Financial Analysis of Indian Oil Ltd.

Financial Analysis of Indian IOCL 1

FINANCIAL STATEMENT ANALYSIS OF INDIAN OIL CORPORATION LTD

SUBMITTED TO PROF.SAROJ ROUTRAY

SUBMITTED BY Manish Kumar (135) Sipra Routaray (143) Nirupama Ghosh Dastidar(153)

KIIT SCHOOL OF MANAGEMENT

Financial Analysis of Indian IOCL

ACKNOWLEDGEMENT At the outset we express our most sincere grateful acknowledgement to the holy sanctum “KIIT school of management” the temple of learning, for giving us an opportunity to pursue the management course thus help shaping our career.

We also wish to express our deep sense of gratitude to our PROJECT GUIDE Prof. S. K. Routray , for his continuous and tireless support and advice not only during the course of our project but also during the period of our stay in “KIIT school of management”.

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Financial Analysis of Indian IOCL

Contents

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 Acknowledgement  Overview of IOCL  Vision, mission and values  Objectives  Financial analysis -

Liquidity ratios Solvency ratios Profitability ratios Market based ratios Activity ratios

 Bibliography

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Financial Analysis of Indian IOCL

EXECUTIVE SUMMARY The basic objective of our project was to undertake a detailed financial statements analysis of Indian Oil Corporation Ltd. from the financial year 20062007 and 2007-2008 using the annual report of the company for the period besides the data from the database of Centre for Monitoring Indian Economy. To get a better idea about the trend in the company we did the analysis for 3 years i.e. 20052006 to 2007-2008. This includes studying the financial position of the company to analysis the performance besides determining the EBIT & EPS Analysis and also the Economic Value Analysis of the Indian Oil Corporation Ltd . In this project we have discussed regarding various Liquidity Ratios, Solvency Ratios, Profitability Ratios, Activity ratios, market capitalization ratios of the company over a period of three financial years ranging from 2005 to 2008.

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Financial Analysis of Indian IOCL

OVERVIEW OF INDIAN OIL CORPORATION Indian Oil Corporation is an Indian public-sector petroleum company. It is India’s largest commercial enterprise, ranking 116th on the Fortune Global 500 listing (2008). It began operation in 1959 as Indian Oil Company Ltd. The Indian Oil Corporation was formed in 1964, with the merger of Indian Refineries Ltd. Indian Oil and its subsidiaries account for a 47% share in the petroleum products market, 40% share in refining capacity and 67% downstream sector pipelines capacity in India. The Indian Oil Group of Companies owns and operates 10 of India's 19 refineries with a combined refining capacity of 60.2 million metric tons per year. Indian Oil operates the largest and the widest network of fuel stations in the country, numbering about 17606 (15557 regular ROs & 2049 Kissan Sewa Kendra). It has also started Auto LPG Dispensing Stations (ALDS). It reaches Indane cooking gas to over 47.5 million households through a network of 4,990 Indian distributors. In addition, Indian Oil's Research and Development Center (R&D) at Faridabad supports, develops and provides the necessary technology solutions to the operating divisions of the corporation and its customers within the country and abroad. Subsequently, Indian Oil Technologies Limited - a wholly owned subsidiary, was set up in 2003, with a vision to market the technologies developed at IndianOil's Research and Development Center. It has been modeled on the R&D marketing arms of Royal Dutch Shell and British Petroleum.

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Financial Analysis of Indian IOCL

Vision, Mission & Values

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Vision A major diversified, trans-national, integrated energy company, with national leadership and a strong environment conscience, playing a national role in oil security & public distribution.

Mission •

To achieve international standards of excellence in all aspects of energy and

diversified business with focus on customer delight through value of products and services, and cost reduction. •

To maximise creation of wealth, value and satisfaction for the stakeholders.

•

To attain leadership in developing, adopting and assimilating state-of-the-art

technology for competitive advantage. •

To provide technology and services through sustained Research and

Development. •

To foster a culture of participation and innovation for employee growth and

contribution. •

To cultivate high standards of business ethics and Total Quality

Management for a strong corporate identity and brand equity. •

To help enrich the quality of life of the community and preserve ecological

balance and heritage through a strong environment conscience.

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Financial Analysis of Indian IOCL Values - Values we nurture

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Care - stands for  Concern  Empathy  Understanding  Cooperation  Empowerment Innovation - stands for  Creativity  Ability to learn  Flexibility  Change Passion - stands for  Commitment  Dedication  Pride  Inspiration  Ownership  Zeal & Zest Trust - stands for  Delivered Promises  Reliability  Dependability KIIT SCHOOL OF MANAGEMENT

Financial Analysis of Indian IOCL  Integrity

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 Truthfulness  Transparency

Objectives of IOCL • To serve the national interests in oil and related sectors in accordance and consistent with Government policies. • To ensure maintenance of continuous and smooth supplies of petroleum products by way of crude oil refining, transportation and marketing activities and to provide appropriate assistance to consumers to conserve and use petroleum products efficiently. • To enhance the country's self-sufficiency in crude oil refining and build expertise in laying of crude oil and petroleum product pipelines. • To further enhance marketing infrastructure and reseller network for providing assured service to customers throughout the country. • To create a strong research& development base in refinery processes, product formulations, pipeline transportation and alternative fuels with a view to minimizing/eliminating imports and to have next generation products. • To optimise utilisation of refining capacity and maximize distillate yield and gross refining margin. • To maximise utilisation of the existing facilities for improving efficiency and increasing productivity.

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Financial Analysis of Indian IOCL

• To minimise fuel consumption and hydrocarbon loss in refineries 9 and stock loss in marketing operations to effect energy conservation. • To earn a reasonable rate of return on investment. • To avail of all viable opportunities, both national and global, arising out of the Government of India’s policy of liberalization and reforms. • To achieve higher growth through mergers, acquisitions, integration and diversification by harnessing new business opportunities in oil exploration& production, petrochemicals, natural gas and downstream opportunities overseas. • To inculcate strong ‘core values’ among the employees and continuously update skill sets for full exploitation of the new business opportunities.

Financial Objectives • To ensure adequate return on the capital employed and maintain a reasonable annual dividend on equity capital. To ensure maximum economy in expenditure. • To manage and operate all facilities in an efficient manner so as to generate adequate internal resources to meet revenue cost and requirements for project investment, without budgetary support. • To develop long-term corporate plans to provide for adequate growth of the Corporation’s business.

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Financial Analysis of Indian IOCL

• To reduce the cost of production of petroleum products by means of systematic cost control measures and thereby sustain market leadership through cost competitiveness. • To complete all planned projects within the scheduled time and approved cost.

Shareholding in Indian Oil

Shareholding FIIs Public 1% 3%

Others 16%

Promoters 80%

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Financial Analysis of Indian IOCL

Share Holding

%age

Promoters

80.35

Public

2.73

FIIs

1.37

Others

15.55

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Expanding Horizons Indian Oil is currently metamorphosing from a pure sectoral company with dominance in downstream in India to a vertically integrated, transnational energy behemoth. The Corporation is already on the way to becoming a major player in petrochemicals by integrating its core refining business with petrochemical activities, besides making large investments in E&P and import/marketing ventures for oil&gas in India and abroad.

Besides two refining subsidiaries, Chennai Petroleum Corporation Ltd. and Bongaigaon Refinery& Petrochemicals Ltd., subsidiaries are operational in Sri Lanka, Mauritius, and UAE.

With a vision to evolve into a major technology provider through excellence in management of knowledge and innovation, Indian Oil has launched Indian Oil Technology Ltd. to market the intellectual properties developed by Indian Oil's R&D Centre

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Financial Analysis of Indian IOCL Market Share of various Companies in this sector in December 2008 (in ’000 tonnes) %age

Dec-08

IOCL

30.98

4167

BPCL

11.76

1582

HPCL

9.76

1313

RIL

21.62

2908

ESSAR

8.00

1076

OTHERS

17.88

2405

Total

13451

Market Share OTHERS 18%

IOCL 31%

ESSAR 8%

RIL 21%

BPCL 12% HPCL 10%

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Financial Analysis of Indian IOCL

Awards and Accolades

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 Business Super brand 2008  3rd most valuable company in India  BML Munjal Award 2009 for Excellence in Learning & Development  World Petroleum Congress Excellence Award 2008  2nd amongst the India’s Top 50 Most Valuable Brands  ‘Most Admired Retailer-Rural’ in 2008

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Financial Analysis of Indian IOCL

FINANCIAL ANALYSIS This is defined as the relationship, or proportion that one amount bears to another. A ratio may be expressed in percentage in which the base, is taken as equal to 100 and the quotient is expressed as per hundred of the base. Financial ratios express relationship between two figures or two groups of figures which are related to each other.

Liquidity Ratios These are the indicators of the ability of the company to convert its assets into cash or to obtain cash to meet short term obligations.

 Working Capital Working capital is a widely used measure of liquidity. This is given by the following:Working Capital = Current Assets – Current Liabilities It is important as a measure of liquid assets that provide safety cushion to creditors. It is also important to measure the liquid reserve available to meet contingencies and uncertainties in a company’s cash inflows. Working capital is a double edged sword. Companies need working capital to effectively operate yet working capital is costly as it must be financed and can entail other operating costs such as credit losses and storage and logistics costs.

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Financial Analysis of Indian IOCL 15

Trend Analysis : 2005-2006

2006-2007

2007-2008

CA

46962.96

48699.65

67270.45

CL

33598.62

36729.43

44387.72

WORKING CAPITAL

13364.34

11970.22

22882.73

As can be observed, working capital has decreased in 2006-07 but in 2007-08 working capital has increased and it is due to the increase in current assets . Current liabilities have also shown an increase. However that has been offset by the increase in the current assets.  Current Ratio

It is calculated as Current Ratio = Current Assets / Current Liabilities Standard Norm: 2:1 Relevance: • Current Liability coverage: Higher the current ratio, greater is the assurance we have that current liabilities will be paid. • Buffer against losses: Current Ratio shows the margin of safety available to cover shrinkage in non cash current asset values when ultimately disposing off or liquidating them.

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Financial Analysis of Indian IOCL • Reserve of liquid funds: It is the measure of margin of safety against uncertainties and random shocks to the company’s cash flows. Limitations: It is static measure of resources available at a point in time to meet the current obligations. The current reservoir of cash does not have a logical or causal relation to its future cash flows. These cash flows depend on factor excluded from the ratio i.e sales, expenditure, cash, profits. 2005-2006

2006-2007

2007-2008

CA

46962.96

48699.65

67270.45

CL

33598.62

36729.43

44387.72

CURRENT

1.3978

1.3259

1.5155

RATIO

Liquid Ratio It is calculated as follows Liquid Ratio = Liquid assets / Liquid liabilities Standard Norm: 1:1 A more stringent test of the liquidity uses the Liquidity ratio, also known as the Quick or the Acid Test Ratio which includes the assets most quickly convertible to cash. This is a better test of liquidity as it handles issues of window dressing.

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Financial Analysis of Indian IOCL 2005-2006

2006-2007

2007-2008

Liquid Asset

18323.23

19709.93

30049.38

Liquid Liability

33598.62

36729.43

44387.72

LIQUID RATIO

0.545

0.537

0.677

 Absolute Liquid Ratio: It is calculated as

Absolute Liquid Ratio = Absolute Liquid assets / Absolute Liquid Liabilities 2005-2006 Absolute

2006-2007

2007-2008

Liquid 1052.85

1076.73

1060.22

Liquid 33598.62

36729.43

44387.72

0.029

0.024

Asset Absolute Liablity ABSOLUTE

0.031

LIQUID RATIO

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Financial Analysis of Indian IOCL Trend Analysis:

18 2005-2006

2006-2007

2007-2008

Current ratio

1.3978

1.3259

1.5155

Liquid ratio

0.545

0.537

0.677

Absolute liquid 0.031

0.029

0.024

ratio

As can be observed, the liquidity ratios have been increasing over the years. This can be mainly attributed to the increase in the current assets over the last 3 years. The current assets have seen a jump by 43% in the last 3 years. Even though the current liabilities have gone up by 32%, this increase has been adjusted by the huge increase in the current assets to give increasing liquidity over the years.

2005-2006

2006-2007

2007-2008

46962.96

48699.65

67270.45

33598.62

36729.43

44387.72

CURRENT ASSETS CURRENT LIABILITIES

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Financial Analysis of Indian IOCL 19

Liquidity Ratios 1.6000 1.4000 1.2000 1.0000

CURRENT RATIO

0.8000

LIQUID RATIO

0.6000

ABSOLUTE LIQUID RATIO

0.4000 0.2000

0.0000 2005-2006

2006-2007

2007-2008

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Financial Analysis of Indian IOCL

Solvency Ratios

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 Debt Equity Ratio:

It is a measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets. DER = LTL / Shareholder's Equity A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy which would leave shareholders with nothing. The debt/equity ratio also depends on the industry in which the company operates.

2005-2006

2006-2007

2007-2008

DEBT

30063

29473.22

38818.52

SHAREHOLDERS

30640.94

36544.27

43619.52

0.981

0.807

0.890

FUND DEBT-Equity Ratio

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Financial Analysis of Indian IOCL 21

 Debt Ratio: It is a ratio that indicates what proportion of debt a company has relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load. Debt Ratio = Total Debt / Total Assets 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. Used in conjunction with other measures of financial health, the debt ratio can help investors determine a company's level of risk.

2005-2006

2006-2007

2007-2008

DEBT

30063

29473.22

38818.52

TOTAL ASSETS

101556.51

110504.36

135139.31

DEBT RATIO

0.296

0.267

0.287

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Financial Analysis of Indian IOCL

 Equity Ratio:

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Total assets divided by shareholder equity. Asset/equity ratio is often used as a measure of leverage

Equity Ratio = Net worth / Total Assets

2005-2006

2006-2007

2007-2008

NET WORTH

30640.94

36544.27

43619.52

TOTAL ASSETS

101556.51

110504.36

135139.31

EQUITY RATIO

0.302

0.331

0.323

 Interest Coverage Ratios: The interest coverage ratio is a measurement of the number of times a company could make its interest payments with its earnings before interest and taxes; the lower the ratio, the higher the company’s debt burden. ICR = EBIT / Total Interest Expense 2005-2006

2006-2007

2007-2008

EBIT

8545.2

13353.82

14291.66

INTEREST

1252.77

1743.01

1803.9

7.661

7.923

INT. COVERAGE 6.821 RATIO

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Financial Analysis of Indian IOCL 23

 Debt Capital Employed Ratio: It is calculated as Debt capital Employed Ratio = Debt / Capital Employed

2005-2006

2006-2007

2007-2008

DEBT

30063

29473.22

38818.52

CAPITAL

60703.94

66017.49

82438.04

0.446

0.471

EMPLOYED Debt-Total

Capital 0.495

Ratio

Trend Analysis :

2005-2006 Debt-Total Ratio

Asset 0.296

2006-2007

2007-2008

0.267

0.287

Debt Equity Ratio

0.981

0.807

0.890

Equity Ratio

0.302

0.331

0.323

Coverage 6.821

7.661

7.923

0.446

0.471

Interest Ratio

Debt Ratio

0.495

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Financial Analysis of Indian IOCL As can we observed the debt ratio has first decreased and then increased. This is responsible for the trend of the Debt Equity Ratio. The equity ratio has

24

increased over the years implies that the net worth of the company as part of total assets has increased. The interest coverage ratio has increased 16% in the selected period. This increase in the ICR can be attributed to the 67% increase in EBIT which is more than the increase in interest rate (44% increase).

Solvency ratios 1.000 0.900

0.800 0.700 0.600

DEBT EQUITY RATIO

0.500 DEBT-CAPITAL EMPLOYED RATIO DEBT TOTAL ASSET RATIO

0.400 0.300 0.200 0.100

0.000 2005-2006

2006-2007

2007-2008

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Financial Analysis of Indian IOCL

Profitability Ratios

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The profitability ratios give an indication of the ability of the company to generate profits.  Profit Margin Ratios:

The profit margin ratios state how much profit the company makes for every dollar of sales. The net profit margin ratio is the most commonly used profit margin ratio. A low profit margin ratio indicates that low amount of earnings, required to pay fixed costs and profits, are generated from revenues. A low profit margin ratio indicates that the business is unable to control its production costs. The profit margin ratio provides clues to the company's pricing, cost structure and production efficiency. The profit margin ratio is a good ratio to benchmark against competitors.

 Net Profit Margin Ratio (PAT to Sales):

Net Profit Margin Ratio (After Tax Margin Ratio) = Net profit after tax / sales.

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Financial Analysis of Indian IOCL 26

PAT (Rs. Crore)

SALES Crore)

2005-2006

2006-2007

2007-2008

5115.14

8178.44

8549.64

228938.27

259207.14

0.036

0.033

(Rs. 192668.86

NET PROFIT 0.027 MARGIN RATIO

 Operating Profit Margin (PBIT to Sales ): Operating Profit Margin (Operating Margin) = Net Income before Interest and Taxes / Sales

2005-2006 8545.2

2006-2007 13353.82

2007-2008 14291.66

SALES (Rs. Crore) 192668.86

228938.27

259207.14

OPERATING 0.044 PROFIT MARGIN

0.058

0.055

PBIT (Rs. Crore)

 Gross Profit Margin Ratio : Gross Profit Ratio = Gross Profit / Net Sales KIIT SCHOOL OF MANAGEMENT

Financial Analysis of Indian IOCL

The gross profit ratio is primarily a test of the efficiency of purchases and sales management. No ideal standard is fixed for this ratio, but the gross profit ratio must be adequate. 2005-2006

2006-2007

2007-2008

GROSS PROFIT

9931

14339

14622

SALES

192668.86

228938.27

259207.14

0.063

0.056

GROSS PROFIT 0.052 MARG IN RATIO

Trend Analysis :

2005-2006

2006-2007

2007-2008

Net Profit Margin 2.7 (%age)

3.6

3.3

Operating Profit 4.4 Margin (%age)

5.8

5.5

Gross Profit 5.2 Margin (%age)

6.3

5.6

As can we observed, the Net Profit Margin Ratio and the Operating Profit Margin Ratio have both increased over the years. While the former has shown a 22%

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Financial Analysis of Indian IOCL increase, the later has shown a 25% increase. The gross profit margin also has increased 7.6% which is a factor for increase in profit margins.

Capital Market Analysis 700

600

Axis Title

500

400 Market price per share Book Value per share

300

Net Worth per share 200

100

0 2005-2006

2006-2007

2007-2008

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Financial Analysis of Indian IOCL

Return on Investment

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The ROI is perhaps the most important ratio of all. It is the percentage of return on funds invested in the business by its owners. In short, this ratio tells the owner whether or not all the effort put into the business has been worthwhile. If the ROI is less than the rate of return on an alternative, risk-free investment such as a bank savings account, the owner may be wiser to sell the company, put the money in such a savings instrument, and avoid the daily struggles of small business management. The ROI can be calculated in three ways: Return on Investment = Return on Net worth = Return on Capital Employed = Return on Total Assets Return on invested capital is an important indicator of a company’s long term financial strength. It uses key summary features from both the income statement and the balance sheet to assess profitability. It can effectively convey the return on invested capital from varying perspectives of different financing contributors. Return on Net worth (RONW) Net after Tax Profit divided by Net Worth, this is the 'final measure' of profitability to evaluate overall return. This ratio measures return relative to investment in the company. So to say Return on Net Worth indicates how well a company leverages the investment in it. It may appear higher for startups and sole proprietorships due to owner compensation draws accounted as net profit. RONW = PAT / Net Worth

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Financial Analysis of Indian IOCL 2005-2006

2006-2007

PROFIT AFTER TAX

5115.14

8178.44

2007-2008 30 8549.64

NET WORTH

30063

36544.27

43619.52

RETURNS ON NET WORTH

0.170

0.224

0.234

Return on Capital Employed (ROCE) It is a ratio that indicates the efficiency and profitability of a company's capital investments. It is calculated as: ROCE = Profit Before Interest and Taxation / Capital Employed ROCE should ideally be higher than the rate at which the company borrows, otherwise any increase in borrowing will reduce shareholders' earnings.

2005-2006 Profit before int. & 8545.2

2006-2007

2007-2008

13353.82

14291.66

66017.49

82438.04

0.202

0.173

taxes (Rs. Crore) Capital employed

60703.94

Return on capital 0.141 employed

Return on Total Assets (ROTA) It is a measure of how effectively a company uses its assets. It is calculated by ROTA = (Income before interest and tax) / (Fixed Assets + Current Assets).

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Financial Analysis of Indian IOCL It is also an indicator of how profitable a company is relative to its total assets and how efficient management is at using its assets to generate earnings. 2005-2006 Profit before interest & 8545.2

2006-2007

2007-2008

13353.82

14291.66

taxes Total assets

101556.51

110504.36

135139.31

Return on total assets

0.084

0.121

0.106

Analysis of Return on Investment We can see from above tables that overall Return on investments has been dwindling . Though Return on Net Worth has been increasing over a period of three years but Return on capital employed & Return on total assets increased in the year 2006-07 but declined in the year 2007-2008. This can be attributed to the fact, decline in Earning per share. Return on Net Worth increased by 31.76% in 2006-07 but there was a substantial decrease in the growth rate. In 2007-08 it only increased by 4%. Return on capital employed & return on total assets increased by 43.26% & 44% respectively but there was a sudden decline in these ratios in the year 2007-08 (14% decline in ROCE & 12% decline in ROTA) basically due to rise in price of crude petroleum oil.

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Financial Analysis of Indian IOCL Earning per share Companies often use a weighted average of shares outstanding over the reporting term. EPS can be calculated for the previous year ("trailing EPS"), for the current year ("current EPS"), or for the coming year ("forward EPS"). Note that last year's EPS would be actual, while current year and forward year EPS would be estimates. It is EPS = Total Earnings / Number of shares outstanding.

EPS

2005-2006

2006-2007

2007-2008

-14.32

-66.52

-100.93

EARNING PER SHARE 0 2005-2006

2006-2007

2007-2008

-20

Axis Title

-40

-60

EARNING PER SHARE

-80

-100

-120

Year

ANALYSIS EPS has been constantly & drasticly declining. The basic cause of this is constant rise in price of crude petroleum in the world market . Sales & cost of production both are increasing simultaneously , which has led to constant declining in EPS. KIIT SCHOOL OF MANAGEMENT

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Financial Analysis of Indian IOCL

Market Based Ratios

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Price Earning Ratio It is a valuation ratio of a company's current share price compared to its pershare earnings. EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken from the estimates of earnings expected in the next four quarters (projected or forward P/E). A third variation uses the sum of the last two actual quarters and the estimates of the next two quarters. It is also known as "price multiple" or "earnings multiple". In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. P/E Ratio = Market Value per share / Earnings per share PE Ratio over the Years 2005-2006 Market price per 584.15

2006-2007

2007-2008

399.6

445.6

-66.52

-100.93

-6.01

-4.41

share (Rs.) Earning Per Share

-14.32

Price earning Ratio -40.79

Note –EPS has been for this taken directly from the CMIE database. 19 Analysis Though the PE ratio is negative but it is increasing due to the reason that Market price per share is increasing & it is negative because the EPS is negative. PE ratio in the year 2007-08 has increased by 36.28% due to the rise in market price per share. an KIIT SCHOOL OF MANAGEMENT

Financial Analysis of Indian IOCL 34

PRICE EARNING RATIO 0.00 -5.00

2005-06

2006-07

2007-08

-10.00 -15.00 -20.00

PRICE EARNING RATIO

-25.00 -30.00 -35.00

-40.00 -45.00

2002005 2003-24

Market Capitalization Market capitalization indicates the public’s opinion of the company’s net worth. It is a determining factor in stock evaluation. It is calculated as follows: Market Capitalization = Market Value * No of Shares

2005-2006 Market price per 584.15

2006-2007

2007-2008

399.6

445.6

share No.of shares

1168012200

1168012200

1192374306

Market

68229.43266

46673.76751

53132.19908

capitalisation

(Rs.

Crores)

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Financial Analysis of Indian IOCL Market Capitalization to Net Worth This is a ratio of market capitalization to net worth of the company. This indicates how much of the market capitalization is driven by the shareholder’s fund. It is expressed as follows: Market Capitalization to Net worth = Market Capitalization / Net worth 2005-2006

2006-2007

2007-2008

68229.43266

46673.76751

53132.19908

Networth

30640.94

36544.27

43619.52

Market capitalisation to

2.227

1.277

1.218

Market capitalisation in crores

Networth

Market to book Ratio

Market price Book

value

2005-2006

2006-2007

2007-2008

584.15

399.6

445.6

302.22

344.58

1.322

1.293

of 250.88

shares Market

to

book 2.328

value

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Financial Analysis of Indian IOCL

Activity Ratios

36

Debtor turnover ratio Debtors turnover ratio indicates the relation between net credit sales and average accounts receivables of the year. This ratio is also known as Debtors’ Velocity. Debtors Turnover Ratio = Net Credit Sales/Average Accounts Receivables Average Accounts Receivables = [Opening Debtors and B/R + Closing Debtors and B/R]/2 Credit Sales = Total Sales – Cash Sales Objective and Significance: This ratio indicates the efficiency of the concern to collect the amount due from debtors. It determines the efficiency with which the trade debtors are managed. Higher the ratio, better it is as it proves that the debts are being collected very quickly. Debtor Days A ratio used to work out how many days on average it takes a company to get paid for what it sells. It is calculated by dividing the figure for trade debtors shown in its accounts by its sales, and then multiplying by 365.

Debtor days = (debtors ÷ Sales) ×365 This indicates whether debtors are being allowed excessive credit. A high figure (more than the industry average) may suggest general problems with debt collection or the financial position of major customers.

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Financial Analysis of Indian IOCL 37 2005-2006 Sales (Rs. Crore) Average debtors

2006-2007

2007-2008

228938.27

259207.14

10685.16

11662.78

16461.09

18.03144361

19.62981982

15.74665712

19.96512358

18.33944495

22.86199524

192668.86

(Rs.Crore) Debtors Turnover ratio Debtor days

Objective and Significance: This ratio indicates how quickly and efficiently the debts are collected. The shorter the period the better it is and longer the period more the chances of bad debts. Although no standard period is prescribed anywhere, it depends on the nature of the industry. Analysis With the increase in overall sales the credit sales of the company is also rising which results in increase in average debtors.The increase in average debtors lead to increase in debtor turnover ratio.

Creditors' Turnover Ratio CTR =Net credit prchases/Average payables(creditor + BP) Net credit purchases = total purchases – cash purchases – purchase return Creditor Days A ratio used to work out how many days on average it takes a company to pay its

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Financial Analysis of Indian IOCL creditors. It is calculated by dividing the trade creditors shown in its accounts by its cost of sales, or sales, and then multiplying by 365 Creditor Days = (Creditors / Sales ) * 365 Lengthening creditor days may mean that a company is heading for financial problems as it is failing to pay creditors, on the other hand it may mean that a company is simply getting better at getting good credit terms out of its suppliers (improving its working capital management), or that its pattern of purchasing has changed.

2005-2006

2006-2007

2007-2008

Purchases

84985.45

99462.67

112741.54

Average Creditors

13473.46

14708.76

18019.23

6.762138345

6.256734611

53.23759758

57.53800063

Creditors turnover 6.30761883 ratio Creditors day

57.07383558

Fixed Assets Turnover Ratio: Fixed assets turnover ratio establishes a relationship between net sales and net fixed assets. This ratio indicates how well the fixed assets are being utilised. Fixed Assets Turnover Ratio = Net Sales/Net Fixed Assets

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38

Financial Analysis of Indian IOCL In case Net Sales are not given in the question cost of goods sold may also be used in place of net sales. Net fixed assets are considered cost less depreciation.

39

Objective and Significance: This ratio expresses the number to times the fixed assets are being turned over in a stated period. It measures the efficiency with which fixed assets are employed. A high ratio means a high rate of efficiency of utilisation of fixed asset and low ratio means improper use of the assets. 2005-2006

2006-2007

2007-2008

Sales (Rs.Crore)

192668.86

228938.27

259207.14

Fixed assets (Rs. Crore)

41949.98

42329.94

46970.47

Fixed assets turnover

4.592823644

5.408424156

5.518512802

Fixed assets turnover is increasing due to implementation high technology machineries for exploration of oil refineries. Total Assets turnover Ratio Total assets turnover ratio establishes relationship between sales and total assets. Total assets turnover ratio = sales/total assets 2005-2006

2006-2007

2007-2008

Sales

192668.86

228938.27

259207.14

Total Asset

101556.51

110504.36

135139.31

Total Asset turnover ratio

1.897159128

2.071757802

1.918073579

Total Asset turnover ratio

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Financial Analysis of Indian IOCL Current asset turnover ratio

40

Current Asset turnover ratio Sales

192668.86

228938.27

259207.14

Current Asset

46962.96

48699.65

67270.45

Current Asset turnover ratio

4.102570622

4.701024956

3.853209544

Networth turnover ratio

Net worth turnover ratio Sales

192668.86

228938.27

259207.14

Net Worth

30640.94

36544.27

43619.52

Net Worth turnover ratio

6.287955265

6.264683082

5.942457414

Capital Turnover Ratio:

Capital turnover ratio establishes a relationship between net sales and capital employed. The ratio indicates the times by which the capital employed is used to generate sales. It is calculated as follows: Capital Turnover Ratio = Net Sales/Capital Employed

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Financial Analysis of Indian IOCL Where Net Sales = Sales – Sales Return Capital Employed = Share Capital (Equity + Preference) + Reserves and Surplus +

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Long-term Loans – Fictitious Assets. Objective and Significance: The objective of capital turnover ratio is to calculate how efficiently the capital invested in the business is being used and how many times the capital is turned into sales. Higher the ratio, better the efficiency of utilisation of capital and it would lead to higher profitability.

2005-2006

2006-2007

2007-2008

Sales

192668.86

228938.27

259207.14

Total Capital

60703.94

66017.49

82438.04

Total Capital turnover ratio

3.173910293

3.467842688

3.144266166

Gross fixed asset ratio 2005-2006

2006-2007

2007-2008

Sales

192668.86

228938.27

259207.14

Gross Fixed Asset

41949.98

42329.94

46970.47

5.408424156

5.518512802

Gross

Fixed

Asset 4.592823644

turnover ratio

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Financial Analysis of Indian IOCL 42

0.250

0.200

0.150 RETURNS ON NET WORTH Return on CAPITAL EMPLOYED RETURN ON TOTAL ASSET

0.100

0.050

0.000

2005-2006

2006-2007

2007-2008

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Financial Analysis of Indian IOCL 43

Debtors/Creditors turnover Ratios 20 18 16 14

12

Debtors turnover

10

Creditors Turnover

8

6 4 2 0 2005-2006

2006-2007

2007-2008

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Financial Analysis of Indian IOCL

ECONOMIC VALUE ADDED EVA ANALYSIS Particulars

2006-2007

2007-2008

BETA

0.376

0.468

NOPAT

7498.56

6961.66

NET WORTH (Rs. Crore)

34857.29

41086.25

DEBT (Rs.Crore)

27077.88

35520.88

TOTAL CAP. (Rs. Crore)

61935.17

76607.13

Cost of Equity

8.034

8.042

Cost of Debt

3.935

3.221

WACC

6.242

5.807

EVA (Rs. Crore)

3632.764

2513.412

Profit is the output of the GAAP driven accounting assumptions. One of the important accounting assumptions is that the interest is treated as an expense, whereas the dividend is treated as distribution of profit. Sometimes, such KIIT SCHOOL OF MANAGEMENT

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Financial Analysis of Indian IOCL assumption result in situations where the company show the accounting profit but may be destroying the wealth of the shareholders. To address such anomaly, the concept of the residual profit

(from the economics literature) has been made

popularized as Economic Value Added by Stern and Stewart EVA measures whether the operating profit is enough compared to the total costs of capital employed. Stewart defined EVA as Net operating profit after taxes (NOPAT) subtracted with a capital charge. Economic Value Added is calculated as follows: • EVA = NOPAT – Capital Charge • NOPAT = Net Operating Profit After Tax (before interest) • Capital Charge = Cost of both Debt and Equity • Capital Charge = WACC * CE • Capital Charge = Ke*Capital + Kd*Debt EVA = NOPAT - (Cost of Capital * Capital Employed)

Cost of capital = Cost of Equity x Proportion of equity from capital + Cost of debt x Proportion of debt from capital x (1-tax rate) Cost of capital or Weighted average cost of capital (WACC) is the average cost of both equity capital and interest bearing debt. Cost of equity capital is the KIIT SCHOOL OF MANAGEMENT

45

Financial Analysis of Indian IOCL opportunity return from an investment with same risk as the company has. Cost of equity is usually defined with Capital asset pricing model (CAPM). The estimation of cost of debt is naturally more straightforward, since its cost is explicit. Cost of debt includes also the tax shield due to tax allowance on interest expenses. The idea behind EVA is that shareholders must earn a return that compensates the risk taken. In other words equity capital has to earn at least same return as similarly risky investments at equity markets. If that is not the case, then there is no real profit made and actually the company operates at a loss from the viewpoint of shareholders. On the other hand if EVA is zero, this should be treated as a sufficient achievement because the shareholders have earned a return that compensates the risk. This approach – using average risk-adjusted market return as a minimum requirement - is justified since that average return is easily obtained from diversified long-term investments on stock markets. Average long-term stock market return reflects the average return that the company generate from their operations.

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46

Financial Analysis of Indian IOCL 47

EVA (Rs. Crore) 4000 3500

3632.764

3000 2513.412

2500 2000 1500 1000 500 0

2006-2007

2007-2008

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Financial Analysis of Indian IOCL

Appendix Executive Summary of the Company:Indian Oil Corpn. Ltd. Rs. Crore (Non-Annualised) Total income Sales Income from financial services

48 Mar 2006 Mar 2007 Mar 2008 12 mths 12 mths 12 mths 201908.8 199430.9 1577.58

244282.8 238498.4 5193.82

274659.63 270582.36 3239.19

199593.8 74560.17 335.06 1860.19 19351.37 6040.23 24.25 0

236603.5 88482.51 415.3 2620.86 22545.4 7071.35 40.31 0

269656.06 101494.57 498.76 2914.21 24196.34 7637.44 50.25 0

9886.94 8916.67 6704.74 4914.36

14617.69 13151.76 10448.02 7498.56

14500.44 13038.99 10092.76 6961.66

Net worth Paid up equity capital (net of forfeited capital) Reserves & surplus

29302.67 1168.01 28134.66

34857.29 1168.01 33664.92

41086.25 1192.37 39893.88

Total borrowings Current liabilities & provisions

26403.72 31511.84

27077.88 34979.13

35520.88 42251.7

Total assets Gross fixed assets Net fixed assets Investments Current assets Loans & advances

91897.74 53305.23 34669.25 14526.39 42382.32 5.7

102643.1 59195.7 37764.52 19997.86 44368.08 6.27

124776.91 65966.92 41942.04 21546.28 60624.06 6.68

Total expenses Raw material expenses Power, fuel & water charges Compensation to employees Indirect taxes Selling & distribution expenses Other operational exp. of indl. enterprises Other oper. exp. of non-fin. service enterprises PBDITA PBDTA PBT PAT

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Financial Analysis of Indian IOCL 49

Bibliography  CMIE database  www.iocl.com  www.wikipedia.com  Financial management by I.M.Pandey  www.nseindia.com

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