels of activities.
Upstream
Major activity is exploration and extraction of crude Major Players are ONGC, OIL and GAIL ONGC accounts for close to 75% of the total oil output, making it the biggest upstream player
Downstream
Major activity is transportation, refinining and marketing of oil Major Players are IOCL, BPCL,HPCL and Essar Oil IOCL operates a total of more than 10 refineries across states IOCL has approx 12,163 km of Pipeline network
1. Upstream Segment: This primarily deals with exploration of crude oil from reserves across regions. Oil and Natural Gas Corporation (ONGC) is the leading player in this sector, operating with close to 75% of the market share in terms of crude oil output.
2. Downstream Segment: This segment deals with transportation, refining and marketing of crude oil. Indian Oil Corporation (IOCL) has mastered this activity. Operating over 12,163 Km of pipeline for crude transportation with a capacity of 1.4 million barrels per day, the firm operates with close to 75% of the total market share in terms of pipelines. IOCL is again a market leader in this segment, operating 10 out of 22 refineries across India. IOCL being a state owned enterprise faces its closest competition from Reliance Industries limited
Company Overview
Indian Oil is Indias largest commercial enterprise and flagship national oil company with business interest comprising the entire hydrocarbon value chain. It is a leading Indian Corporate in fortune Global 500 listing, rank at the 83rd position by the sales turnover for the year 2013. Indian Oil and its subsidiaries have a dominant share in the petroleum products market, national refining capacity and downstream pipeline capacity. It has been helping meet Indias energy demands over five decades now with business verticals spread over Refineries, Pipelines, Marketing, Research & Development and Business Development- E&P, Petrochemicals and Natural Gas. It is controlling Indias 10 out of 22 refineries with a group refining capacity of 65.7 MMTPA and a cross country network of crude oil, product and gas pipelines arching over 10,900 km with a capacity of 77 MMTPA as well as maintains a marketing network with 37000 touch points (52%). With an aim of maintaining its market leadership and providing best quality product and services, IndianOil is investing over Rs. 47,000 crores in a host of projects for amplification of refining and pipeline capacity, product quality up gradation, expansion of marketing infrastructure etc. Indian Oil services every nook and corner of the country, every hour of the day with customer sales points supplying by bulk storage in terminals and depots, aviation fuel stations and LPG bottling plants.
IOCLs dominance in downstream Oil sector:
IndianOil has the largest refining capacity in India comprising of almost 31% of the market share. It has the highest Petroleum products market share of 46% 87% downstream market share in crude oil pipelines. Largest provider of pipelines for petroleum products of 50% approximately 89% market share of bulk consumer pumps 52% market share in LPG dealership 54% of total consumer touch points
Core Operations
Refining : Indian Oil controls 10 refineries spread across the country in Barauni(6.0 MMT), Guwahati(1 MMT), Digboi(0.65 MMT), Bongaigaon(2.35 MMT), Haldia(7.5 MMT), Panipat(15 MMT), Mathura(8 MMT), Koyali(13.7 MMT) along with two subsidiaries in Narimanan(1 MMT) and Chennai(10.6 MMT). A new refinery of IOCL is still under construction in Paradip (15 MMT). The refineries in the north eastern part of the company benefits from excise duty concession and has the ability to supply in the North Indian market at low cost by leveraging pipeline network. The total refining industry capacity is 215.066 MMTPA and IndianOil with a capacity of 65.7 MMTPA and holds 31% of the entire market. IOCLs share among the PSUs stands at 49%. It is the only oil company to have presence in high consumption North Indian region comprising of Uttar Pradesh, Punjab, Haryana, Rajasthan, Himachal Pradesh, Uttaranchal and Jammu & Kashmir. The Corporation has been consistently maintain a capacity utilization of 100% and above in the wake of planned revamp shutdowns for implementation of quality upgradation projects in all the refineries.
Operating Highlights Strategic inland refinery locations with most effective supply and evacuation system through pipelines Highest ever throughput of 55.6 MMT Lowest ever specific energy consumption at 57 MBN against 59 MBN in FYE 2010-11 Highest ever distillate yield of 77.8% All refineries are Euro III/IV compliant
Pipelines: IndianOil owns and operates Indias largest network of crude and product pipelines getting closer to the clients with increasing length. With the commissioning of new pipelines the total network of product, crude and gas is operating at 10,777 km during the year. With a length of 4,376 km and a capacity of 40.40 MMTPA comprises of 73% downstream market share and product pipelines with a length of 6401 km and capacity of 35.36 MMTPA comprises of 50% of downstream market share. It provides low cost crude transportation to all the companys refineries. The highest ever throughput of 75.5 MMT was achieved by IOCLs pipelines in FYE 12. Also, it achieved the highest ever capacity utilization of 118% for crude oil pipelines.
The recently completed product pipelines are: 290 km long Chennai Bangalore product pipeline. 265 km long Koyali Ratlam product pipeline. 275 km long Panipat Jalandar LPG pipeline. 36 km long ATF pipeline connecting IOCLs Devanagonthi terminal to Bengaluru International Airport. 95 km long pipeline connecting CPCLs Manali refinery to Meenabakkam AFS.
Marketing- Sales: IOCL has a share of 52% in the Marketing infrastructure with 4 Regional offices, 16 State offices, 100 Divisional offices (66 retail and 34 consumers) and 45 Indane Area Offices.The organization is continuing to leverage its distributors to maintain leadership.
Rural Penetration through Marketing FY 2012 made an impressive record by commissioning of 731 KSKs during the year. Also, 9.2% of total IOCs sales (MS & HSD) was record which was the highest since 4 years.
Research and Development: The R&D department of IndianOil was established in 1972 and currently has 438 scientist and support staff. The major focus of the department mainly now is to reduce the carbon footprints of IOCLs process, products and technologies; endeavor to reduce company. Commercialisation of Technologies INDMAX : For maximisation of LPG & light distillates from refinery residue Marine Oils : One of six companies to have developed Original Equipment Manufacturer Approved Marine Technology Equipment Needle Coke : One of three companies in the world that possesses technology to make high value needle coke
Lubricants 154 product formulations developed, 108 commercialised, 56 approvals obtained from user industries/OEMs In a first overseas business gain, Mauritius Shipping Corporation adopted indigenously developed Servo marine grades Patents Six patents granted during the year
Active Patents by Geography

Others 23% USA 22% India 55%
Active Patents by division

Lubes 20% Refinery 47%
Others 33%
Widening horizons New petrochemical and polymer labs fully functional MOU with the department of Bio-Technology to set up Advanced Bio-energy research centre Diversified Customer Base and Product Suite
The various diversification initiatives towards clean energy are: Wind power project:
Commissioned in Kachchh, Gujrat in January 2009 has a capacity of 21 MW( 14 WEG of 1.5 MW each) Considering further investment in Wind power projects.
Solar Power Plant: IOCL won bid to set up 5 MW Solar PV Power Plant at Barmer, Rajasthan under Jawaharlal Nehru National Solar Mission. More than 3000 solar lanterns sold from retail outlets, LPG distributors for lighting rural homes and shops. Three solar charging stations installed for poorer villages at pilot basis to centrally charge lanterns for renting to customers. Nuclear Power: JV Company incorporated to set up Nuclear Power Plants in India. Equity participation (26%) in Rawatbhata, Rajasthan.
Biofuels: Energy Crop Plantation Captive plantation for Jatropha in India. In Uttar Pradesh plantation under MNREGS funded Public- Private- Panchayat partnership model: 10 ha completed Further proposed to extend plantation to 5000 ha.
SWOT Analysis of IOCL (Division Vise) SWOT Analysis With Respect To Marketing Division
Strengths: Indias highest ranked Fortune 500 Company and a market leader with 50% share of Petroleum products.
Possess the largest Pipeline Network; and thus has a vital competitive edge in transportation costs and thus helps to access in deficit markets. IOC controls 10 refineries, by virtue of which it has a total share of around 34% of Indias overall refining capacity. There are more than 35600 sale points all over India which is 55% of industry. There are about 5096 distributors of Indane Cooking gas for catering 56 million households. Reaching the doors of bulk customers: Bulk Consumer Pumps 7,593 (89%). Strong Brand name for its products (For example, SERVO which covers 42% market shares, with more than 450 grades). Excellent credibility and international corporate image for raising funds. IOC also acquired management control of the marketing company IBP, thereby strengthening its position in these activities. There are around 229 active Patents which includes 125 international patents.
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: 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. 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. 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: Enhancement of the distribution network must be made especially in the deficit regions. Distribution / sale of alternative products through existing retail network can be chalked out. With gas emerging as an attractive alternative fuel due to the twin benefits of low pollution and better economics, IOCL has planned 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. 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 Gujarat State Petroleum Corp. IOC has procured Exxon Mobils 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. Improvement of customer management services at the retail end (a customer satisfaction has shown only 65% customer satisfaction level).
Threats: 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. Increase in number of players, specialization in lube marketing (such as HPCL, BPCL, and Reliance). Introduction of LNG / CNG in some metro cities (e.g., Delhi) can reduce the demand of petrol or diesel in near future. Consumption of marine fuel procured by some major public sector shipping companies is showing a decreasing trend. 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.
Demographic issues are also posing some serious threats to IOCL. IOCLs north east operations continue to suffer from certain constraints.
SWOT Analysis With Respect To Refineries Division

Strengths: 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.
58% of IOCs refining capacity is located in the Northern and Western regions, which are high demand and high growth areas. Pioneer in quality management with its Mathura Refinery as the 1st in Asia and 3rd in the world to earn ISO14001 Certification. High quality LOBS produced by refineries contribute to world class lubes. No financial constraints in modernizing and improving facilities for refineries.
Weaknesses: Operating cost is comparatively higher than new refineries of competitors (e.g. Jamnagar Refinery of Reliance Petroleum).
There is less flexibility option of handling various types of crude (both sweet & sour) unlike new refineries of competitors.
Opportunities: Need for additional refining capacity to meet rising demand in petroleum product. 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. Improvement / creation of new infrastructure storage, transportation and distribution. Globalization in refining, pipeline and consultancy.
Threats: The decontrol in Hydrocarbon sector is likely to bring in new players specially the MNCs, with new refining capacity having the flexibility to improvise the product mix according to the nature of market demand. Growth of merchant refining can be a new source of competition. Higher Capital needs to modernize existing infrastructure.
Pipelines An Introduction
The term pipeline in broader sense means a facility used to transport commodities from point of receipt to the point of delivery. Many commodities are transported through pipelines. Crude oil and petroleum products are perhaps the most common commodities transported by pipelines. Development of Pipelines in India Most of the earlier refineries in India were installed at coastal locations, Thus depending on coastal movement of Crude Oil. Further, The Refining capacities being low, The products were either consumed locally or transported to the consumption centres by Rail or Road. After 1960, Most of the Refineries were installed in Land-Locked locations and Crude and Product Pipelines were prompltly laid. The First Crude Oil Pipeline was laid from DIGBOI Oil fields to DIGBOI Refinery. During 1960-63, OIL INDIA LIMITED laid the First Trunk Crude Oil Pipeline, 1156 Km long from Naharkatiya and Moran Oil fields to the refineries at GuwahatiI and Barauni. The First Cross Country Product Pipeline was laid during 1962-64 to transport products from Guwahati Refinery to Siliguri. Subsequently , A number of product and Crude Oil Pipelines were laid in the 60s, 70s and 80s, including sub-sea Crude Oil Pipelines. The country today has about 24,000 Km of major Crude Oil and Product Pipelines.
The Pipelines laid during the 60s were Designed, Engineered and Constructed by Foreign Companies. However, The exposure to this Technology enabled indian engineers to gain confidence, and the Pipelines which came up later, were designed and constructed with indigenous expertise. The country today has about 24,000 Km of major Crude Oil and Product Pipelines.
Pipeline Transportation of Liquid Petroleum : The Indian Scenario

Indian oil industry has over four decades of experience in transportation of crude oil and finished petroleum products. The crude oil pipelines transport waxy crude as well as low sulphur & high sulphur crude.
The finished product pipelines transport primarily light and middle distillates, including aviation turbine fuel, in multi-product pipelines.
ADVANTAGES OF PL TRANSPORTATION Cost effective Economies of scale Negligible transit loss Energy efficient Reliable Safe, environment friendly WEAKNESS IN PIPELINE TRANSPORTATION SYSTEM Capital intensive Viability depends on utilization Once laid, it is sunk cost/No alternate use Inventory carrying cost Less flexibility regarding batch size Interface and contamination of product Door to Door delivery not possible MODES FOR TRANSPORTATION OF PETROLEUM PRODUCTS A COMPARISON
Road Energy cost Operating cost Pollution Movement congestion Very High Very High High High
Rail High High Low Low
Pipeline Low Low Nil Nil
Handling loss Safety Hazards Reliability
High High Low
Low Low Low
Negligible Negligible 100%
EXISTING CRUDE OIL & GAS PIPELINES Crude Oil Pipelines
S. No 1. 2.
Name of the Pipeline
Length (KM) 1870 1312
Diameter (Inch) 28 / 24 30/18
Refinery
Capacity (MMTPA) 21.6 11
SALAYA-MATHURA (WR) PARADIP HALDIABARAUNI (ER) MUNDRA-PANIPAT (NR) TOTAL
J/M/P H/B/BN
3.
1194 4376
28 / 22
8.4 41.0
Gas Pipelines S. No 1. Name of the Pipeline Length (KM) 132 Diameter (Inch) 30 Refinery Capacity (MMSCMD) 9.5
DADRI-PANIPAT - NR
PRODUCT PIPELINES S. No. Name of the Pipeline EASTERN REGION 1. 2. 3. 4. GUWAHATI-SILIGURI BARAUNI-KANPUR HALDIA-BARAUNI HALDIA-MOURIGRAM435 745 525 277 8 20/12 12 12 1.4 3.5 1.25 1.35 Length (KM) Diameter (Inch) Capacity (MMTPA)
RAJBANDH WESTERN REGION 5. 6. 7. 8. 9. KOYALI-SANGANER KOYALIDAHEJ KOYALI-RATLAM KOYALI-AHMEDABAD VIRAMGAM KANDLA 1056 197 265 116 231 18/12 14/12 16 8 16/22 4.6 2.6 2.0 1.1 -
S. No.
Name of the Pipeline NORTHERN REGION
Length (KM)
Diameter (Inch)
Capacity (MMTPA)
10. MATHURA-DELHI 11. MATHURA-TUNDLA 12. BIJWASAN-PANIPAT NAPHTHA 13. PANIPAT-AMBALA-JALANDHAR 14. PANIPAT-BHATINDA 15. PANIPAT-REWARI 16. PANIPAT-DELHI 17. PANIPAT-JALANDHAR LPG
147 77 111 434 219 155 182 274
16 16/8 10 14/12 14 12 14 10
3.7 1.2 3.5 1.5 1.5 0.7
S. No.
Name of the Pipeline
Length (KM)
Diameter (Inch)
Capacity (MMTPA)
SOUTHERN REGION 18. CHENNAITRICHYMADURAI 19. CHENNAI-BANGALORE
683 290
14/12/10 14/12
2.30 2.45
OTHERS 20. CHENNAI ATF 95 8 0.18
21. NARIMANAM-NAGAPATTINAM 22. BENGALURU ATF 23. DIGBOI-TINSUKIA TOTAL PROJECTS UNDER IMPLEMENTATION S. No . 1. Projects Description
7 36 75 6632
18 8 8/6
0.368 0.66 1.0 36.858
App. Cost (`/ Crore)
Capacity (MMTP A) -
Length (km)
Dia (inch)
Hook-up of Tikrikalan Terminal with MJPL
59
14
2.
Paradip- Raipur-Ranchi Pipeline
1793
5.0
1065
18/10
3.
Integrated Crude Handling Facilities at Paradip
1492
70
48
4.
Addl Tanks and blending facility at Vadinar
267
5.
De-Bottlenecking of SMPL
1584
767
28/24
6.
Kolkata ATF Pipeline
45
0.13
28
7.
Guwahati ATF Pipeline
44
0.07
35
8.
Cauvery Basin Refinery - Trichy Pipeline
98
0.40
114
9.
Paradip-Haldia-Durgapur LPG Pipeline
913
0.85
710
12/10
10.
PHBPL Augmentation
586
4.2
64
18
11.
Branch Line from BKPL to Motihari & Baitalpur
276
275
10
12.
Last Mile connectivity to NFL from DPPL
10
1.8
10
TOTAL
7167
14.65
3137.80
GROWTH OF PIPELINE NETWORK
Length ( KM)
16000 14000 12000 10000 8000 6000 4000 2000 0
14278
11140
8951 6364 5423 3980 2014 435 1964 1975 1985 1995 2000 2005 2013 2015
GROWTH OF PIPELINE CAPACITY
Capacity(MMT)
100 90 80 70 60 50 40 30 20 10 0
92.51
77.86
56.82 43.72 28.92 23.07 0.48 5.71 1964 1975 1985 1995 2000 2005 2013 2015
INCOME- Pipelines Division
Freight Recovery. This is a contra item in Divisional Accounts and is nullified at Corporate level. Since Pipeline freight includes an element of profit, the margin is eliminated for closing stock valuation. Consultancy Income/ Training & Development Sale of Scrap/Wind Power Recoveries from employees/contractors
Unspent/ Unclaimed Liabilities written back Interest on Employee advances
EXPENSES- Pipelines Division
Power & Fuel Repairs & Maintenance Chemical Consumption Establishment Cost Depreciation General Administration expenses
30% 13% 2% 14% 28% 13%
Introduction to the report

Background Financial Ratio Analysis Ratio Analysis compares one figure in one financial statement (say P&L account or Balance Sheet) with another figure in the same financial statement or in another financial statement of the company. A ratio is expressed in the numerator denominator format. Thus the numerator and denominator can be either from the P&L account or the Balance sheet of the same company. Hence, ratio analysis facilitates intra firm comparison. i.e. comparison of your companys performance in the current year with your companys performance in the previous year. It also facilitates inter firm comparison. i.e. comparison of your companys performance in the current year with your competitors performance in the current year. Peer review, as this is called, helps you benchmark your performance with your peers. Ratios help in ascertaining the financial health of the company and also its future prospects. These ratios can be classified under various heads to reflect what they measure. There may be a tendency to work a number of ratios. But we believe that being thorough in the computation and interpretation of a few ratios (Say 20-25) would be ideal, since too much of analysis could lead to paralysis.
Capital Budgeting Decisions The Capital Investment plays a very vital role in the growth and financial health of any company. Such investments are necessary for continued growth of the organization, updation of technology, removal of operational bottlenecks, improvement in efficiency and productivity, enhancement of capacities, fulfillment of social objectives etc. Capital Investment decisions
would generally include expansion, acquisition, modernization and replacement of long term assets. Decisions involving Capital Investments requires special attention due to the following reasons: Growth: Investment decisions are generally long term and taken for future benefits. It has to be endured for a longer period than consequences of current operating expenditure. A wrong decision can prove disastrous for the growth and survival of the company, unprofitable ventures can hamper to compete successfully and even result in loosing on its market share. Risk: Capital investment decision even changes the risk complexion of a company. If adoption of a particular investment increases the average gain of the firm and along with that also brings in frequent fluctuations in its earnings, the overall risk profile of the company increases. Funding: Long term commitment of funds generally involves large amount of funds, which makes it imperative for the company to take it decisions very carefully and arrange in advance the procurement of finance internally or externally. Irreversibility: These decisions are generally irreversible and the company would incur heavy losses if such assets are scrapped as the marketability of such investments is very less. Further, if the fixed charges required to be incurred can make difficult the very survival of the company if there is no commensurate income to meet them. Complexity: Capital investment decisions are an assessment of future benefits and difficult to predict.
Capital projects in Indian Oil Corporation Limited can be broadly divided into:
Core sector projects
Refining, marketing, pipelines and R&D Exploration and Production (E&P) Core/ non core sector projects overseas
Diversification projects
Globalization projects
As per revised DOA effective from April 9, 2001, all capital investment proposals above Rs 100 crore require boards approval as under: Above Rs. 100 crore : Board Above Rs. 50 crore to Rs. 100 crore: Planning and Project Committee Board Above Rs. 10 crore to Rs. 50 crore: Chairman Upto Rs. 10 crore: Functional Director
Project costing Rs. 250 crore and above requires approval of Project Evaluation Committee.
Capital Investment Analysis in IOCL

Need and Justification: The foremost issue that needs to be described in the capital investment proposal pertains to the identification of the basic objective or need which is sought to be fulfilled by the implementation of the proposed project. The proposal shall present the complete perspective, rationale and background of the need for the project. Types of Needs : The need for a project can be on account of: Capacity enhancement due to demand and supply imbalances. Economic considerations Technical/ operational necessity Marketing considerations Improvement in existing operations through removal of constraints/updation of technology Government/ Strategic policy decision Safety/ Environment and other statutory requirements Expansion into new business- Diversification/ Globalization Research and Development activities
Here, all the possible alternatives for meeting the need shall be briefly indicated and thereafter, be evaluated based on the qualitative and quantitative aspects. Some of the criteria that may be considered are cost benefit analysis, techno- commercial feasibility, synchronization with Govt. / Corporate policies, time schedule, statutory requirements, inter-relation with other operations etc.
Market and Commercial Assessment Commercial or market viability is the starting point for assessing the feasibility of capital investment proposals. It determines the need for a new project or for the expansion of an existing project. Three critical questions to be asked are: Where and how much is the demand ? What is the price? Is the proposal consistent with the organizations expertise and strategy?
Factors affecting commercial viability are: Existing and potential demand and supply - both domestic and international Proposed product mix and volume Possible future changes Expected market share of the proposed product Reasonability of selling price Impact of tariffs on imports, where imports are alternative sources of supply Export potentials of the product
Project cost An accurate and realistic cost estimation of the project is very necessary as it directly affects the analysis of the financial viability of the project. The following components are taken into consideration while preparing the project cost estimates: Prime Cost: includes the total cost of land, building, equipment, material, civil construction and other items viz, mechanical, electrical, instrumentation, fire fighting,
safety, pollution control etc. The major component wise breakup will be annexed to the proposal. The cost estimates are generally compiled based on the data maintained by various units all over the country. The proposal will be a comparative analysis with similar projects, all statutory levies related to the project cost Custom/ Excise duty, sales tax etc shall be provided and foreign exchange requirement of the project will be separately reflected. Provision for design and scope changes: This provision needs to be justified on case to case basis. Normally the provision for design and scope change is not required for repetitive projects where the cost estimates are amply clear at the time of preparation. Provision for contingencies: Provision for contingencies not exceeding 3% to 5% of the total estimated cost can be normally included while estimating the project cost. Forward cost escalation: The cost estimates will correspond to recent dates not dated more than three months old from the date of proposal and as such no forward cost escalation shall be considered. Financing cost: Financing cost during construction period shall be reflected separately, wherever applicable Technical Feasibility Study: Technical appraisal is important to ensure that the necessary physical requirements are available and choose the best possible alternative to procure them. While formulating the proposal the following checklist given under should be taken into consideration.
Financing of the project: Projects taken up by the corporation are partly financed from internal funds and if required from external borrowings. When no specific financial plans have been finalized a debt to equity ratio of 1:1 shall be considered. However the ratio needs to be reviewed on case to case basis. Internal resources will be assumed for non-plan schemes. The following issues are needed to be dealt where financing is envisaged by external borrowings: Extent of loans available and terms thereof like rate of interest, repayment schedule, moratorium, commitment charges etc. Break up of financing into foreign exchange and Indian Rupee Component. Deferred credit if available.
Phasing of expenditure: Phasing of year wise expenditure with Interest during Construction (IDC) and without IDC shall form a part of the Capital Investment proposal. The following aspects should be kept in mind while assessing the year wise need of expenditure: The various critical activities as per the activity chart and requirement of funds for those activities. Terms and conditions at which external funds are to be mobilized. Terms of payments for major equipments and work wherever applicable. Detailed capital expenditures should be linked with activities in high value projects.
Budget/ Plan provision: The proposal shall also present the availability of the proposal in the Budget and if the proposal has not been included or partly included the source of reapportionment of funds shall be clearly defined. Integrated linked projects: Many times projects are integrated across divisions like a grass root refinery may require a crude product pipeline and a marketing terminal. In such a case project formulation will be done in totality of the scheme and therefore the following aspects will be ensured for proper coordination to implement the linked projects:
Project formulation in a consolidated way by sourcing the inputs from various division
Project economics to be carried out in totality of all the division
Approval is obtained as a single project and shall be vetted by concerned divisional directors.
Under-utilization / Abandonment of existing plant/ facilities: While putting up any new proposals for new facilities, it should clearly mention if any existing plant are under- utilized or will be abandoned including the financial implication.
Financial Analysis by IOCL Introduction The financial analysis is vital for assessing the viability and feasibility of the project and helps in decision making process. It gives the estimate of financial gains the company will earn if the project is implemented. This analysis comprises of determination of yearly cash flows of the project, computation of key decision criteria like Net Present Value (NPV), Internal Rate of Return (IRR), Debt service coverage ratio (DSCR) etc. Financial analysis of Capital Investment proposals shall be carried out based on realistic assumptions taking into consideration present input/ output prices, market forces etc. Determination of Cash Flows It is the most crucial step of financial analysis and shall be determined for three components namely: Initial investment: This component mainly represents net cash outlay in the period when the asset is purchased or constructed. It comprises of the total project cost as mentioned in the proposal and an incremental working capital wherever required. In projects where external borrowings are envisaged for financing interest payments or principal repayments will not be considered while calculating Return on Investment (ROI). However these are considered while calculating Return on Equity (ROE). Operating Cash Flows: This component of cash flow represents year wise cash flow after the project has been commissioned. The capacity utilization should not exceed 60% in the first year and 90% from the second year onwards till the project life cycle. This cash flow entails the determination of operating income, input/raw material cost and operating expenses. When computing gross operating income in the Organization the following issues are to be kept in mind:
Refinery Gate Price( 3 years average excluding abnormal fluctuation) based on 80% import parity and 20% export parity considering all applicable Ocean freight, loss, insurance, present duties, inland freight etc is to be reckoned in price build up of Refinery projects. For Petroleum products, 3Years average of import parity( 80% import parity and 20% export parity) prices on landed cost basis shall be assumed. However if the competitors prices are lower than the same shall be considered. Marketing margin of 8% or actual margin whichever is low shall be considered.
The impact of discounts like extension of credits, freight under recovery should be accounted while considering the prices. In case of cap by government or regulatory authority is applicable should be given due consideration and subsidy component any to be borne by the corporation should be factored in. Alternate mode of transport in case of pipeline products should be considered as benchmark. Freight is to be compared for analyzing the Return on Investment (cost of capital). 70% of Notional Railway Freight shall be considered as revenue generation for the base case. Tariff cap by regulatory authority shall be given due consideration. Prices for new products are based on landed cost of substituted products and for diversification products prices are considered as per Govt. policy or competitors prices. In case of Export Parity prices selling price would be considered based on three years FOB price of similar or near similar products in the nearest market minus 5% to take care of the extra supply in the market plus the freight charges. Terminal Cash Flows: This cash flow represents the salvage value of the project in the terminal year plus a release of incremental working capital, if any. It shall be considered as under:
Land to be valued at original cost Other items to be valued at 30% of the original cost without financing cost. Tax on capital gain shall be considered. Capital gain is calculated as terminal value minus the written down value as per income tax act.
Financial Evaluation After determining the cash flows as per the methodologies enumerated, the next step is to financially evaluate the proposal. The following two methods will be considered to evaluate the project proposal of IOCL: Internal Rate of Return (IRR): It is the discounting rate at which the present value of cash outflows will be equal to the present value of cash inflows. In other words, the discount rate that yields a zero Net Present Value is known as IRR. Projects having a IRR less than the hurdle rate (cost of capital+ premium) shall not be considered commercially viable and shall be justified on non- commercial grounds, wherever applicable. For calculation of Return on Equity Principal Repayment along with interest outgo shall be taken into consideration. Net Present Value (NPV): The present value of a future sum of money can be found by discounting it to the present time in time or Year 0 at the required rate of return /discount rate. Required rate of return shall not be less than cost of capital. Under this method, the present value of each years net cash flow is calculated, starting from the Year 0 till complete project life i.e. 15 years. This discounting rate adopted shall be the hurdle rate. If the project has a positive NPV, the project is considered to be commercially viable.
Other Measures: For debt financed projects, the Debt Service Coverage Ratio (DSCR) is calculated to ascertain the debt serving capacity of the project. It is calculated as:
Profit after tax + Depreciation + Interest on long term loan/Interest on long term loan + loan repayment installment. Break even analysis is a tool to compute the level of sales required to meet the funds requirement (fixed + variable). It can be used as a sensitivity analysis tool and can be computed as under: Total fixed cost/ Unit selling price- Unit variable cost. Other intangible benefits: Apart from analyzing the financial viability of the project it is equally important that the proposal indicates other intangible benefits of the project. These are benefits related to socio and strategic needs of the country and includes project for pollution control, safety needs, staff welfare etc. The benefits that can be quantified and measured from such projects will not be considered as intangible benefits. It shall be considered for the purpose of economic and financial analysis.
Analysis of Risk and Assessment All capital investment proposals involve some risk or uncertainty with respect to their completion, capacity utilization, fulfillment of specified need, safety and profitability etc. as the underlying assumptions made at the project formulation stage may not hold good during the project life. Therefore analysis of risk and uncertainty is an essential part of formulation of capital investment proposal. This not only facilitates the preparation of sound proposals but also helps in systematic consideration of risk by the approving authorities.
Types of Risks Financial Risk : Impact of various risks finally affect the profitability as a result of change in cash flows from the values considered at proposal stage. Some quantification of financial risk helps in decision making. Many techniques are available for determining financial risk involved with the project like Sensitivity Analysis
Sensitivity Analysis Sensitivity Analysis is a quantitative process of measuring change in value of a dependent variable consequent to change in the value of one or more other variables. A further aspect of such analysis is evaluation of its sensitivity to possible errors in estimation of each or some of the critical variable. For the purpose of carrying out the sensitivity analysis, it is utmost necessary in the first place to identify the important variables of the projects. These may be assumptions regarding incremental throughput/sales, capital cost, operating cost, completion schedule, prices of various input/output, reduction in duty protection, Cenvat Benefit etc. After identification of these important variables, sensitivity analysis shall be carried out to assess the impact of marginal changes in these variables on final results of the project i.e. IRR/NPV of the project.
Other Risks : Some of them which shall come under such risks are given below: Risk in getting input/linkage with input sources Risk in disposing output/linkage with market, downstream plants etc. Risk in obtaining Government clearances Risk of technology obsolescence Reduction in duty protection
CHAPTER 2 RESEARCH METHODOLOGY

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 Capital Budgeting, Capital Structure and Ratio Analysis whose theoretical aspects are known.
The study is conducted with the following objectives: To understand the various financial implications involved in the pipelines projects. To canvas the steps involved in the tendering process. To understand the steps involved in evaluating the estimates. To gain knowledge involved in the preparation of Detailed Feasibility Report (DFR). To get equipped with the workable knowledge of MS Excel To bridge the gap between the theoretical aspects and practical implementation in Pipelines Division To understand the working of finance department To get experience & exposure for the corporate life To comprehensively calculate all the financial ratios after analysing Balance sheet and P/L account and interpret the results. To suggest on the basis of findings, improvements in the management of sensitive factors and financial ratios.
Scope of the Study Study the Augmentation of Barauni-Kanpur Pipeline and understand the various financial implications involved in the pipeline project. Understand the financial feasibility of the project Calculate the various Financial Ratios and evaluate the financial condition of the company as a whole.
Methodology Type of Research Analytical Research, i.e., to use facts or information already available, & analyze these to make a critical evaluation (Detailed Feasibility Report) Fundamental or Basic Research, i.e., finding information that has a broad base of applications & thus adds to the already existing organized body of scientific knowledge (Budgeting). Research Design The research conducted here is of Exploratory and Descriptive in nature which structures and identifies new problems. The objective of exploratory research and descriptive research is to gather preliminary information. Sources of Data Collection Primary Data The method which involves, collection of data for the given subject, is directly from the real world which is collected by the researcher himself. The data were collected through: Discussions among the concerned executives of the corporate. Interaction with the key employees of the organization.
Secondary Data The data which is collected by others is to be re-used by the researcher. Analysis prepared from collection of various required information from: Internal Reports (Annual), Performance Report of Indian Oil Corporation-Pipeline Division, financial statements of the company (i.e. Balance sheet, P&L, Revenue budgets etc.) Study of the Detailed Feasibility Reports (DFR) of other projects which have been already completed and the various manuals of the division.
Limitations
Time constraint: The duration of the project limited the in-depth understanding of every aspect involved in the Capital Budgeting decision making of the organization
Limited scope: The project was carried out within the scope of the company. The predetermined guidelines given by the corporate office should be strictly adhered to. The efficacy of the methods followed is still debated in the academic arena.
Technicality: The proposals put forward by the technical department of the Pipelines are generally very technical and takes effort for non-technical background students to interpret certain terminologies. The issue was mainly faced during the bifurcation of cost estimates.
CHAPTER 3 FINDINGS & ANALYSIS
Project Proposal
Financial Analysis of Indian Oil Corporation Limited and DFR on Proposal for Investment Approval of Branch Pipeline from Barauni-Kanpur Pipeline to Motihari and Baitalpur for leveraging the transportation tariff.
Brief Description of the Proposal
Financial (Ratio) Analysis Financial analysis refers to an assessment of the viability, stability and profitability of a business, sub-business or project. Professionals who prepare reports using ratios that make use of information taken from financial statements and other reports perform it. These reports are usually presented to top management as one of their bases in making business decisions. Based on these reports, management may: Continue or discontinue its main operation or part of its business; Make or purchase certain materials in the manufacture of its product; Acquire or rent/lease certain machineries and equipments in the production of its goods; Other decisions that allow management to make an informed selection on various alternatives in the conduct of its business. Financial analysts often asses the firms on: Profitability- its ability to earn income and sustain growth in both short-term and longterm. Solvency- its ability to pay its obligation to creditors and other third parties in the long term;
Liquidity- its ability to maintain positive cash flow, while satisfying immediate obligations;
Solvency & Liquidity are based on the companys balance sheet, which indicates the financial condition of a business at given point of time. The weighted average cost of capital (WACC)- is the rate that a company is expected to pay to finance its assets. WACC is the minimum return that a company must earn on their existing asset base to satisfy its creditors, owners, and other providers of capital. Leverage- Any ratio used to calculate financial leverage of a company to get an idea of the companys methods of financing or to measure its ability to meet financial obligations. It also gives an idea of how changes in output will affect operating income. DU PONT- analysis shows that the profitability depends not only on the profit margin but also on how efficiently the firm has used its assets to generate sales. Debt financing and Growth- It is the maximum growth rate that can be achieved with no external financing while taking into consideration the debt equity ratio. Market test ratios- It relates the firms stock price to its earnings and book value per share.
DFR on Proposal for Investment Approval of Branch Pipeline from BKPL to Motihari and Baitalpur for leveraging the transportation tariff
With a view to give leverage in optimizing transportation tariff for Product positioning at Raxaul and Baitalpur, it is proposed to lay a 275 km branch pipeline on Barauni-Kanpur Pipeline (BKPL) at Patna to Motihari and Baitalpur. Presently, supplies to Raxaul, Baitalpur and Nepal (partially through Raxaul) are being effected by rail mostly from Barauni Refinery. IOCL has to pay substantial amount to Railway for product movement to IOCLs depots at Raxaul and Baitalpur. Raxaul and Baitalpur are major demand centres of Motor Spirit (MS) and High Spirit Diesel (HSD) and the demand is predicted to increase in the coming years. Resitement of Raxaul
Depot to Motihari and Patna depot to a suitable location in and around Patna is to be carried out. For this purpose, a suitable land at Naubatpur on the outskirts of Patna has been identified for the resitement of the existing Patna Depot. Early implementation of this pipeline is very critical for retaining IOCLs market share in this region as well as Nepals market as other OMCs may consider extending their pipeline to Raxaul and target Nepal market.
Pipeline Route
The proposed Pipeline would originate from Naubatpur, where resitement of Patna Transfer of Product (ToP) is proposed. From Naubatpur, the Pipeline would move broadly in the North/North-West Direction, crossing Rivers Son, Ghagara & Ganga and keeping west of Chapra Town, would reach Siwan. A T-Point cum-scraper station is to be installed near Siwan. From Siwan T-Point, one branch of the pipeline would move in the North-East direction, crossing river Gandak and reach Motihari. Another branch from Siwan T-Point would move in the North-West direction to reach the existing depot at Baitalpur near Deoria (Uttar Pradesh). The pipeline would be laid almost in independent Right Of Way (ROW), which would be acquired. The proposed route traverses through the Gangetic Flood Plains hence no high elevations are expected. The terrain along the pipeline route is mostly flat and plain. No rocky terrain is envisaged along the proposed pipeline route.
Process Description The branch pipeline would receive High Spirit Diesel (HSD) through 20 Barauni-Patna (Naubatpur) section under heart-cut operation at Naubatpur, whereas Motor Spirit (MS) and Superior Kerosene Oil (SKO) through 12 dia Barauni-Patna (Naubatpur) section under blocked out operation at Naubatpur.
Patna pump station would receive products ex Barauni both from 20 and 12 Barauni Patna pipeline section of BKPL. 20 pipeline would be used for pumping of HSD as is being done presently. 12 Pipeline would be used for MS/SKO/HSD. During receipt of products from 20 pipeline at Patna, bypassing to branch line may be heart-cut mode or full-cut mode. However, during bypassing of products to branch line received through 12 pipeline at Patna would necessarily be in full-cut mode. During this operation, pumping to Patna-Mughalsarai section might be continued with products from 20 pipeline at Patna. Simultaneous pumping from Barauni in both 20 and 12.75 pipeline of same or different products would be done.
The salient features of the branch pipeline are as under: Pipeline size optimization : The minimum pipe sizes have been considered for the pipeline system, which can enable achieving a throughput of about 1.50 MMTPA considering three shift operation and blocked out delivery to Motihari and Baitalpur
Hydraulics and System Configuration : Based on the pipeline throughput requirements, hydraulic details have been worked out. Details are as under
Area Naubatpur -> Siwan T-Point
Pipeline size and length 10.75 OD X 0.219 WT, API 5L- X 70, 115 Km 10.75 OD X 0.219 WT, API 5L- X 70, 80 Km 10.75 OD X 0.219 WT, API 5L- X 70, 80 Km
Siwan T-Point -> Motihari
Siwan T-Point -> Baitalpur
System requirements : The proposal of the branch pipeline to Motihari and Baitalpur broadly involves the following activities: Installation of dedicated pumping facilities, with 2+1 Engine Driven MLPUs, at Naubatpur Installation of T-Point facilities, along with one scraper launcher at Siwan Laying of 10.75 OD, 275 km pipeline from Naubatpur to Siwan, Siwan to Motihari and Siwan to Baitalpur
Flow Parameters for the Pipeline Different products in varying quantities as per requirement for local demand & export, would be required to be delivered at Motihari and Baitalpur, which would be the delivery stations in this branch pipeline system. Siwan would become a T-Point in system where the branch pipeline to Motihari and Baitalpur would originate. The normal operation of Siwan T-Point would be as under : Full flow ex-Patna towards Motihari Full flow ex-Patna towards Baitalpur Heart cut operation to both Motihari and Baitalpur
The pipeline would transport MS, HSD and SKO. The typical pumping sequence would be as under HSD - SKO MS SKO HSD SKO
The total line fill of the branch pipeline from Patna (Naubatpur ) to Motihari and Baitalpur would be about 14,900 KL
Completion Schedule The project is estimated to be completed in a period of 24 months after the receipt of all statutory clearances. Suitable action will be taken for obtaining MOE&F and other statutory clearances for the proposed pipeline system from the concerned authorities, as applicable.
Need and Justification of the Proposal
Depot Demands Vs Proposed Pipeline Throughputs Actual Consumption The actual throughput (consumption) of Petroleum Products for Raxaul and Baitalpur fed areas for last 3 years is shown below
Year 2009-10 2010-11 2011-12
Raxaul (TKL) (TKL) 512 605 718
Baitalpur 579 631 781
Total (TKL) 1,091 1,236 1,499
Future Projected Consumption (in TMTPA) The future throughput projections for marketing depots at Raxaul (Motihari) and Baitalpur has been worked out and is shown below
Motihari (Raxaul) Depot Year 201415 2016405 117 23 545 HSD 388 MS 106 SKO 23 Total 517
17 202122 497 153 23 673
Baitalpur Depot Year 201415 201617 202122 605 178 83 866 525 131 79 735 HSD 448 MS 109 SKO 84 Total 641
Combined demand of Motihari and Baitalpur Depot Year 201415 201617 202122 1,102 331 106 1,539 930 248 102 1,280 HSD 836 MS 215 SKO 107 Total 1,158
Projected throughput of the Pipeline (in TMTPA) Though there is robust growth in the projected demand for Motihari and Baitalpur depots, the optimization study indicates that there would be product shortage ex-Barauni refinery to feed this pipeline and in the process, the demand of Motihari and Baitalpur depots would be required to be
met from other sources only. Therefore, the projected throughput of the Branch Pipeline would be less than the demand The throughput projections of this branch pipeline, as per optimization study is shown below Year 2014-15 2016-17 2021-22 Raxaul 517 545 674 Baitalpur 600 736 462 Total 1,117 1,281 1,136
Despite proposed Pipeline connectivity for Motihari and Baitalpur depots, we can see from the above tables that the pipeline alone will not be able to meet the product demand requirement of these depots fully beyond 2016-17 as per optimization study and the balanced products are to be bridged from other sources through tank wagon. This is due to increased demands of Barauni fed locations and no corresponding increase in Barauni Production as well as no cushion/slack available at Barauni through Haldia-Barauni Pipeline
Assumptions for working out Demand Projections The long-term demand Projections are based on inputs from HO Planning Cell considering High Spirit Diesel (HSD) deregulation. Location-wise demand for 2014-15, 2016-17, 2021-22 have been arrived by applying state-wise Compound Annual Growth Rate (CAGR). The all-India CAGR for Products are as shown below Year 2014-15 2016-17 2021-22 HSD 4.6% 5.2% 4.5% MS 8.3% 8.2% 7.4% SKO -1.5% -0.9% 0.0%
Estimation of Capital Cost
The complete branch pipeline system is estimated to cost Rs. 276 crore, including a foreign exchange component of Rs. 4.48 crore at March 2013 price level. The project cost for pipeline facilities has been estimated on the basis of the following Cost actually incurred in the past with appropriate escalation Establishing physical requirements, preliminary specifications and in-house cost data Experience of virtually identical projects elsewhere to establish physical requirements and cost Experience of slightly different projects adjusted approximately to establish physical requirements and budgetary quotations Experience of similar projects in value/terms adjusted for price difference by past experience and escalation data
The summarised table of capital cost is shown below
S. No 1. 2. 3. 4. 5. 6.
7. 8. 9.
Item Description Survey & field engineering Land,ROW & Crop compensation Mainline Pipes Mainline Materials Mainline Construction Pump station & terminal Civil Electrical Mechanical Instrumentation Sub-total (Pump station & terminal) Cathodic Protection Telecommunications Telesupervisory (SCADA) SUB-TOTAL (A) Contingencies @ 0%
FE 0 0 0 134 0 0 0 292 0 292 22 0 0
RE 225 2562 8043 70 4212 2074 570 3415 758 6817 518 796 511
Total 225 2562 8043 204 4212 2074 570 3707 758 7109 540 796 511
10.
448 0
23754 0
24202 0
11.
12. 13.
Project Management, engineering and insurance@5.711% CSR@1% SUB-TOTAL (B) Interest during construction TOTAL
0 0 448 0 448
1382 242 25378 1774 27152
1382 242 25826 1774 27600
The detailed basis of cost estimates have been shown as under : 1. Survey and field engineering This cost includes the cost of surveys, sub-soil investigation & field engineering.
2. Land acquisition, ROW and crop compensation Land requirement for T-point at Siwan and RCPs etc. has been taken on the basis of permanent land acquisition. Right -of-way (R0W) compensation has been considered for the new route of the pipeline, which is approximately 275 km. 3. Project management & engineering, insurance The proposed scheme is expected to be completed in a period of about 24 months after receipt of statutory clearances. The cost of project management &engineering is estimated on the basis of envisaged time schedule. 4. Mainline pipes & materials The cost and coating has been considered as per the latest data available. The cost of mainline materials required such as casing pipe, coating and wrapping materials, valves etc. has been
estimated on the basis of budgetary offers and cost actually incurred in recent past on similar items. 5. Mainline Construction The cost of mainline construction has been estimated on the basis of the cost incurred in similar project executed elsewhere, suitably adjusted to bring it to March 2013 price level 6. Pump station and terminal The cost under this head includes the cost of mechanical, civil, electrical and instrumentation & control facilities which mainly comprise mainline pumping units, mainline valves,sump pump & motor, scraper barrels, fire alarm & detection system, fire hydrant network & related facilities, Power-cum-Motor Control Center, PLC based control system, control buildings etc. including the erection and installation of requisite facilities. 7. Cathodic protection This includes the cost of materials required for temporary and permanent cathodic protection, installation and commissioning of equipment/materials, CP Rectifier units, ground beds, cable etc. Estimates are based on budgetary offers and the rates from similar projects executed in the recent past
8. Telecommunication and Telesupervisory system OFC based telecommunication system and a dedicated telesupervisory system has been envisaged for the proposed pipeline system. Cost estimates are based on budgetary offers/earlier purchase orders. 9. Escalation No provision has been made for price escalation during the period of execution of the project
Estimation of Operating Cost
The operating cost of the branch pipeline system includes the cost if power required for running the mainline pumping (Naubatpur) pump station of BKPL, utilities, consumables, salaries, & wages, administrative overheads, repair &maintenance etc. the operating cost for the design capacity of 1.5 MMTPA is estimated to be Rs 14.47 crore/year at March 2013 price level.
The summarised table of operating cost is shown below S. No 1. 1. A 2. 3. Utilities 4. Manpower 319 Item Description Fuel Electricity Lube Oil Power(General) & Cost 427 199 4 12 Basis Not Applicable
5. 6.
7. 8.
General Administration Repair & Maintenance Mainline Others Chemicals Total
188 130 168 0 144 7
Not Applicable (5 Lakh for IPS + 5 Lakh for TS) + 2 Lakh for T Point (No. of IOC Employees: 25 (NO. OF DGR EMPLOYEES (LPM): 34 (@ Rs. 10 Lakh per IOC Employee) (@ 2 Lakh per DGR Employee@8 km) (Rs. 6.75 Lakh per IOC Employee) (1%*12999) (2%*8416) @6 PPM
Source: IOCL Finance Department
The detailed basis of estimation is given as under : 1. Fuel/power (Electricity) : The project envisages use of engine driven MLPUs at Patna (Naubatpur). The cost of the fuel (HSD) has been considered @ Rs.46,327 per MT for engines at Patna and electricity @ 5 per unit incremental power at Barauni. 2. Utilities : Power : Power is also required for operation of the auxiliaries & control etc. and for illumination at the stations. Requirement of power at Siwan T-point is planned to be
drawn from nearby BSEB supply point, whereas, for meeting power requirement at Motihari and Baitalpur, power would be extended from co-located marketing depots. Water : There is no major requirement of water operation of the pipeline system. Water for fighting will be drawn from fire water network of the marketing depots at Motihari and Baitalpur.
Manpower : The cost towards salaries and wages shown against labour component in the operating cost is based on the estimated manpower requirement on the existing scales of pay and allowances. Repair and maintenance : Repair and maintenance of the mainline has been considered @ 1% of the investment in the mainline. Similarly, repair and maintenance of the stations has been considered @ 2% of the investment on stations, telecommunication & telesupervisory system.
General administration expenses : The cost under this head covers management expenses including security services, insurance of facilities etc. being proposed in the branch pipeline system.
Phasing of Expenditure Based on the project schedule, the phasing of expenditure is as shown below : Year 1st Year 2nd Year 3rd Year Calculation of Interest on Capital Cost Rs. (in crore) 2.40 121.40 152.2
For the calculation of Interest on the Capital Cost incurred by IOCL for this project, a debt equity ratio of 1:1 has been considered. The amount of equity and debt for each year has been calculated as : [(Capital Cost with repayments of the same year) Amount of Equity for a year= + (Total Interest Capitalised for this year)] Debt
Equity Equity +
[(Capital Cost with repayments of the same year) * Debt Amount of Debt for a year= + (Total Interest Capitalised for this year)] Equity + Debt The Interest was calculated for the first 4 years and then the repayment was made within the next 8 years. During the First 4 years, capital cost was incurred. And during the last 8 years, operating cost was incurred. The capital cost along with the interest is capitalised during the 8 years of repayment.
Analysis of Financial Viability The general criterion for IOCL to evaluate Capital Investment proposals is to compute the Internal Rate of Return (IRR). In order to get a clearer picture of the financial viability, Modified Internal Rate of Return (MIRR) was also calculated. As the name implies, MIRR is a modification of the IRR and as such aims to resolve some problems with the IRR. The details of the various headings under IRR are : 1) Corporate saving: These includes all savings done by the company . In this project the saving is done by the laying of a branch pipeline because of which the company saved on the previous transport charges which was incurred through railways. By laying down of the branch pipeline, we incur just 75% of the Notional Railway Freight. Calculated as: for 2014: Already given and its being multiplied by the throughput factor. 2015: previous year saving *(next year saving /previous year saving)^1/2 2016 : done same as for 2014 2017-20: previous year saving *(next year saving /previous year saving)^1/5 2021: already provided multiplied by throughput factor for rest years same as 2021.( capacity of the pipeline gets saturated and hence, constant throughput has been considered beyond that). 2)Operating cost excluded: Expenses associated with administering a business on a day to day basis. Operating costs include both fixed costs and variable costs. In this operating cost is taken as the monthly cost which is being charged for the throughput provided. Calculated as: throughput*1000*30/10000 3)Saving in loading charges: These are the savings which is being done as earlier charges had to be paid for loading done at barauni depot , but after the laying of pipeline this has been termed as saving. This includes the terminalling charges that had to be paid for sending through rail or road. Calculated by:
Multiplying by(SKO,MS etc)quantity at both motihari and baitalpur with the terminalling charges of the products per MMT.( as provided). Together multiplying this with the throughput factor. 4)Saving due to less transit loss: these are the savings done by assuming less loss during transit from pipeline as compared to other transport such as leakage and pilferage. Its given as(.25% to .05%) Calculated as: multiplying throughput of each product with rtp barauni quantity of that product. 5)Manpower and GA cost: cost applicable with the workers used in project, together with other expenses. Calculated as: as seen from operating cost sheet Manpower cost: 319(25*10 for IOC employee and 34*2 for DGR employee) GA cost: 188(6.75 *25=168 +Insurance charges /10=approx.20) 6)Interest: Got from the interest and SLM sheet. By adding all four years interests. 7)EBT: SAVINGS COST 8)DEPRECIATION:For 1ST YEAR 35% ON capex excluding land After that 15% for each year. 9)Taxable income: EBT -DEPRECIATION 10)Profit after Tax: EBT-Income Tax 11)Repayment of loan :in 1st year no repayment is done and for next 8 years (as given)loan repaid after loan repayment for all 4 years .
12)Capital investment :funds invested in a firm or enterprise for the purposes of furthering its business objectives. Capital investment may also refer to a firm's acquisition of capital assets or fixed assets such as manufacturing plants and machinery that is expected to be productive over many years. Calculated by: for 1st year: year 1 expense +year 2 expense /2 For Year 2nd : year 3 expense
13)Working capital: The sum of all of a company's current assets (assets that are convertible to cash within a year or less). Calculated as: Operating cost of previous year-current year/divided by no. of months.
14)Salvage value : The estimated value that an asset will realize upon its sale at the end of its useful life. In this project assets are depreciated at 30%.
Conclusion The acceptance rule of projects using the IRR method is that the internal rate of return is higher than the opportunity cost of capital (k). k is also known as the required rate of return, or the cut-off or the hurdle rate. As per Indian Oil Corporation Limited (Corporate office), the hurdle rate (benchmark IRR) for capital intensive proposals are 13% for Refinery and Pipeline projects. The three major considerations of the company to determine the hurdle rate are: Rates are based on Debt: Equity ratio and may be applied for all the projects that are less than Rs. 250 Crores. Major projects with an amount more than than Rs. 250 Crore, specific hurdle rate would be derived based on funding pattern and anticipated borrowing cost. Hurdle rate for global projects are subjective as varies from country to country depending upon the country risk. As the IRR of the proposed project is 16.42 % which is higher than the hurdle rate we can suggest to go ahead with the branch pipeline as it proves to be financially feasible. Also, the MIRR of the proposed branch pipeline is 14.32% which is also more than the hurdle rate i.e. 13%, we can definitely go ahead with the project as it is financially feasible.
Analysis of Risk and Assessment
As specified earlier, Sensitivity analysis is a major tool which used to give an overview of the impact in the changes in the value of those variables, which form an essential part of the analysis. 3 major variables were considered in the project which has a major impact on the IRR of the project are : 1) Sensitivity of the IRR on the changing of OPEX factor and Capex factor from 95% to 110% 2) Sensitivity of the IRR on the changing of Opex factor and Throughput factor from 95% to 110% 3) Sensitivity of the IRR on the changing of Throughput factor and Capex Factor from 95% to 110%
FINANCIAL ANALYSIS OF INDIAN OIL CORPORATION LIMITED
IMPORTANCE OF FINANCIAL ANALYSIS
A basic limitation of the traditional financial statements comprising the balance sheet and the profit and loss account is that they do not give all the information related to the financial operations of a firm. Nevertheless, they provide some extremely useful information to the extent that the balance sheet mirrors the financial position on a particular date in terms of the structure of assets, liabilities and owners equity, and so on and the profit and loss account shows the results of operations during a certain period of time in terms of the revenues obtained and the cost incurred during the year. Thus, the financial statements provide a summarized view of the financial position and operations of a firm. Therefore, much can be learnt about a firm from a careful examination of its financial statements as invaluable documents/performance reports. The analysis of financial statements is, thus, an important aid to financial analysis. The focus of the financial analysis is on key figures in the financial statements and the significant relationship that exists between them. The analysis of financial statements is a process of evaluating the relationship between component parts of financial statements to obtain a better understanding of the firms position and performance. The first task of the financial analyst is to select the information relevant to the decision under consideration from the total information contained in the financial statements. The second step is to arrange the information in a way to highlight significant relationships. The final step is the interpretation and drawing of inferences and conclusions. In brief, financial analysis is the process of selection, relation and evaluation.
Ratio Analysis: It is important when examining a set of financial statements and using ratio analysis to relate them to reference points or standards. These points of reference might be to:
establish trends from past years, so providing a standard of comparison compare against other businesses in the same industry compare with standards assumed to be satisfactory by the interested party, e.g. a bank
Above all, it is important to understand the relationships between ratios: one ratio may give an indication of the state of the business but, before drawing conclusions, this needs to be supported by other ratios. Ratios can highlight symptoms, but the cause will then need to be investigated. Another use of ratios is to estimate the likely future profit or balance sheet of a business. For example, it might be assumed that the same gross profit percentage as last year will also apply next year; thus, given an estimated increase in sales revenue, it is a simple matter to estimate gross profit. In a similar way, by making use of ratios, net profit (profit before tax) and the balance sheet can be forecast.
Ratio Analysis of IOCL
Particulars Liquidity ratio:
2008-09
2009-10
2010-11
2011-12
2012-13
Current ratio Liquid ratio Cash ratio Defensive Interval Ratio Activity Ratio: Inventory turnover ratio Debtors turnover ratio Creditors turnover ratio Assets turnover ratio Capital turnover ratio Leverage ratio: Debt-equity ratio Total debt ratio Proprietary ratio Interest coverage ratio Financial leverage ratio Profitability ratio: Gross profit ratio Operating profit ratio Net profit ratio Return on capital employed Return on equity Return on Assets Earnings per share Dividend per share Dividend Payout Ratio Cash profit ratio Expense ratio Du Pont analysis Earning Power Return on equity Debt- financing growth Internal growth rate Sustainable growth rate Market test ratio Dividend-yield ratio Earning-yield ratio
0.96 0.64 0.01 72.62 16.00 41.18 6.34 2.74 3.47 1.02 0.64 0.36 2.10 1.91 0.04 0.03 0.01 0.15 0.07 0.03 24.74 8.93 0.36 0.02 1.16 0.02 0.07 0.02 0.04 0.039 0.128
0.92 0.49 0.01 67.39 13.24 42.48 6.00 2.28 2.93 0.88 0.61 0.39 10.24 1.11 0.08 0.06 0.04 0.10 0.20 0.09 42.10 15.10 0.36 0.05 1.06 0.08 0.20 0.05 0.11 0.044 0.142
0.87 0.44 0.01 63.88 12.79 41.31 5.97 2.20 3.42 0.95 0.66 0.34 4.41 1.29 0.05 0.04 0.02 0.18 0.13 0.05 30.67 10.98 0.36 0.04 1.08 0.05 0.13 0.03 0.08 0.028 0.092
1.01 0.54 0.00 62.76 9.18 42.68 5.39 2.38 4.62 1.30 0.77 0.23 3.05 4.54 0.05 0.04 0.01 0.20 0.07 0.04 16.29 5.80 0.36 0.02 0.98 0.02 0.07 0.02 0.04 0.019 0.062
1.03 0.56 0.00 58.37 7.39 42.53 6.57 2.37 5.68 1.32 0.77 0.23 1.88 2.13 0.04 0.03 0.01 0.25 0.08 0.08 20.62 7.25 0.35 0.02 1.00 0.02 0.08 0.05 0.05 0.022 0.073
Liquidity Ratios: The importance of adequate liquidity in the sense of the ability of a firm to meet current/shortterm obligations when they become due for payment can hardly be overstressed. In fact, liquidity is the prerequisite for the very survival of a firm. The short-term creditors of the firm are interested in the short term solvency or liquidity of a firm. But liquidity implies, from the viewpoint of utilization of the funds of the firm that funds are idle or they earn very little. A proper balance between the two contradictory requirements, that is, liquidity and profitability, is required for efficient financial management. The Liquidity Ratios measure the ability of a firm to meet its short-term obligations and reflect the short term financial strength/solvency of a firm. The ratios which indicate the liquidity of a firm are: 1. Current ratios 2. Acid test/ quick ratios 3. Cash ratios 4. Defensive Interval ratios Current Ratio: The current ratio is the ratio of total current assets to total current liabilities. It is calculated by dividing current assets to current liabilities.
The total current assets include those assets which are in the form of cash, near cash or convertible into cash within a period of 1 year. The term current assets also include prepaid expenses and short term investments, if any. The current liabilities include all types of liabilities which will mature for payment within a period of 1year e.g. bank overdraft, bills payable, trade creditors, outstanding expenses et.c. The current ratio throws light on the firms ability to pay its current liabilities out of its current assets.
IOCL Current Ratio Analysis:
Year 200809 200910 201011 201112 201213
Current Assets (A)
Current Ratio Current (**) Liabilities (G) = (B) (A) / (B) 0.96 0.92
76767.32 80330.04 81759.05 89318.01
102565.9 118348.01 0.87 121001.6 119825.93 1.01 128298.6 124133.67 1.03
Current ratio
1.05 1 0.95 0.9 0.85 0.8 0.75 2008-09 2009-10 2010-11 2011-12 2012-13 0.96 0.92 0.87 1.01 1.03
Interpretation: Current Ratio of IOCL has been close to 1 most of the times for the last 3 years, indicating the inability of the IOCL to meet its short term obligations. Generally, a current ratio of 2:1 is considered to be the minimum required ratio for a firm to be declared liquid. So, from that point of view, IOCL is suffering from a serious liquidity crunch. Top Management needs to work upon
this issue. So, The ratio signifies that IOCL is inadequately liquid from the point of view of its ability to always satisfy the claims of the short-term creditors. A slight decline in the value of the current assets will adversely affect the ability of IOCL to meet its obligations; therefore, from the viewpoint of the creditors, IOCL is a more risky venture.
Acid-Test/Quick Ratio: One defect of the Current Ratio is that it fails to convey any information on the composition of the current assets of a firm. A rupee of cash is considered equivalent to a rupee of inventory or receivables. But it is not so. A rupee of cash is more readily available to meet current obligations than a rupee of inventory. This impairs the usefulness of the current ratio. The acid-test ratio is a measure of liquidity designed to overcome this defect of the current ratio. It is often referred to as quick ratio because it is a measurement of a firms ability to convert its current assets quickly into cash on order to meet its current liabilities. Thus, it is a measure of quick or acid liquidity. The acid-test ratio is the ratio between quick current assets and current liabilities and is calculated by dividing the quick assets by current liabilities. Acid test ratio Quick Assets Current Liabilities
The term Quick assets refers to current assets which can be converted into cash immediately or at a short notice without diminution of value. Included in this category of current assets are cash and bank balance, short-term marketable securities and debtors/receivables. Thus, the current assets which are excluded are: prepaid expenses and inventory. The exclusion of inventory is based on the reasoning that it is not readily and easily convertible in to cash. Prepaid expenses by their very nature are not available to pay off current debts. They merely reduce the amount of cash required in one period because of payment in a prior period. IOCL Quick Ratio Analysis:
Year 200809 200910 201011 201112 201213
Current Assets (A) 76767.32 81759.05
Current Liabilities Inventories (B) (C) 80330.04 89318.01 25149.6 36404.08 49284.52 55829.2 59314.39
Prepaid Expenses (D) 0 1262.76 1483.72 0 0
Liquid Assets (H) = (A) - (C) (D) 51617.72 44092.21 51797.7 65172.36 68984.21
Quick Ratio (@) (I) = (H) / (B) 0.64 0.49 0.44 0.54 0.56
102565.9 118348.01 121001.6 119825.93 128298.6 124133.67
Quick Ratio depicts the following trend:
Liquid ratio
0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2008-09 2009-10 2010-11 2011-12 2012-13 0.64 0.49 0.54 0.44 0.56
Interpretation: The acid-test ratio measures the ability to service short-term liabilities of IOCL. Generally, an acid-test ratio of 1:1 is considered satisfactory as a firm can easily meet all current claims. But the Quick Ratio of IOCL has never been able to touch the target point of 1:1, indicating the liquidity crunch for the firm. So, like Current Ratio, Quick Ratio trend depicts the same thing
that IOCL is suffering from liquidity and the management needs to take corrective actions immediately to retain the trust of their creditors. Cash Ratio: This ratio is known as Super Quick Ratio or Cash Ratio or Cash Reservoir Ratio. This ratio considers only the absolute liquidity available with the firm. The cash and bank balance are no doubt, the most liquid assets and the marketable securities are also considered as highly liquid asset. In order to have an idea of super liquidity, the cash + bank balance + marketable securities are compared with the current liabilities. The Cash Ratio is calculated as follows: Cash Ratio Cash and bank Marketable Securities Total Current Liabilities
IOCL Cash Ratio Analysis: Cash Cash and Ratio Bank (#) Balances (J) = (E) (E) / (B) Year 200809 200910 201011 201112 201213 798.02 1315.11 1294.42 307.01 503.09 0.01 0.01 0.01 0.00 0.00
Cash Ratio
0.012 0.01 0.008 0.006 0.004 0.002 0 2008-09 2009-10 2010-11 0 2011-12 0 2012-13 0.01 0.01 0.01
Cash Ratio
Interpretation: Generally, a cash ratio of .5:1 is considered satisfactory for a firm, but IOCL has never been able to achieve this critical value. Moreover, the difference between the critical value and the cash ratio values for IOCL is very large indicating the illiquidity of the firm. So, Cash ratio also depicts the same result that IOCL is not sound in meeting its short term obligations.
Defensive Interval Ratio: The ratios discussed till now throw light on the ability of the firm to pay its current liabilities. Apart from paying the current liabilities the liquidity position of a firm should also be examined from in relation to its ability to meet projected daily expenditure from operations. The defensiveinterval ratio provides such a measure of liquidity. It is a ratio between the quick/liquid assets and the projected daily cash requirements. Defensive Interval Ratio Liquid Assets Projected Daily Cash Requirement
The projected cash operating expenditure is based on past expenditures and future plans. It is equivalent to the cost of goods sold excluding depreciation, plus selling and administrative expenses and other ordinary cash expenses. Liquid assets include current assets excluding inventory and prepaid expenses. The defensive interval ratio measures the time span a firm can operate on present liquid assets. IOCL Defensive Interval Ratio Analysis:
Year 200809 200910 201011 201112 201213
Liquid Assets (a) = (H) 51617.7 2 44092.2 1 51797.7 65172.3 6 68984.2 1
Net Sales (b) 262654.4 2 249271.3 5 302954.3 7 396793.0 7 446120.4
Gros s Profi t (c) 1131 9 1887 2 1633 6 2160 0 1725 7
Cost of Good Sold (d) = (b) - (c) 251335. 42 230399. 35 286618. 37 375193. 07 428862. 51
Deprici ation (e) 2881.71 3227.14 4567.01 4542.4 5219.8
Selling and Administ Other rative Cash Expenses Expense (f) s (g) 10709.66 11386.06 13378.79 6321.11 5396.76 267.76 253.86 555.25 2055.4 2337.41
Projected daily cash requiremet (h) = (d) (e) +(f) + (g) 710.77 654.28 810.92 1038.43 1181.85
DIR ($) (i) = (a) / (h) 72.62 67.39 63.88 62.76 58.37
defensive interval ratio

80 70 60 50 40 30 20 10 0 2008-09 2009-10 2010-11 2011-12 2012-13 defensive interval ratio 72.62 67.39 63.88 62.76 58.37
Interpretation: The figures of the Defensive Interval Ratio of IOCL measures its capacity to meet immediate cash requirements without resorting to sales or other sources i.e., the time lag for which IOCL can operate without resorting to the sales receipts. The Defensive Interval Ratio of 72.62 in the year 2008-09 indicates that IOCL has the liquid assets which can meet the operating cash requirements of business for 72 days without resorting to future revenues. Similarly, the other
DIRs tells us the number of days for which IOCL can operate on its liquid assets to meet the cash requirements.
Conclusion: To conclude the discussion of liquidity ratios, the short-term solvency of the firm Indian Oil Corporation Limited (IOCL) does not seems to be good according to the various ratios calculated. IOCL was never able to achieve the target value of a particular ratio over a time span of last 4 to 5 years. So, this is a matter of serious concern to the management and creditors of IOCL. Activity Ratios:
Funds are invested in various assets in business to make sales and earn profits. The efficiency with which assets are managed directly affects the volume of the sales. The better the management of assets, the larger is the amount of sales and the profits. Activity ratios measure the efficiency or effectiveness with which a firm manages its resources or assets. These ratios are also called Turnover Ratios because they indicate the speed with which assets are converted or turned over into sales. The current ratio or acid test ratio gives misleading results if current assets include high amount of debtors due to slow credit collections. In the same manner, current ratio may be further misleading if the assets include high amount of slow moving inventories as both these ratios ignore the movement of current assets, it is important to calculate the following turnover or efficiency ratios to comment upon the liquidity or the efficiency with which the liquid resources are being used by a firm.
Inventory Turnover Ratio: Every firm has to maintain a certain level of inventory of finished goods so as to be able to meet the requirements of the business. But the level of the inventory should not be too high or too low.
Inventory turnover ratio is also known as stock velocity. It indicates whether inventory has been efficiently used or not. It indicates the no. of times the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory.
Debtors Turnover Ratio: Debtors turnover ratio indicates the velocity of debt collection of the firm. In simple words, it indicates the no. of times the average debtors (receivables) are turned over during a year.
Creditors Turnover Ratio: This ratio shows the velocity of debt payment by the firm.
IOCL Turnover Ratios Analysis: Cost of Goods Sold (C) = (A) - (B) 251335.42 230399.35 286618.37 375193.07 Average Inventory (F) = [(D) + (E)] / 2 15711.96 17396.805 22405.395 40860.435 58072.01 Inventory Turnover Ratio (*) (G) = (C) / (F) 16.00 13.24 12.79 9.18 7.39 Days for Inventory Holding (**) (H) 22.82 27.56 28.53 39.75 49.42
Year 200809 200910 201011 201112 201213
Net Sales (A) 262654.42 249271.35 302954.37 396793.07 446120.4
Gross Profit (B) 11319 18872 16336 21600
Opening Stock (D) 16549.24 14874.68 19918.93 24891.86 56829.01
Closing Stock (E) 14874.68 19918.93 24891.86 56829.01 59315.01
17257.89 428862.51
Year 200809 200910 201011 201112 201213
Net Purchase (1) 131482.60 123704.72 150484.12 154093.5 188182.2
Opening Creditors (2) 20973.91 20519.51 20719.03 29661.76 27520.75
Closing Creditors (3) 20519.51 20719.03 29661.76 27520.75 29729.91
Average Creditors (4) = [(2) +(3)] /2 20746.71 20619.27 25190.395 28591.255 28625.33
Creditors Tunover Ratio ($) (5) =(1) / (4) 6.34 6.00 5.97 5.39 6.57
Average Payment Period (&) (6) = 365 / (5) 57.59 60.84 61.10 67.72 55.52
Year 2008-09 2009-10 2010-11 2011-12 2012-13
Net Sales (a) 262654.42 249271.35 302954.37 396793.07 446120.41
Opening Debtors (b) 6819.23 5937.86 5799.28 8869.65 9725.47
Closing Debtors (c) 5937.86 5799.28 8869.65 9725.47 11254.78
Average Debtors (d) = [(b) +(c)] / 2 6378.55 5868.57 7334.47 9297.56 10490.13
Debtors Tunover Ratio (@) (e) =(a) / (d) 41.18 42.48 41.31 42.68 42.53
Average Collection Period (#) (f) = 365 / (e) 8.86 8.59 8.84 8.55 8.58
45 40 35 30 25 20 15 10 5 0
41.18
42.48
41.31
42.68
42.53
Inventory Turnover ratio Debtors Turnover ratio 16 13.24 6.34 6 12.79 9.18 5.97 5.39 7.39 6.57 Creditors Turnover ratio
2008-09
2009-10
2010-11
2011-12
2012-13
Interpretation: ITR indicates that IOCL has been facing a problem in converting its inventory into sales from the past 4-5 years as the ITR has shown a continuous decrease over this period. It directly affects the liquidity of the firm. When a firm is not able to convert its inventory into sales, its liquidity is surely going to be affected. So, as indicated by the liquidity ratios, the inventory turnover ratio
also concludes that the liquidity of IOCL is not very sound and its top management needs to take corrective actions to improve it. DTR ratio shows a good thing for IOCL i.e. its velocity of receivables collection has increased over a span of time. It shows how efficiently and effectively the top management of IOCL has managed its debtors. CTR ratio shows that IOCL is not very fast in paying to its creditors. This is an another good sign of IOCLs Top Management efficiency. Some other trends depicting the activity ratios of IOCL are as follows:
Asset turnover ratio: Asset turnover ratio is the ratio of a company's sales to its assets. It is an efficiency ratio which tells how successfully the company is using its assets to generate revenue. Capital turnover ratio: Measures the sales made per rupee of the capital employed in the firm. Higher is the ratio, higher is the profit. Average Tangible Assets (D) = [(B) + (C)] / 2 95887.385 109452.545 137474.15 166545.825 188188.865 Assets Turnover Ratio (**) (E) = (A) / (D) 2.74 2.28 2.20 2.38 2.37
Year 200809 200910 201011 201112 201213
Net Sales (A) 262654.4 249271.4 302954.4 396793.1 446120.4
Opening Tangible Assets (*) (B) 94660.08 97114.69 121790.4 153157.9 188255.71
Closing Tangible Assets (*) (C) 97114.69 121790.4 153157.9 179933.75 188122.02
Year 200809 200910 201011 201112 201213
Net Sales (a) 262654.4 249271.4 302954.4 396793.1 446120.4
Opening stock of Capital Employed (@) (b) 61542.2 89661.9 80486.5 96750.5 74942.5
Closing Stock of Capital Employed (@) (c) 89661.9 80486.5 96750.5 74942.5 82223.1
Average Capital employed (d) = [(b) + (c)] /2 75602.05 85074.20 88618.50 85846.50 78582.80
Capital Turnover Ratio (#) (e) = (a) / (d) 3.47 2.93 3.42 4.62 5.68
5.68
4.62
3.47 2.74 2.93 2.28 2.2
3.42 Assets Turnover ratio 2.38 2.37 Capital Turnover ratio
0 2008-09 2009-10 2010-11 2011-12 2012-13
Interpretation : Asset turnover ratio when compared to last five years , gives the highest turnover in the year 2008-09 which is showing a positive impact as it is an efficiency ratio which tells how successfully the company is using its assets to generate revenue, then it is going on decreasing for next two years ant then in the year 2012-13 it is reaching the point 2.37.
While doing the interpretation for Capital turnover ratio , it is showing a positive signal as it has increased from 3.47 times in 2008-09 to 5.68 times in 2012-13 thus this means it is making more sales per rupee of the capital employed in the firm which is a sign of better profitability.
Leverage Ratios: The long term lenders/creditors would judge the soundness of a firm on the basis of the longterm financial strength measured in terms of its ability to pay the interest regularly as well as repay the installment of the principal on due dates or in one lump sum at the time of maturity. The long-term solvency of a firm can be examined by using leverage or capital structure ratios. The leverage ratios may be defined as financial ratios which throw light on the long term solvency of a firm as reflected in its ability to assure the long-term lenders with regard to periodic payment of interest during the period of the loan and
Repayment of principal on maturity or in predetermined installments at due dates.
Debt-Equity Ratio: The DE Ratio is the basic and the most common measure of studying the indebtedness of the firm. The DE Ratio is based on the assumption that the extent to which the firm should employ the debt should be viewed in terms of the size of the cushion provided by the shareholders funds. The DE Ratio is calculated by comparing the total debts with the total shareholders funds as follows: Debt Equity Ratio Total Debt Shareholder s Equity
Total Debt include the long term loans and the current liabilities, and the term shareholders equity include the equity share capital, the preference share capital and all accumulated reserves and surplus. Total Debt Ratio: The TD Ratio compares the total debts (long term as well as short term) with the total assets. It is computed as follows: Total Debt Ratio Proprietory Ratio: It establishes the relationship between the shareholders funds to total assets of the firm. Total Debts Total Assets
Year 200809 2009-
Long Term Debt (A) 44,972. 06 44,566.
Current Liabiliti es (B) 32754.58 34480.17
Total Debt (C) = (A) + (B) 77,726.6 4 79,046.4
ESC (Rs.10 Each) (D) 1,213. 97 2,427.
Reserve s& Surplus (E) 42,784.2 1 48,124.9
Net Worth (F) = (D) + (E) 43,998. 18 50,552.
Propriet Total ory Total DebtRati Ratio Assets o (** ) (@) (G) = (H) = (C) (I) = (F) (C) + (F) / (G) / (G) 121,724. 82 0.64 0.36 129,599. 0.61 0.39
10 201011 201112 201213
25 52,733. 87 75,447. 10 80,894. 01
52549.94 119825.9 3 124133.6 7
2 105,283. 81 195,273. 03 205,027. 68
95 2,427. 95 2,427. 95 2,427. 95
8 52,904.3 7 55,448.7 5 58,696.3 6
93 55,332. 32 57,876. 70 61,124. 31
35 160,616. 13 253,149. 73 266,151. 99
0.66 0.77 0.77
0.34 0.23 0.23
1.4 1.2 1.02 1 0.8 0.64 0.6 0.4 0.2 0 2008-09 2009-10 2010-11 0.36 0.39 0.34 0.61 0.66 0.95 0.88
1.3
1.32
0.77
0.77 Debt-equity ratio Total Debt ratio Proprietary ratio
0.23
0.23
2011-12
2012-13
Interpretation: Debt equity ratio When compared to its previous year, IOCL is now more subjected to financial risk and depends more on financial risk. Further now IOCL has more creditors and obligors money in business than its shareholders. A ratio of 1:1 is usually considered to be satisfactory. Total Debt ratio -A debt ratio of greater than 1 indicates that a company has more debt than assets, meanwhile, a debt ratio of less than 1 indicates that a company has more assets than debt. Proprietary ratio-Thus, shareholders have contributed 23% of all funds used in the business, with creditors contributing the remaining 77% of funds in 2013. Higher the ratio, better is the long term solvency position of the company.
Interest Coverage Ratio:

This ratio is also called the times interest earned ratio and it measures the ability of the firm to pay the fixed interest liability. The ratio may be calculated as follows: IC Ratio EBIT Interest
It measures as to how many times the interest liability of the firm is covered with the operating profits of the firm.
Financial Leverage Ratio: The term financial leverage refers to the use of fixed charge securities such as debentures and the variable charge securities such as equity shares in the capital structure to finance the total assets of the firm. So, the financial leverage refers to the presence of fixed charge (in the form of interest) in the income statement of the firm. The fixed charge is fixed in amount and do not vary with the change in the EBIT, whereas the return available to the equity shareholders, which is a residual balance, is affected by the change in EBIT. The Financial Leverage Ratio measures the relationship between EBIT and EBT and is calculated as follows: FL Ratio EBIT EBT Financial Leverage Ratio ($) (E) = (A) / (D) 1.91 1.11 1.29 4.54 2.13
Year 200809 200910 201011 201112 201213
PBIT (A) 8,280.73 15,632.55 11,765.69 17,058.00 12,056.59
Interest (B) 3,952.14 1,526.46 2,669.83 5,596.11 6,408.79
Interest Coverage Ratio (#) (C) = (A) / (B) 2.10 10.24 4.41 3.05 1.88
PBT (D) 4,328.59 14,106.09 9,095.86 3,754.31 5,647.80
12 10.24 10
8 Interest coverage ratio 4.41 4 2.1 1.91 1.11 1.29 4.54 3.05 1.88 2.13 Financial coverage ratio
0 2008-09 2009-10 2010-11 2011-12 2012-13
Interpretation: ICR- It can be seen that ICR of IOCL in 2009 was 2.10 which increased to 10.24(Highest) in 2010.This then kept decreasing thereafter. Since ICR was lowest in 2013.Hence Compared to previous years, IOCL was more burdened with debt expense in this Financial Year. Higher the ratio, more safe are the long term creditors .
FCR- It can be seen that ICR of IOCL in 2009 was 1.91.It decreased to 1.11 in 2010, increased to 1.29 in 2011 again increased to 4.54(Highest) in 2012 and then decreased to 2.13 in 2013. Financial Leverage Ratio tells about the extent of change in PBT as a result of change in PBIT. Profitability Ratios: The profitability ratios measure the profitability of the operational efficiency of the firm. There are two groups of persons who may be specifically interested in the analysis of the profitability of the firm. These are: The management which is interested in the overall profitability and the operational efficiency of the firm and The equity shareholders who are interested in the ultimate returns available to them. Both of these parties and any other party such as creditors can measure the profitability of the firm in terms of the P ratios. Different P Ratios have been suggested to assess the profitability of the firm from different angles. The performance of the firm can be evaluated in terms of its earnings with reference to a given level of assets or sales or owner interest et.c. Broadly, P Ratios are calculated by relating the returns with the Sales of the firm Assets of the firm The owners contribution
Profitability Ratios based on the Sales of the Firm: These ratios are based on the premise that a firm should earn sufficient profit on each rupee of sales. If adequate profits are not earned on sales, there will be difficulty in meeting the operating expenses and no returns will be available to the owners. These ratios consist of Gross Profit ratio Operating profit ratio Net Profit ratio
Gross Profit Ratio: The GP Ratio is also called the average mark up ratio. It is calculated by comparing the gross profit of the firm with the net sales as follows: GP Ratio Net Profit Ratio: It measures the relationship between net profits and sales of a firm. Net Profit ratio Operating Profit Ratio: The operating profit refers to the profit generated by the operation of the firm and hence is calculated by considering any financial charge etc. OP Ratio Gross Profit Ratio (*) (C) = (A) / (B) 0.04 0.08 0.05 0.05 0.04 EBIT Net Sales Operating Profit Ratio (**) (E) = (D) / (B) 0.03 0.06 0.04 0.04 0.03 PAT Net Sales Gross Profit Net Sales
Year 200809 200910 201011 201112 201213
Gross Profit (A)
Net Sales (B)
PBIT (D) 8,280.73 15,632.55 11,765.69 17,058.00 12,056.59
PAT (F) 2,949.55 10,220.55 7,445.48 3,954.62 5,005.17
Net Profit Ratio(@) (G) = (F) / (B) 0.01 0.04 0.02 0.01 0.01
11,319.00 262,654.42 18,872.00 249,271.35 16,336.00 302,954.37 21,600.00 396,793.07 17,257.89 446,120.40
9.00% 8.00% 8.00% 7.00% 6.00% 6.00% 5.00% 5.00% 4.00% 4.00% 3.00% 3.00% 2.00% 2.00% 1.00% 1.00% 0.00% 2008-09 2009-10 2010-11 2011-12 2012-13 1.00% 1.00% 3.00% 4.00% 4.00% 4.00% 4.00% 5.00% Gross profit Operating profit Net profit
Interpretation Gross Profit Ratio: The FY 20121-13 has little bit lower percentage of Gross profit ratio as compared to previous years which is not a good indicator as this ratio indicates the margin left after meeting manufacturing costs. So, it is to be higher. GPR in the FY 2009-10 was approx. 8% which was a positive signal from companys point of view. Net Profit Ratio:As this ratio shows the earning left for shareholders as percentage of net sales and also measures the efficiency of the management in generating additional revenues over and above the total cost of operations. Thus Higher the ratio, better is the profitability. As NPR of IOCL for the last five years lies between 1% to 4% and was highest in the FY 2009-10 but it has keep on decreasing year after year which is not showing the sound profitability. Operating Profit Ratio: Operating Profit (OP) Ratio shows the pure profit earned on every 1 rupee of sales made. Thus a higher value of operating margin ratio is favorable which indicates that more proportion of revenue is converted to operating income. But in IOCL Operating Profit Ratio is declining from 6% to 3% from the year 2010 to 2013 which is not favourable for the company.
Return on Assets Ratio: The ROA measures the profitability of the firm in terms of assets employed in the firm. The ROA is calculated by establishing the relationship between the profits and the assets employed to earn that profit. ROA PAT Total Assets
Return on Capital Employed Ratio: The profitability of the firm can also be analyzed from the point of view of the total funds employed in the firm. The term funds employed or the capital employed refers to the total long term sources of funds. The capital employed comprises of shareholders funds plus long term debts. RCE EBIT Average Capital Employed
Return on Equity Ratio: The ROE examines profitability from the perspective of the equity investors by relating profits available for the equity shareholders with the book value of the equity investment. ROE (PAT Preference Dividend) Equity Shareholder s Funds
Year 200809 200910 201011 201112 201213
PAT (a) 2,949.55
Opening Tangible Assets (b) 94660.08
Closing Tangible Assets (c) 97114.69 121790.4 153157.9 58932.29 59823.45 Average Capital Employed (i) = [(g) + (h)] / 2 75602.05 85074.2 88618.5 85846.5 78582.8
Average Tangible Assets (d) = [(b) + (c)] / 2 95887.385 109452.545 137474.15 106045.095 59377.87
Return on Assets (#) (e) = (a) / (d) 0.03 0.09 0.05 0.04 0.08
PBIT (f) 11,631.64 8,280.73 15,632.55 17,058.00 12,056.59
Opening stock of Capital Employed (g) 61542.2 89661.9 80486.5 96750.5 74942.5
10,220.55 97114.69 7,445.48 3,954.62 5,005.17 121790.4 153157.9 58932.29
Closing Stock of Capital Employed (h) Year 2008-09 2009-10 2010-11 2011-12 2012-13 89661.9 80486.5 96750.5 74942.5 82223.1
Return on Capital Employed ($) (j) = (f) / (i) 0.15 0.10 0.18 0.20 0.15
Net worth (k) 43,998.18 50,552.93 55,332.32 57,876.70 61,124.31
Return on Equity (&) (l) = (a) / (k) 0.07 0.20 0.13 0.07 0.08
30.00% 25.00% 25.00% 20.00% 20.00% 15.00% 15.00% 10.00% 5.00% 0.00% 2008-09 2009-10 2010-11 2011-12 2012-13 10.00% 9.00% 7.00% 5.00% 3.00% 4.00% 10.00% 8.00% 8.00% 13.00% 18.00% Return on assets Return on capital employed Return on equity 20.00%
Interpretation Return on Assets (ROA) shows how much profit is earned per rupee of assets used. Higher the ROA, higher is the profitability. Hence, ROA in 2013 is much higher than its previous year. Return on capital employed - ROCE measurement is a comprehensive profitability indicator because it gauges management's ability to generate earnings from a company's total pool of capital. Hence IOCL was more profitable in 2013. Return on equity - Investors received the best return on their investment from IOCL 2010 but compared to previous years, IOCL has been less profitable and inefficient in utilizing its Equity base properly.
Other Charts depicting the profitability of IOCL are: No. of Equity Shares Issued (2) 119.23 242.79 242.79 242.79 242.79
Year 200809 200910 201011 201112 201213
PAT (1) 2,949.55 10,220.55 7,445.48 3,954.62 5,005.17
EPS (3) = (1) / (2) 24.74 42.10 30.67 16.29 20.62
Div. + Div. Tax (4) 1,065.22 3,665.17 2,665.25 1,408.41 1,760.83
DPS (5) = (4) / (2) 8.93 15.10 10.98 5.80 7.25
DP Ratio (6) = (5) / (3) 0.36 0.36 0.36 0.36 0.35
45 40 35 30 25 20 15 10 5 0 2008-09 2009-10 2010-11 2011-12 2012-13 Earning per share Dividend per share
Interpretation EPS - IOCL earnings were more in FY Mar10 for each share issued but compared to previous years, IOCL earnings per share issued has decreased significantly. DPS - Hence IOCL paid more dividends to its shareholders for each share issued in FY Mar10 and compared to previous years IOCL is paying fewer dividends now.
Year 200809 200910 201011 201112 201213
Net Sales (A) 262,654.42
PAT (B) 2,949.55
Depriciation Cash Profit (C) (D) = (A) + (B) 2,881.71 3,227.14 4,567.01 4,542.40 5,219.80 5,831.26 13,447.69 12,012.49 8,497.02 10,224.97
Cash Profit Ratio (^) (E) = (D) / (A) 0.02 0.05 0.04 0.02 0.02
Total Expenses (F) 303465.83 263544.52 327694.54 390492.34 444969.7
Expense Ratio (^^) (G) = (F) / (A) 1.16 1.06 1.08 0.98 1.00
249,271.35 10,220.55 302,954.37 396,793.07 446,120.40 7,445.48 3,954.62 5,005.17
140.00% 120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00% 2008-09 2009-10 2010-11 2011-12 2012-13 36.00% 2.00% 36.00% 5.00% 36.00% 4.00% 36.00% 2.00% 35.00% 2.00% 116.00% 106.00% 108.00% 98.00% 100.00% Dividend payout ratio Cash profit ratio Expense ratio
Interpretation It can be seen that Dividend payout Ratio of IOCL was 36% in every year and 35% in 2013 Hence IOCL allocates almost same percentage of dividends to earnings in every year. If I talk about cash profit ratio of IOCL for the last 5 years, it was highest in the FY 200910, thus was having the highest profitability but from last two years it is only 2% which is not a positive sign. Expense ratio identifies the proportion of total expenditure to net sales. Lower the ratio, greater is the profitability. Thus the expense ratio of the company is not very sound. DU PONT Analysis:
DuPont analysis is an extended analysis of a company's return on equity. It concludes that a company can earn a high return on equity if: 1. It earns a high net profit margin; 2. It uses its assets effectively to generate more sales; and/or 3. It has a high financial leverage. DuPont equation provides a broader picture of the return the company is earning on its equity. It tells where a company's strength lies and where there is a room for improvement. It also shows that the profitability depends not only on the profit margin but also on how efficiently the firm has used its assets to generate sales
Year 200708 200809 200910 201011 201112 201213
PAT (A) 6,962.58 2,949.55
Net Sales (B) 224,428.14 262,654.42
Profit Margin (C) = (A) / (B) 0.03 0.01 0.04 0.02 0.01 0.01
Total Assets (D) 110017.4 121724.8 129599.4 160616.1 209859.8 223995.3
Assets Turnover (E) = (A) / (D) 2.04 2.16 1.92 1.89 1.89 1.99
Earnings Power (ROI) (F) = (C)* (E) 0.06 0.02 0.08 0.05 0.02 0.02
Net Worth (G) 41,086.25 43,998.18 50,552.93 55,332.32 57,877.00 61,124.01
Equity Return Multiplier on Equity (H) = (D) (I) = (F) * / (G) (H) 2.68 2.77 2.56 2.90 3.63 3.66 0.17 0.07 0.20 0.13 0.07 0.08
10,220.55 249,271.35 7,445.48 3,954.62 5,005.17 302,954.37 396,793.62 446,120.40
0.25 0.2 0.2
0.15
0.13 Earning power Return on equity 0.07 0.08 0.05 0.07 0.08
0.1
0.05 0.02 0 2008-09 2009-10 2010-11 2011-12 2012-13 0.02 0.02
Interpretation As Earnings power is used to analyze stocks to assess whether the underlying company is worthy of investment or not. IOCL has contineous earning power lying between 2% to 8% and in the current years it is only 2% which is need to be impoved.
Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. So, IOCL should improve its percentage of return on equity to generate more profit on shareholders investment.
Debt financing growth: Internal growth rate Sustainable growth rate
Internal growth rate - The highest level of growth achievable for a business without obtaining outside financing. A firm's maximum internal growth rate is the level at which growth from general business operations can continue to fund and grow the company. Sustainable growth rate - The maximum growth rate that a firm can sustain without having to increase financial leverage. The sustainable growth rate is a measure of how much a firm can grow without borrowing more money. After the firm has passed this rate, it must borrow funds from another source to facilitate growth. Internal Growth Rate (#) (E) = (D) / [1-(D)] 0.02 0.05 0.03
Year 200809 200910 2010-
Retu rn on assets (A) 0.03 0.09 0.05
DP Ratio (B) 0.36 0.36 0.36
Retentio n rate (C) = 1(B) 0.64 0.64 0.64
ROA * Retentio n rate (D) 0.02 0.06 0.03
Return on Equity (F) 0.07 0.2 0.13
ROE * Retentio n Rate (G) 0.04 0.13 0.08
Sustainable Growth Rate (##) (H) = (G) / [1-(G)] 0.04 0.11 0.08
11 201112 201213
0.04 0.08
0.36 0.35
0.64 0.65
0.03 0.05
0.02 0.05
0.07 0.08
0.04 0.05
0.04 0.05
0.12
0.11
0.1 0.08 0.08 Internal growth rate 0.05 0.04 0.04 0.02 0.02 0.03 0.02 0.04 0.05 0.05 Sustainable growth rate
0.06
0 2008-09 2009-10 2010-11 2011-12 2012-13
Interpretation: Internal Growth Rate: Indicates the highest level of growth achievable for a business without obtaining outside financing. IGR of Indian Oil is not very sound, it was having the good percentage in the FY 2009-10 but in the current year it is less. So, it needs to be improved. Sustainable Growth rate: Indicates the maximum growth rate that a firm can sustain without having to increase financial leverage or without borrowing more money. As given above, SGR of IOCL in the current FY is only 5% which needs to be improved.
Market test ratio: Dividend yield ratio Earning yield ratio
Dividend yield ratio is the amount that a company pays to its share holders annually for their investments. It is expressed as a percentage and indicates attractiveness of investing in a companys stocks. Dividend yield ratio provides a comparison of amount of dividend in relation to investment needed to purchase its share. Following formula is used for the calculation of dividend yield ratio: DYR Dividend Per share Market Per share
Earning yield ratio gives an estimate about an appreciation in the value of a share of a company. Lower the ratio, the better it is. EYR Earning Per share Market Per share
IOCL Market Test Ratios Analysis: Market Price as on 31st March (B) 193.68 296.75 334.25 262.7 281.6 Dividend Yield (*) (C) = (A) / (B) 0.039 0.044 0.028 0.019 0.022 Earning Yield (#) (E) = (D) / (B) 0.128 0.142 0.092 0.062 0.073
Year 200809 200910 201011 201112 201213
DPS (A) 7.64 13.00 9.50 5.00 6.20
EPS (D) 24.74 42.1 30.67 16.29 20.61
16.00% 14.20% 14.00% 12.00% 10.00% 8.00% 6.20% 6.00% 4.00% 2.00% 0.00% 2008-09 2009-10 2010-11 2011-12 2012-13 3.90% 4.40% 2.80% 1.90% 2.20% 9.20% 7.30% Dividend yield ratio Earning yield ratio 12.80%
Interpretation: Dividend yield is a way to measure how much cash flow shareholders are getting for each rupee invested in an equity position. Value investors often look at the stock of a company, the way a real estate investor looks at rental properties. They expect to put money one down one time and expect to receive payments for the rest of their lives. Hence the dividend yield tells them a percentage of their original investment that they would receive each year, if
they invested in the stocks right away. So, DYR of IOCL is not very attractive with investor point of view. If we talk about earning yield ratio , it is a way to measure returns, and it helps investors evaluate whether those returns commensurate with an investment's risk. For example, the investor of IOCL may not feel that 7.30% adequately compensates for the added risk of owning IOCL stock if lower-risk stocks carry yields of 8.5%. However, a 7.30% earnings yield could be attractive if similar companies like BPCL yield only 5%.
CHAPTER 4 LIMITATIONS
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. 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. No opportunity to visit the pipelines.
CHAPTER 5 SUGGESTIONS &

RECOMMENDATIONS
Conclusion
The acceptance rule of projects after doing the Sensitivity analysis is that the rates should be more than the opportunity cost of capital or the hurdle rate. As per IOCL, the hurdle rate or the opportunity cost of capital is 13%. As calculating the Sensitivity Analysis, we can see that the rates were always more than 13%. Therefore, the project does not bear any kind of risk as such. Therefore, overall we can say that the project is financially feasible as well as does not carry any risk of financial feasibility in the future.
Recommendations
Based on my study I would like to infer the following recommendations which might be helpful for the company. They are as follows: Limitations of IRR: A non-conventional project involving more than one reversal of signs in cash flows may have multiple rates arising out because of the mathematics of IRR computation. It may also fail to indicate the correct project to be chosen amongst various alternatives and where we can select only one. This pitfall of the IRR method is being overlooked by IOCL which can be a major drawback in certain decisive proposals. To overcome this I would suggest to adopt the Net Present Value (NPV) method also along with IRR. Adoption of MIRR : Generally, IOCL does not employ MIRR to analyze the financial viability of the capital investment proposals. MIRR gives a more clearer picture of the viability of the proposal. It covers the limitations of the IRR. While the same steps are taken, the MIRR goes a step further by examining the reinvestment of positive cash flows that the company does with the money it receives.
Benefits to the Organization 1. Cost Bifurcation: Detailing out each and every cost of the proposed project in consultation with the technical department helped the finance department to have an overview of the estimated cost without any in-depth interpretation.
2. Evaluation of Smaller projects: During my course of internship, few smaller projects were also evaluated before this project requiring some important study was handed over. The department found those evaluations beneficial and attained the confidence to allow me handle this project. The details of those projects are confidential and company specific.
Learning from the SIP

Practical Exposure: As the SIP was my first work experience, I learnt about the different departments and their functioning in an Organization. I learnt the flow of authority and responsibility pertaining to the various aspects of a Company.
Decision making process: As the project I worked upon dealt with an important investment decision, I realized that decision making is quite intricate and need careful observation of the people involved. Every investment for future benefit is crucial to an organization and I have learnt how several matters should be taken into consideration while determining its viability irrespective of the industry.
Interdepartmental activities: The coordination of different departments in a Company is essentially required for the very survival of the Company. Even though the job I handled was restricted to the scope of finance department, yet certain issues necessarily required the consultation of the technical department for clarification. As already learnt in the academic arena about interdepartmental activities, I practically experienced it during the course of my internship.
Enhanced efficacy: As the SIP also involved evaluating certain smaller projects which are outside the scope of this report and are company specific; it raised my capability of crucially examining data and arrive at some meaningful comprehensions.
References
I. REFERENCES FROM PRINT MATERIALS I M Pandey, 10th Edition, Financial Management, Vikas Publication House Prasanna Chandra, 5th Edition, Financial Management, Tata Mc Graw-Hill Education
II REFERENCES FROM ELECTRONIC SOURCES a) From online newspapers, journals, web pages Indian Oil Corporation Limited. Available from http://www.iocl.com/ Ministry of Petroleum and Natural Gas. Available from http://petroleum.nic.in/ India Brand Equity Foundation. Available from http://www.ibef.org/ BP Statistical Review of World Energy, 2012. Accessed http://www.bp.com/sectionbodycopy.do?categoryId=7500&contentId=7068481 Annual Report of IOCL
from
III. SECONDARY REFERENCING Operating manual of Barauni Kanpur Pipeline to Motihari and Baitalpur Accounts Manual (Secured) ; Pipelines Division, IOCL Guidelines for Capital Investment Proposals, IOCL

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PROJECT REPORT INDIAN OIL CORPORATION LIMITED (IOCL), PIPELINE HEAD OFFICE (PLHO), NOIDA

ARPIT VERMA/ A1802012113/ AIBS, AMITY UNIVERSITY, NOIDA

ARPIT VERMA/ A1802012113/ AIBS, AMITY UNIVERSITY, NOIDA

ARPIT VERMA/ A1802012113/ AIBS, AMITY UNIVERSITY, NOIDA

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ARPIT VERMA/ A1802012113/ AIBS, AMITY UNIVERSITY, NOIDA

ARPIT VERMA/ A1802012113/ AIBS, AMITY UNIVERSITY, NOIDA

IOCLs dominance in downstream Oil sector:

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ARPIT VERMA/ A1802012113/ AIBS, AMITY UNIVERSITY, NOIDA

ARPIT VERMA/ A1802012113/ AIBS, AMITY UNIVERSITY, NOIDA

Active Patents by Geography

Active Patents by division

ARPIT VERMA/ A1802012113/ AIBS, AMITY UNIVERSITY, NOIDA

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SWOT Analysis With Respect To Refineries Division

ARPIT VERMA/ A1802012113/ AIBS, AMITY UNIVERSITY, NOIDA

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Pipeline Transportation of Liquid Petroleum : The Indian Scenario

ARPIT VERMA/ A1802012113/ AIBS, AMITY UNIVERSITY, NOIDA

Rail High High Low Low

Pipeline Low Low Nil Nil

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Handling loss Safety Hazards Reliability

High High Low

Low Low Low

Negligible Negligible 100%

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ARPIT VERMA/ A1802012113/ AIBS, AMITY UNIVERSITY, NOIDA

EXISTING CRUDE OIL & GAS PIPELINES Crude Oil Pipelines

Name of the Pipeline

Length (KM) 1870 1312

Diameter (Inch) 28 / 24 30/18

Capacity (MMTPA) 21.6 11

SALAYA-MATHURA (WR) PARADIP HALDIABARAUNI (ER) MUNDRA-PANIPAT (NR) TOTAL

ARPIT VERMA/ A1802012113/ AIBS, AMITY UNIVERSITY, NOIDA

Name of the Pipeline NORTHERN REGION

147 77 111 434 219 155 182 274

3.7 1.2 3.5 1.5 1.5 0.7

Name of the Pipeline

SOUTHERN REGION 18. CHENNAITRICHYMADURAI 19. CHENNAI-BANGALORE

OTHERS 20. CHENNAI ATF 95 8 0.18

ARPIT VERMA/ A1802012113/ AIBS, AMITY UNIVERSITY, NOIDA

0.368 0.66 1.0 36.858

App. Cost (`/ Crore)

Hook-up of Tikrikalan Terminal with MJPL

Paradip- Raipur-Ranchi Pipeline

Integrated Crude Handling Facilities at Paradip

Addl Tanks and blending facility at Vadinar

Kolkata ATF Pipeline

Guwahati ATF Pipeline