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Summer Training Report

Working Capital Management And Comparative
Financial Analysis of IOCL with its Major Competitors


Prepared by:-

Amit Kumar Shaw

2009-11 Batch

Under the guidance of

Faculty Guide: Company Guide:
Prof. S. S. Ahmed Mr. Kapil Kumar Santra
Asst. Professor, Finance Deputy Manager, Finance

As a partial fulfillment of PGDM program of IMIS, Bhubaneswar

S. No. Content Page No.
1. Certificate

2. Declaration 3
3. Acknowledgement 4
4. Executive Summary 5
5. Chapter-1
Introduction………………………………………………………….. 6
1.1 Industry Overview…………………………………………………… 8
1.2 Company Overview
Introduction………………………………………………... 11
Major Divisions…………………………………………….. 14
Organization Structure…………………………………….. 18
Management………………………………………………… 19
Distinctions…………………………………………………. 20
Product Profile……………………………………………… 23
1.3 Major Competitors in Public Sector.………………………………... 24
1.4 SWOT Analysis………………………………………………………. 26
6. Chapter-2
Research Methodology 31
7. Chapter-3
3. Literature Review 33
3.1 Working Capital Management – Theoretical Underpinnings 36
Working Capital
3.1.1 Meaning
3.1.2 Constituents
3.1.3 Determinants
3.2 Working Capital Management- Meaning & Objective
3.3 Dimensions of Working Capital Management
3.3.1 Estimating Investment in Working Capital
3.3.2 Financing of Working Capital
3.3.3 Managing Profitability, Risk & Liquidity
3.4 Managing Components of Working Capital

8. Chapter-4
Observation and Analysis 59
9. Chapter-5 87
Conclusions and
10. Terminology 91
11. Bibliography 92
12. Annexure 93

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 2


It is hereby declared that, this project is being submitted as a partial fulfillment of the Post
Graduate Diploma in Management program of INSTITUTE OF MANAGEMENT &
INFORMATION SCIENCE, Bhubaneswar. It has been exclusively designed and prepared by
me. It has not been submitted to any other institute or organization except Indian Oil
Corporation Ltd., Dhanbad. It has also not been published elsewhere.

Amit Kumar Shaw

IMIS, Bhubaneswar

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 3


Sometimes words fall short to show gratitude, the same happened with me during this project.
The immense help and support received from IOCL overwhelmed me during the project.

It was a great opportunity for me to work with IOCL, pioneers in the field of Oil and
Gas. I am extremely grateful to the entire team of IOCL at Dhanbad who have shared their
expertise and knowledge with me and without whom the completion of this project would
have virtually impossible.

My sincere gratitude to Mr. Kapil Kumar Santra, Deputy Manager, Finance (Dhanbad
Divisional Office) for providing me with an opportunity to work with IOCL as a company
project guide who has provided me with the necessary information and his valuable
suggestion and comments on bringing out this report in the best possible way.

I am highly indebted to Mr. Anjay Kumar, Deputy Manger (Consumer Sales), Mr.
Vikash, Sales Officer (Consumer Sales), Mr. Haranath Saha, Fleet Marketing Manager
(Retail Sales), Mr. P.P.Minz & Ms. Bharati Mishra, Engineer (Retail Sales) and last but not
the least Mr. Ashok Kumar, Depot In-charge who has given me a good support in
understanding the workings at IOCL.

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

I believe my seven weeks tenure at IOCL was a very vivid experience that gave me a feel of
not just the PSU culture but also of private firms associated with IOCL.

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 4

Executive Summary

The intended growth strategy demands a strong financial position to build and sustain the
growth story. Any company whether industrial or trading requires the current assets for day
to day working of the unit and these current assets are often referred as working capital of the
company and is one of the major contributors in improving profitability of any organisation
and is a vital component of success and survival i.e. both profitability and liquidity for the

So looking at the importance of the working capital and working capital management, the
project was aimed to assist the company to analyse its present efficiency in terms of
managing working capital and assessing the future working capital requirement and assisting
to identify the major loopholes in various processes which are having or can have an adverse
effect on the working capital of the company and suggesting some of the important ways to
handle those condition.

The project started with understanding the company process and then reviewing the past
financial performances and working capital efficiency with the help of ratio analysis. The
next step was to see the operating cycles and the process of forecasting working capital and
then finding out the sources the company uses to raise these funds. The project also focuses
on the prevailing policies related to inventory, receivable, cash and payable management.
The analysis resulted in assessing the working capital requirement problem in the system of
recording and reporting of various data related to policy formulation and better working
capital management. There is an urgent need to develop a formal process of credit analysis of
the existing and more importantly the new customer to develop more specific credit terms
and the most importantly a proper monitoring and controlling system for a better
management of receivables.

Managing working capital has always been a challenge for the big companies and IOCL is
not an exception to this.

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Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 6

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

 To determine the managerial aspects of working capital in IOCL.

 To understand how efficiently the working capital is being managed in IOCL.
 To understand the short-term solvency as well as the effectiveness of working capital
in the operation of business.
 To study the policies and the procedures adopted by IOCL for managing the various
components of working capital.
 To comprehensively evaluate the inventory, receivables, creditors and cash
Management performances.
 To undertake a study of the various sources of working capital financing, employed
by IOCL.
 To suggest on the basis of findings, improvements in the management of working
capital, at IOCL.


The scope of this project work is confined to the Working Capital Management Practices at
IOCL only for a past period of 5 years i.e. from 2005-06 to 2009-10 and at the same time a
comparative financial analysis of IOCL with HPCL and BPCL for duration 2004-05 to 2008-


 Time is definitely the main constraint. Time was not sufficient enough to assess all
processes and policies of an organization of the stature of IOCL.

 Inadequacy of required data is another constraint.

 Even if actual data was gathered, it is often against the company policy to disclose
many such data in the project report. In that case the actual data was then slightly
modified and then utilized for the project.

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 7


Oil & Gas is one of the most important factors contributing to the economic development of a
country. The production and consumption of oil & Gas in a country has become a barometer
of its growth and prosperity.

The origin of oil & gas industry in India can be traced back to 1867 when oil was struck at
Makum near Margherita in Assam. At the time of Independence in 1947, the Oil & Gas
industry was controlled by international companies. India's domestic oil production was just
250,000 tonnes per annum and the entire production was from one state - Assam.

The foundation of the Oil & Gas Industry in India was laid by the Industrial Policy
Resolution, 1954, when the government announced that petroleum would be the core sector
industry. In pursuance of the Industrial Policy Resolution, 1954, Government-owned
National Oil Companies ONGC (Oil & Natural Gas Commission), IOC (Indian Oil
Corporation), and OIL (Oil India Ltd.) were formed. ONGC was formed as a Directorate in
1955, and became a Commission in 1956. In 1958, Indian Refineries Ltd, a government
company was set up. In 1959, for marketing of petroleum products, the government set up
another company called Indian Oil Company Ltd. In 1964, Indian Refineries Ltd was merged
with Indian Oil Company Ltd. to form Indian Oil Corporation Ltd.

During 1960s, a number of oil and gas-bearing structures were discovered by ONGC in
Gujarat and Assam. Discovery of oil in significant quantities in Bombay High in February,
1974 opened up new avenues of oil exploration in offshore areas. During 1970s and till mid
1980s exploratory efforts by ONGC and OIL India yielded discoveries of oil and gas in a
number of structures in Bassein, Tapti, Krishna-Godavari-Cauvery basins, Cachar (Assam),
Nagaland, and Tripura. In 1984-85, India achieved a self-sufficiency level of 70% in
petroleum products.

In 1984, Gas Authority of India Ltd. (GAIL) was set up to look after transportation,
processing and marketing of natural gas and natural gas liquids. GAIL has been instrumental
in the laying of a 1700 km-long gas pipeline (HBJ pipeline) from Hazira in Gujarat to
Jagdishpur in Uttar Pradesh, passing through Rajasthan and Madhya Pradesh.

After Independence, India also made significant additions to its refining capacity. In the first
decade after independence, three coastal refineries were established by multinational oil
companies operating in India at that time. These included refineries by Burma Shell, and Esso
Stanvac at Mumbai, and by Caltex at Visakhapatnam. Today, there are a total of 18 refineries
in the country comprising 17 in the Public Sector, one in the private sector. The 17 Public
sector refineries are located at Guwahati, Barauni, Koyali, Haldia, Mathura, Digboi, Panipat,
Vishakapatnam, Chennai, Nagapatinam, Kochi, Bongaigaon, Numaligarh, Mangalore,
Tatipaka, and two refineries in Mumbai. The private sector refinery built by Reliance
Petroleum Ltd is in Jamnagar. It is the biggest oil refinery in Asia.

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 8

By the end of 1980s, the petroleum sector was in the doldrums. Oil production had begun to
decline whereas there was a steady increase in consumption and domestic oil production was
able to meet only about 35% of the domestic requirement. The situation was further
compounded by the resource crunch in early 1990s. The Government had no money for the
development of some of the then newly discovered fields (Gandhar, Heera Phase-II and III,
Neelam, Ravva, Panna, Mukta, Tapti, Lakwa Phase-II, Geleki, Bombay High Final
Development schemes etc. This forced the Government to go for the petroleum sector
reforms which had become inevitable if India had to attract funds and technology from
abroad into the petroleum sector.

The government in order to increase exploration activity, approved the New Exploration
Licensing Policy (NELP) in March 1997 to ensure level playing field in the upstream sector
between private and public sector companies in all fiscal, financial and contractual matters.
This ensured there was no mandatory state participation through ONGC/OIL nor there was
any carried interest of the government.

To meet its growing petroleum demand, India is investing heavily in oil fields abroad. India's
state-owned oil firms already have stakes in oil and gas fields in Russia, Sudan, Iraq, Libya,
Egypt, Qatar, Ivory Coast, Australia, Vietnam and Myanmar. Oil and Gas Industry has a vital
role to play in India's energy security and if India has to sustain its high economic growth


(in this sector)

(As on 1st April, 09)

Oil Marketing Companies Market Cap. Sales Net Profit Total Assets
(Rs. cr.) Turnover
IOCL 85,949.52 305,527.05 2,949.55 88,975.32
BPCL 20,803.13 135,331.48 735.9 33,299.52
HPCL 12,312.49 124,752.42 574.98 33,485.80
Reliance 330,634.85 192,461.00 16,236.00 199,665.30
Essar Oil 14,532.18 37,652.00 -514 13,613.72
MRPL 11,882.62 32,287.94 1,112.38 6,716.19
Chennai Petro 3,721.30 24,927.26 603.22 4,615.15


Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 9

Industry Overview


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

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

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

IndianOil today

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

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

The IndianOil Group of companies owns and operates 10 of India’s 20 refineries with a
combined capacity of over 60 MMTPA, accounting for 34% of national refining capacity,
after excluding EOU refineries. Projects under execution will take the capacity further to 80
MMTPA by the year 2011-12. Besides setting up state-of-the-art facilities to raise product
quality to global standards, IndianOil has undertaken chartering of ships for crude oil imports
on its own and is expanding its basket of crudes and upgrading its refineries to handle a wider
array of crudes, including high-sulphur types.

As a pioneer in laying of cross-country crude oil and product pipelines, the Corporation
crossed 10,540 km in pipeline length and about 65 MMTPA in throughput capacity with the
commissioning of the 330-km Paradip-Haldia crude oil pipeline recently. Plans are under
execution to add about 4,000 km more by the year 2012. In-house capabilities have enabled

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

the Corporation undertake all pipeline projects on its own and even offer turnkey expertise in
techno-economic feasibility studies, design and detailed engineering, project execution,
operations, maintenance and consultancy services.

Set up in 1972, IndianOil's R&D Centre has blossomed into a world-class institution and
Asia's finest. Besides its pioneering work in lubricants formulation, refinery processes,
pipeline transportation and alternative fuels such as ethanol-blended petrol and bio-diesel, the
Centre is also the nodal agency of the Indian hydrocarbon sector for ushering in Hydrogen
fuel into the country. It has over 229 active patents to its credit, including 125 international
patents. Its current R&D focus is on the future business needs of IndianOil in the areas of
petrochemicals, including polymers, and alternative energy sources.

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

Network Beyond Compare:

 As the flagship national oil company in the downstream sector, Indian Oil reaches
precious petroleum products to millions of people everyday through a countrywide
network of over 35,600 sales points. They are backed for supplies by 140 bulk storage
terminals and depots, 99 aviation fuel stations and 89 Indane LPG bottling plants.

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

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

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

 Indian Oil’s world class R&D centre is perhaps Asia’s finest. Besides pioneering work in
lubricants formulation, refinery processes, pipeline transportation and alternative fuels
such as Bio-diesel, the Centre is also the nodal agency of the Indane hydrocarbon sector
for ushering in hydrogen fuel in the country.

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 12

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


Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 13


Born from the vision of achieving self-reliance

self in
oil refining and marketing for the nation,
IndianOil has gathered a luminous legacy of
more than 100 years of accumulated
ccumulated experiences
in all areas of petroleum refining by taking into
its fold, the Digboi Refinery commissioned in

IndianOil controls 10 of India’s 20 refineries.

The group refining capacity is 60.2 million
metric tonnes per annum (MMTPA) or 1.2
million barrels per day -the
the largest share among
refining companies in India. It accounts for 33.8% share of national refining capacity.

IndianOil Refineries: Installed Capacities (MMTPA)

Digboi 0.65
Guwahati 1
Barauni 6
Koyali 13.7
Haldia 6
Mathura 8
Panipat 12
Bongaigaon 2.35
Subtotal 49.7

Subsidiaries’ Refineries
CPCL - Chennai 9.5
Narimanam 1
Subtotal 10.5
Group Total 60.2
Paradip upcoming 15

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


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BBSR/2009-11 Page 14

Indian Oil Corporation Ltd. operates a

network of 10540 km long crude oil and
petroleum product pipelines with a capacity
of 71.60 million metric tonnes per annum.
country pipelines are globally
recognised as the safest, cost-effective,
efficient and environment-friendly
mode for transportation of crude oil and
petroleum products. IndianOil’s crude oil
pipelines registered the highest ever
throughput of 65 million tonnes.

Transportation of crude oil to IndianOil's

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

Products Pipeline-% share

PIL, 8%

Industry Capacity:- BPCL
62.34 MMT IOCL, 54%

BPCL, 17%


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BBSR/2009-11 Page 15

IndianOil has one of the largest

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

As on 1st April, 10


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Research & Development

The R&D Centre continues to provide

significant support to the IndianOil Group
refineries in product quality improvement,
evaluation of catalysts and additives, health
assessment of catalysts, material failure
analysis, troubleshooting and in improving
overall efficiency of operations. IndianOil
R&D is also working on production,
storage, transportation, distribution and
commercialization of Hydrogen as an
alternative fuel. IndianOil has, till date,
invested close to Rs. 1,000 crore in setting
class facilities at its R&D Centre for building world-class
up world-class world class capabilities in analytical
services, engines, test rigs and pilot plants for all major refinery processes, catalyst
characterisation & development, etc. While continuing with cutting edgee R&D in the core
areas of lubricants formulations, refinery process technologies and pipeline transportation, the
thrust would now be on commercializing the developed technologies and initiating research
in new frontier areas such as petrochemicals, residue
residue gassification, coal-to-liquid,
coal gas-to-
liquid, alternative fuels, synthetic lubricants, nano-technology,
nano etc.

IndianOil’s R&D continued to add value to different facets of the companies’ activities.
During the year 2009-10,, 181 lube formulations were developed and 75%(147)
(147) were

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Installation Terminals Depots


Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 18

Management – IOCL

B M Bansal Chairman & Director

(Planning & Business Development)

S V Narasimhan Director (Finance)

V C Agrawal Director (Human Resources) &

Director-in-charge (IBP Division)

G C Daga Director (Marketing)

B N Bankapur Director (Refineries)

Anand Kumar Director (Research & Development)

K K Jha Director (Pipelines)

P K Sinha Additional Secretary & Financial Advisor

Ministry Of Petroleum & Natural Gas
Sudhir Bhargava Additional Secretary
Ministry of Petroleum & Natural Gas
Prof.(Mrs.) Indira J. Parikh Independent Director
Anees Noorani Independent Director
Michael Bastian Independent Director
Dr.(Mrs.) Indu Shahani Independent Director
Prof. Gautam Barua, Independent Director
N.K. Poddar Independent Director
Raju Ranganathan Company Secretary

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 19

IndianOil leads India Inc. in Fortune's 'Global 500' listing for
In a befitting acknowledgement of its ever-improving performance, and a crowning glory in
its Golden Jubilee Year (1959-2009), IndianOil has moved up 11 places, in the Fortune
'Global 500' list of world's largest companies by sales for the year 2009. Placed at 105,
IndianOil leads the pack of seven Indian companies appearing in the list that is based on the
performance in of the year 2008.

IndianOil has been consistently improving its position in the elite list published annually by
the CNN-Time Warner group magazine, Fortune. In the ‘Global 500' club, IndianOil has
steadfastly climbed from 226 in the year 2002 to 191 in 2003, 189 in 2004 to 170 in 2005,
153 in 2006, 135 in 2007, 116 in 2008 and now 105 in 2009. Fortune magazine has
considered IndianOil’s revenue for the fiscal 2008-09 and has derived the same at US$
62.993 billion (excluding excise duties). This is the 7th year in succession that IndianOil has
improved its ranking.

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

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 20

Other Distinctions in brief:
• IndianOil in ‘Top 50’ Best Companies To Work For in India, 2010
• Tops ‘ET 500’ ranking 2009
• No.1 in ‘BW 500’ ranking 2009
• Award for ‘Global Impact by an Indian PSU’
• Among top five in Business India’s ‘Super 100’ ranking
• Place of pride in ‘Platts Ranking’ 2009
• Only PSU among India's 25 best employers
• Frontrunner in Oil & Gas category in ‘FE-500’ listing
• Top slot in Business Standard’s 'BS 1000' again

• Owns and operates 10 of India's 20 refineries
• Combined refining capacity of 60.2 MMTPA
• Accounts for 34% national refining capacity
• Sales of 62.6 million tonnes of petroleum products
• Exports of 3.64 million tonnes of petroleum products
• Investments of Rs. 43,400 crore (US $10.8 billion) during 2007-12
• New projects worth Rs. 32,000 crore

Pipelines – Underground Highways

• 71% downstream sector pipelines capacity in India
• Pipelines network crossed 10,540 km mark
• Commissioned a record no. of pipeline projects
• Paradip-Haldia crude oil pipeline commissioned
• Commissioned Panipat-Jalandhar LPG pipeline
• First LPG Pipeline in North India from Panipat to Jalandhar
• Koyali-Ratlam product pipeline commissioned
• ATF Pipeline from CPCL (Manali) to Chennai AFS
• Highest ever operational throughput of 59.38 million metric tones

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 21

• 48% petroleum products market share
• 35,600 sales points.
• 167 bulk storage terminals and depots
• 101 aviation fuel stations
• 89 Indane (LPGas) bottling plants
• 7,335 bulk consumer pumps
• Widest network of petrol & diesel stations - 18,278
• 5,000 Indane distributors
• ISO-9002 certified Aviation Service commands over 63% market share
• XTRAPREMIUM available at 6446 retail outlets
• XTRAMILE available at 9256 retail outlets
• 2545 Kisan Seva Kendras
• 5,849 retail outlets have XTRAPOWER fleet card transactions

Research & Development

• Forays into new areas of research - Petrochemicals, Polymers and
• 9 patents received approvals
• 153 lubricant formulations commercialised
• 47 lubricant formulations approved by OEMs
• India’s first commercial Hydrogen-CNG dispensing station at New Delhi
• Among the 6 worldwide technology holders for marine oils

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 22


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

IndianOil’s Retail Brand template of XtraCare(Urban), Swagat(Highway) and Kisan Seva

Kendras(Rural) are widely recognized as pioneering brands in the petroleum retail segment.
IndianOil’s leadership extends to its energy brands - Indane LPG, SERVO Lubricants,
Autogas LPG. XtraPremium Branded Petrol, Xtramile Branded Diesel, XtraPower Fleet
Card, IndianOil Aviation and XtraRewards cash customer loyalty programme.

 Auto Gas
 High Speed Diesel
 Furnace Oil
 Light Diesel Oil
 Indane Gas
 Lubricants & Greases
 Marine Fuel & Lubricants
 Superior Kerosene Oil
 Crude Oil

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 23


HPCL is a Fortune 500 company, with an annual turnover of Rs. 1,08,599 Crores and
sales/income from operations of Rs 1,14,889 Crores (US$ 25,306 Millions) during FY 2009-
10, having about 20% Marketing share in India and a strong market infrastructure.

HPCL operates 2 major refineries producing a wide variety of petroleum fuels & specialties,
one in Mumbai (West Coast) of 6.5 Million Metric Tonnes Per Annum (MMTPA) capacity
and the other in Vishakapatnam, (East Coast) with a capacity of 7.5 MMTPA. HPCL holds an
equity stake of 16.95% in Mangalore Refinery & Petrochemicals Limited, a state-of-the-art
refinery at Mangalore with a capacity of 9 MMTPA. In addition, HPCL is constructing a
refinery at Bhatinda, in the state of Punjab, as a Joint venture with Mittal Energy Investments

HPCL also owns and operates the largest Lube Refinery in the country producing Lube Base
Oils of international standards, with a capacity of 335 TMT. This Lube Refinery accounts for
over 40% of the India's total Lube Base Oil production.

HPCL's vast marketing network consists of 13 Zonal offices in major cities and 101 Regional
Offices facilitated by a Supply & Distribution infrastructure comprising Terminals, Aviation
Service Stations, LPG Bottling Plants, and Inland Relay Depots & Retail Outlets, Lube and
LPG Distributorships. HPCL, over the years, has moved from strength to strength on all
fronts. The refining capacity steadily increased from 5.5 MMTPA in 1984/85 to 13
MMTPA presently.

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 24

Bharat Petroleum Corporation Ltd. was formed on 24th January , 1976 when the
Government of India took over the Burmah Shell Group of Companies. On 1st August , 1977
the company was renamed as Bharat Petroleum Corporation Limited (BPCL). It was the first
refinery to process newly found indigenous Crude (Bombay High) in the country. The core
business of BPCL is Petroleum Refining. Bharat Petroleum produces a diverse range of
products, from petrochemicals and solvents to aircraft fuel and speciality lubricants and
markets them through its wide network of Petrol Stations, Kerosene Dealers, LPG
Distributors, Lube Shoppes, besides supplying fuel directly to hundreds of industries, and
several international and domestic airlines.

The core strength of Bharat Petroleum Corporation Limited has always been the ardent
pursuit of qualitative excellence for maximisation of customer satisfaction. Thus Bharat
Petroleum, the erstwhile Burmah Shell, has today become one of the most formidable names
in the petroleum industry.

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

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

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

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 25

SWOT Analysis With Respect To Marketing Division


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

Market Share In The Indian Petroleum Industry



(2) Possess the largest Pipeline Network; and thus has a vital competitive edge in
transportation costs and thus helps to access in deficit markets.
(3) IOC controls 10 refineries, by virtue of which it has a total share of around 34% of
India’s overall refining capacity.
(4) There are more than 35600 sale points all over India which is 55% of industry.
(5) There are about 5096 distributors of Indane Cooking gas for catering 56 million
(6) Reaching the doors of bulk customers : Bulk Consumer Pumps 7,593 (89%)
(7) Strong Brand name for its products (For example, SERVO which covers 42% market
shares, with more than 450 grades).
(8) Excellent credibility and international corporate image for raising funds.
(9) IOC also acquired management control of the marketing company IBP, thereby
strengthening its position in these activities.
(10) There are around 229 active Patents which includes 125 international patents.

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 26

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


(1) The functioning of IOC is greatly influenced by the government policy and
regulation. The government has 82% stake in the company, thus gaining the control of
the company. There is always a risk of its proposals being rejected as there is
uncertain political environment prevailing in the country.
(2) The Advertisement strategy of IOCL is not extremely effective. For example, Xtra
Premium is the best petrol available in the market, but due to lack of effective
advertisement, the sale of the product is not in the desired level, where as Castrol is
known for its celebrity advertisement.
(3) Even though IOC controls most retail outlets it has market share of only 33.8% in the
petrol and 39.6% in diesel registering an increase of 0.5% and 0.3% respectively over
the last year.
This is comparatively very small as compared to its size, reach and production. This is
because of the fact that its retail outlets are concentrated more in semi-urban area and
rural area.


(1) Enhancement of the distribution network must be made especially in the deficit
(2) Distribution / sale of alternative products through existing retail network can be
chalked out.
(3) With gas emerging as an attractive alternative fuel due to the twin benefits of low
pollution and better economics, IOCL has planed to quickly establish itself in the gas
market also. The LNG and Hydrogen business offers an attractive environment for its
future business. Gas is steadily growing into the most preferred fuel among utility
providers such as power, fertilizers and transportation. IOC plans to set up a
nationwide gas distribution network for serving major Indian cities to market CNG for
automobiles and to import LNG.

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 27

(4) IOC signed a MOU with the National Iranian Oil Company (NIOC) for importing 2.5
MMTPA LNG and also for taking part in the LNG midstream projects in Iran. The
initial efforts turned successful with IOC already becoming the lead supplier of LNG
to Essar Steel and Gujrat State Petroleum Corp. IOC has procured Exxon Mobil’s
regas from Qatar for a period of twenty five years from April 2004 to meet rising
demand. All these efforts would stimulate the growth and profitability of the company
in the near term.
(5) Improvement of customer management services at the retail end (a customer
satisfaction has shown only 65% customer satisfaction level).


(1) In the post APM scenario, IOC will face competition in the area of crude / product
import. Consequently it has affected the margin of Rs.5000crore which it earns from
trading operations.
(2) Increase in number of players, specialization in lube marketing (such as HPCL,
BPCL, Reliance).
(3) Introduction of LNG / CNG in some metro cities (eg, Delhi) can reduce the demand
of petrol or diesel in near future.

(4) Consumption of marine fuel procured by some major public sector shipping
companies is showing a decreasing trend.
(5) Deregulation of Indian Petroleum sector: The deregulation of the petroleum sector in
India during 2002 abolished the monopoly stakes of IOC. The company is now facing
stiff competition from several players, striving to gain market share. There exists a
close competition between ONGC and IOC in the Indian oil market. RIL has also
emerged as an important player competing in the upstream sector subsequent to the
deregulation of the petroleum sector.
(6) Demographic issues are also posing some serious threats to IOCL. IOCL’s north east
operations continue to suffer from certain constraints.

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 28

SWOT Analysis With Respect To Refineries Division


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

Refining Capacity in Indian Petroleum


ONGC 13%

(2) 58% of IOC’s refining capacity is located in the Northern and Western regions, which
are high demand and high growth areas.
(3) Pioneer in quality management with its Mathura Refinery as the 1st in Asia and 3rd in
the world to earn ISO14001 Certification.
(4) High quality LOBS produced by refineries contribute to world class lubes.
(5) No financial constraints in modernizing and improving facilities for refineries.


(1) Operating cost is comparatively higher than new refineries of competitors (e.g.
Jamnagar Refinery of Reliance Petroleum).
(2) There is less flexibility option of handling various types of crude (both sweet & sour)
unlike new refineries of competitors.

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 29


(1) Need for additional refining capacity to meet rising demand in petroleum product.
(2) Installation of pipeline infrastructure for deficit regions and increased application of
pipelines as a preferred mode of transportation for lower logistics cost as compared to
road / rail transport.
(3) Improvement / creation of new infrastructure – storage, transportation and
(4) Globalization in refining, pipeline and consultancy.


(1) The decontrol in Hydrocarbon sector is likely to bring in new players specially the
MNC’s, with new refining capacity having the flexibility to improvise the product
mix according to the nature of market demand.
(2) Growth of merchant refining can be a new source of competition.
(3) Higher Capital needs to modernize existing infrastructure.

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 30



Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 31


The methodology followed in this project involves the following phases:

 Collection of data
 Observation and Analysis
 Conclusion & Recommendation

Research Design:
In view of the objective of the study listed above, a descriptive research design has been
adopted. I have tried to interpret already available information and it lays particular emphasis
on analysis and interpretation of the existing and available information with both primary and
secondary data.

Collection of Data:
There are two sources of collecting data (of both financial and non-financial in nature).
1) Primary Data
2) Secondary Data

Primary Data Collection:

To collect the primary data I have visited the IOCL and collected the information by informal
discussion held with various department heads. Information pertaining to receivables, cash,
inventory and creditors were collected from the respective departments in the unit.

Secondary Data Collection:

Secondary financial data was collected ., Annual Reports of IOCL, BPCL, HPCL for the
financial years 2004-05, 2005-06, 2006-07, 2007-08, 2008-09, 2009-10. Besides the report,
intranet data, internet data, books, several magazines like several articles, along with internal
records like manuals, brochures, magazines etc. were used for explanation.

For the comparative performance analysis among the companies, several working capital
related ratios were used along with the graphs, charts and relevant diagrams.

Conclusion & Recommendation:

IOCL should try to reduce its high investment in current assets and the valuation of current
assets like inventory, book debts etc. depends on international prices of raw materials, cost of
processing and profit margin. So IOCL must try to concentrate on cost part because cost is
only variable which is controllable by IOCL and there is a need of implementation of better
pricing policies by the Govt. The full conclusion & recommendation are made after
completion of the entire analysis on the basis of figures and diagrams.

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 32



Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 33

Literature review
Importance of Working capital management has always been a topic of discussion and
various previous studies had unanimously accepted its importance in improving the
profitability and resulting improvement in return on investment or capital employed of the
company. In the present scenario of credit crunch organizations are looking back at their
working capital management to release unnecessary blocking of funds in gross working
capital in form of investment in inventories or receivables.
As the global financial crisis deepens and banks tighten up on credit, working capital has
become a pressing issue. Ralf Seifert and Daniel Seifert (Dec, 2008) and their studies
confirms that In an average company, decreasing working capital by 30% leads to a 16%
increase in after-tax returns on invested capital resulting in an increase in ROI.
The pioneer work of Shin and Soenen (1998) and the more recent study of Deloof (2003)
have found a strong significant relationship between the measures of WCM and corporate
profitability. Their findings suggest that managers can increase profitability by reducing the
number of day’s accounts receivable and inventories. This is particularly important for small
growing firms who need to finance increasing amounts of debtors.
Narasimhan and Murty (2001) stress on the need for many industries to improve their
return on capital employed (ROCE) by focusing on some critical areas such as cost
containment, reducing investment in working capital and improving working capital
Though the working capital efficiency and working capital management is concern for all the
business organization but its importance is more crucial for the success of the small firms.
Peel and Wilson (2000) studied the importance of working capital for small and growing
businesses, and concluded that an efficient working capital management is a vital component
of success and survival; i.e. both profitability and liquidity .Study undertaken reveals that
small firms tend to have a relatively high proportion of current assets, less liquidity, exhibit
volatile cash flows, and a high reliance on short-term debt. They further assert that smaller
firms should adopt formal working capital management routines in order to reduce the
probability of business closure, as well as to enhance business performance.
Ghosh and Maji (2003) in this paper made an attempt to examine the efficiency of working
capital management during 1992 – 1993 to 2001 – 2002. For measuring the efficiency of
working capital management, performance, utilization, and overall efficiency indices were
calculated instead of using some common working capital management ratios.
The importance of cash flow is not new to the finance literature and so he cash conversion
cycle. As maintaining an optimal balance of cash is important for the profitability of the
organization, as an excess investment in cash is unproductive for the business.
Over twenty years ago, Largay and Stickney (1980) reported that the then-recent
bankruptcy of W.T. Grant, a nationwide chain of department stores, should have been

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 34

anticipated because the corporation had been running a deficit cash flow from operations for
8 of the last 10 years of its corporate life.
Walker and Petty (1978); Deakins ( 2001) both stress on cash management as managing
cash flow and cash conversion cycle is a critical component of overall financial management
for all firms, especially those who are capital constrained and more reliant on short-term
sources of finance
Eljelly (2004) elucidated that efficient liquidity management involves planning and
controlling current assets and current liabilities in such a manner that eliminates the risk of
inability to meet due short-term obligations and avoids excessive investment in these assets.
The relation between profitability and liquidity was examined, as measured by current ratio
and cash gap (cash conversion cycle) on a sample of joint stock companies in Saudi Arabia
using correlation and regression analysis. The study found that the cash conversion cycle was
of more importance as a measure of liquidity than the current ratio that affects profitability.
Apart from cash, accounts receivables, payables and inventory also accounts for the major
investment in the current assets and liabilities of the firm. Thus managing this investment at
the optimal level is necessary for an effective overall management of the working capital.
Deloof (2003) discussed that most firms had a large amount of cash invested in working
capital. It can therefore be expected that the way in which working capital is managed will
have a significant impact on profitability of those firms. Using correlation and regression
tests he found a significant negative relationship between gross operating income and the
number of days accounts receivable, inventories and accounts payable of Belgian firms. On
basis of these results he suggested that managers could create value for their shareholders by
reducing the number of days’ accounts receivable and inventories to a reasonable minimum.
The negative relationship between accounts payable and profitability is consistent with the
view that less profitable firms wait longer to pay their bills.
All the above studies provide a solid base and give an idea regarding importance of working
capital, working capital management and its components.
Working capital management ensures effective and efficient cash flow in the business with
the effective management of receivables, inventories and payables and helps in determining
short term fund required by the firm.

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 35


In a perfect world, there would be no necessity for current assets and liabilities because there
would be no uncertainty, no transaction costs, information search costs, scheduling costs, or
production and technology constraints. The unit cost of production would not vary with the
quantity produced. Borrowing and lending rates shall be same. Capital, labour and product
market shall be perfectly competitive and would reflect all available information, thus in such
an environment, there would be no advantage for investing in short term assets.

However the world we live is not perfect. It is characterized by considerable amount of

uncertainty regarding the demand, market price, quality and availability of own products and
those of suppliers. There are transaction costs for purchasing or selling goods or securities.
Information is costly to obtain and is not equally distributed, there are spreads between the
borrowings and lending rates for investments and financing of equal risks. Similarly each
organization is faced with its own limits on the production capacity and technologies it can
employ. There are fixed as well as variable costs associated with production of goods. In
other words, the markets in which real firm operated are not perfectly competitive.

These real world circumstances introduce problem’s which require the necessity of
maintaining working capital. For example, an organization may be faced with an uncertainty
regarding availability of sufficient quantity of crucial input in future at reasonable price. This
may necessitate the holding of inventory. Similarly an organization may be faced with an
uncertainty regarding the level of its future cash flows and insufficient amount of cash may
incur substantial costs. This may necessitate the holding of reserve of short term marketable
securities, again a short term capital asset. In the management of working capital the time
factor is not a crucial decision if the size of such assets is large, the liquidity position would
improve, but profitability would be adversely affected because of idle funds. Conversely, if
the holdings of such assets are relatively small, the overall profitability will increase, but it
adversely affected on the liquidity position and makes the firm more risky. So the working
capital management should aim at striking a balance such that there is an optimum amount of
short term assets.

Meaning Of Working Capital:

Ordinarily, the term “working capital” stands for that part of the capital, which is required for
the financing of working or current needs of the company. Working capital is the lifetime of
every concern. Whether it is manufacturing or non-manufacturing one without adequate
working capital, there can be no progress in the industry.

Inadequate working capital means shortage of raw materials, labour etc., resulting in partial
current assets less current liabilities-has no economic meaning in the sense of implying some
type of normative behaviour. According to this line of reasoning, it is largely an accounting
artefact. Working capital management, then, is a misnomer.

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 36

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


According to Western and Brigham, “Working

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

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







1.On the basis of Concept:

There are two concepts that are

re currently accepted about working capital. They are:

a) Gross working capital concept =Total of current assets

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

Gross working capital concept:

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

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

BBSR/2009-11 Page 37
Reasons given for the concept is:

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

2) Current asset whatever my be the sources of acquisition, are used in activities related
to day to day operations and their forms keep on changing. Therefore they should be
considered as working capital.

Net working capital concept:

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

The reasons for the net working capital method are:

1) The material thing in the long run is the surplus of current assets over current liability
2) Financial health can easily be judged by with this concept particularly from the view
point of creditors and investors.
3) Excess of current assets over current liabilities represents’ the amount which is not
liable to be returned and which can be relied upon to meet any contingency.
4) Intercompany comparison of financial position may be correctly done particularly
when both the companies have the same amount of current assets.

Components of Working Capital:

Current Assets Current Liabilities

• Cash in hand/bank • Bank overdraft
• Bills receivable • Bills Payable
• Sundry Debtors • Sundry Creditors
• Prepaid expenses • Outstanding Expenses
• Short term investment • Advance Taken
• Inventory
• Accrued Income

2. On the basis of Time:

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

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

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 38

Amount of working capital Amount of working capital




Time Time
(a) Permanent or Fixed Working Capital:
It represents that part of capital which is permanently locked up in the current assets and
carrying out business smoothly. It is permanent in nature and will increase as the size of
business expands. In other words current assets required on a continuing basis over the entire
year are permanent working capital.

Permanent working capital can be further divided into:

1. Regular Working Capital
2. Reserve Working Capital

1. Regular Working Capital:

It is the minimum amount of liquid capital needed to keep up the circulation of the capital
form cash to inventories to receivables and again to cash. This would include sufficient
minimum bank balance to discount all bills, maintain adequate supply of raw materials etc...

2. Reserve Working Capital:

It is the excess over the needs or regular working capital that should be kept in reserve for
contingencies that may arise at any time these contingencies include rising prices business
depression strikes special operations such as experiments with new products.

(b)Variable or Temporary Working Capital:

Variable Working Capital changes with the increase or decrease in the volume of business.

It may be sub-divided into.

1. Seasonal Working Capital
2. Special Working Capital

1. The working capital required to meet the seasonal needs of the industry is known as
seasonal working capital.
2. Special working capital is that part of the variable working capital with is required to
finance the special operations such as extensive marketing campaigns experiments
with the products or methods of production carry of special job etc.

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 39

Determinants of working capital:

1. Nature and Size of Business 11. Cash requirements

2. Manufacturing cycle 12. Time
3. Business fluctuation 13. Volume of sales
4. Production policy 14. Terms of purchases and sales
5. Firm’s credit policy 15. Inventory turnover
6. Availability credit 16. Inflation
7. Growth of expansion 17. Seasonal fluctuations
8. Profit margin and profit 18. Re payment ability
appropriation 19. Actives of firm
9. Price level Changes 20. Demand of creditors
10. Operating of efficiency

Advantage of adequate working capital:






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

BBSR/2009-11 Page 40
Disadvantage of inadequate or excess working capital











Working Capital Management:-


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

Why Working Capital Management?

The dynamic business environment demands a framework for an efficient working capital
management system in order to be more competitive.
Every business concern aims at having adequate or optimal amount of working capital to run
its business operations. Bothh excess as well as shortage of working capital situations are bad
for any business. Too much of working capital means that large sum of money is tied up in
accounts receivable and inventory and inadequate working capital can adversely affect the
productionn and business operation, which is more dangerous.
Thus the working capital management is required to maintain an optimal working capital
with a proper risk and return trade off.

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

BBSR/2009-11 Page 41
This principle is based on the following assumptions: -

1. There is direct relationship between risk and profitability -- Higher is the risk, higher
is the profitability, while lower is the risk, lower is the profitability.
2. Current assets are less profitable than fixed assets.
3. Short-term funds are less expensive than long-term funds.

Working capital meets the short term financial requirement of a business enterprise and
ensures flow of fund in the business which is very necessary to maintain business same as the
circulation of blood in human body. Poor financial planning or working capital management
on the part of any company can lead to the business failure. An active working capital
management is an extremely effective way to increase enterprise value by continuously
improving cash flow, reducing inventory & resulting capital costs, without sacrificing the
business of the company.

Now need is for an integrated roadmap to better working capital management- one that
shortens the cash conversion cycle and minimizes capital lockup, which can help the
organization to face any favorable and unfavorable economic situation.

A successful business functions like an olive tree. Olive trees are remarkable for their
survival skills. Deeply rooted in Greek history, their branches crowned the heads of the first
Olympic champions. Their longevity is a case study in adaptability- they require little water
and easily uprooted and replanted. Like the olive tree, a business must weather the elements
of any economic climate. Companies must adjust to macro business factors- economic
activity, interest rates, stock market valuations, and regulatory changes- over which they have
little control. Working capital performance is fundamental to a company’s ability to
adapt in a challenging economy, because it is both independent of macroeconomic factors
and firmly within an organization’s control. Reducing working capital fuels success by
enhancing economic value added, regardless of environmental changes. Thus working
capital optimization is a vital component of corporate strategy.

Active working capital management is an extremely effective way to increase enterprise

value. Optimizing working capital results in a rapid release of liquid resources and
contributes to an improvement in free cash flow and to a permanent reduction in
inventory and capital costs. In an average company, decreasing working capital by 30%
leads to approx. 16% increase in after-tax returns on invested capital.
A reduction of time span during which capital is tied up releases liquidity, has a direct impact
on the company’s financial position. However return on capital will also increase, balance
sheet structures will get optimized and company financial will get improved

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 42

Dimensions of Working Capital Management-:

1. Estimating Investment in Working Capital

2. Financing of Working Capital
3. Managing Profitability, Risk & Liquidity

Techniques used to forecast the working capital requirement:

There are basically 3 approaches used to forecast the working capital requirement:

1. Estimation of components of working capital method:

This method is based on the basic definition of working capital, excess of current assets over
the current liabilities. In other worked the amount of different constituent of the working
capital such as debtors, cash inventories, creditors etc are estimated separately and the total
amount of working capital requirement is worked out accordingly.

2. Percent sales method:

This is the most simple and widely used method in combination with other scientific
methods. According to this method a ratio is determined for estimating the future working
capital requirement. This is generally based on the past experience of management as the
ratio varies from industry to industry. For example if the past experience shows that the
amount of working capital has been 20% of sales and projected amount of sales for the next
year is Rs. 10 lakhs, the required amount of working capital shall be Rs. 2 lakhs.

As seen from above the above method is merely an estimation based on past experience.
Their fore a lot depends on the efficiency of decision maker, which may not be correct in all
circumstances. This method assumes a linear relationship of working capital and sales,
however the relationship can also be curvilinear.

3. Operating cycle approach:

The need of working capital arises mainly because of them gap between the production of
goods and their actual realization after sales. This gap is technically referred as the “operating
cycle” or the “cash cycle” of the business. If it were possible to complete the entire job
instantaneously, there would be no need for current asset (working capital). Since it is not
possible, every business organization is forced to have current asset and hence operating

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 43

Operating cycle and cash cycle are two important components of working capital
management. Together they determine the efficiency of a firm regarding working capital

Finished Goods

Work in Progress

Wages, Salaries,
Factory Overheads

Raw Materials

Cash Suppliers

Operating cycle:

Operating cycle refers to the delay between the buying of raw materials and the receipt of
cash from sales proceeds. In other words, operating cycle refers to the number of days taken
for the conversion of cash to inventory through the conversion of accounts
receivable to cash. It indicates towards the time period for which cash is engaged in inventory
and accounts receivable. If an operating cycle is long, then there is lower accessibility to
cash for satisfying liabilities for the short term.

Operating cycle takes into consideration the following elements:

 Accounts payable,
 Accounts receivable, and
 Inventory replacement.

The following formula is used for calculating operating cycle:

Operating cycle = age of inventory + collection period

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 44

Cash cycle:

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

The fundamental formula that is applied for the calculation of cash conversion cycle is
as follows:

Cash cycle = (Average Stockholding Period)

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


(Operating cycle – Average Payable Period)

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

A short cash cycle reflects sound management of working capital. On the other hand, a long
cash cycle denotes that capital is occupied when the commercial entity is expecting its clients
to make payments.

There is always a probability that a commercial enterprise can face negative cash conversion
cycle, in which case they are getting payments from the clients before any payment is made
to the suppliers. Instances of such business entities are commonly those companies, which
apply JIT or Just in Time techniques, for example Dell, as well as commercial enterprises,
which purchase on terms and conditions of longer duration credits and perform sales against
cash, for instance Tesco.

The more the manufacturing procedure is extended, the higher the amount of cash should be
kept engaged in inventories by the company. Likewise, the more time is taken for the clients
for the purpose of bill payment, the more is the accounts receivable amount. From another
viewpoint, if a company is able to detain the payment for its internal inputs, it can decrease
the amount of money required. Put differently, the net working capital is diminished by
accounts payable.

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 45

Different Sources of Financing Working Capital

Sources of Working Capital

Sources of Fixed Sources of Variable

portion of working portion of working
capital capital

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

Internal Sources External Sources

1. Provision for Taxation. 1. Loan from Bank or

2. Provision for Depreciation. other Financial
3. Ploughing back of profit. Institution.
2. Trade Credits &
3. Commercial Papers.
4. Advance from
5. Public Deposits.
6. Govt. Aid.

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 46

Managing components of working capital

Managing individual element of working capital plays an important role in integrated

working capital management. The various component of working capital are:

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

1. Receivables Management:

Account receivables represent the amount due from its customer to whom the company has
extended the credit. For most of the companies account receivables constitutes a major
components as it account for approximately 30% of the current asset.
When a company sells on credit, it does not get cash at the time of sale, while during the
process of manufacturing it has already spent money to pay for labour, raw material, and
other expenses. Therefore, the company has to find out source of financing which would
provide funds to finance that transaction for the time period for which credit has been
granted. Thus receivables imply investment and involve certain costs.
Besides the cost of investment, there are two types of risks which are associated with the
accounts receivables management. One is the risk of opportunity loss and the other liquidity
risk. Thus management of receivables requires a proper tradeoff among different risks and
Thus, the management of receivables involves the following steps:
• Management has to decide to whom the company should sell its products on credit. This
would require the development of the credit standard.
• Determining what are the factors the company should take into account while analyzing
the potential customers who are interested in availing the credit facility of the company
and what are the sources of information which one can use in credit analysis.
• The company has to determine the credit terms on which the company would be
interested in selling the goods.
• Once the decision to grant the credit has been implemented, what should be the collection
policy of the company? How should the company monitor its receivables and
subsequently control them.

I. Credit Standard:

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

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 47

Thus a company may define their credit standard in a very conservative or a strict manner and
thus restrain the marginal customers in getting credit.
The companies generally use some of the following quantitative indicators for establishing
credit standard.

• Payment Period
• Selected Financial Ratios
• Rating based on financial ratios.

The subjective assessment obtained through the market about the credit worthiness of the
customer also helps in defining credit standard.
Examining the effect of change in credit standards is done by comparing the profitability
generated by lowering down the credit standards and added cost of accounts receivables. So
long as the profitability is more than the added cost, the company can lower down the credit

II. Credit Terms:

The decision about the credit terns would involve the decision about the following variables:

• Credit Period
• Credit Limit
• Cash Discount
• Discount Rate and Discount Period

Credit period is the time for which the company is willing to allow their customers not to
pay their bills. Liberalizing the credit period means more investment in account receivables
and would also result in increase sales. Thus a proper balance is required while deciding
about the credit period and credit limit.

Cash discounts is a mechanism through which company is giving some benefits to

customers who opt to pay earlier and thus may influence its customers to pay promptly. Two
important aspects of this policy are - Cash discount rate and Discount period.
The cash discount policy would result into loss of revenue to the company. At the same time
the company would experience a quick collection resulting into lower collection period; this
in turn will affect the investment in receivables. Thus there will be need to find out whether
the returns on funds released on account of reduction in investment in accounts receivable is
more than the loss of revenue. Only if the returns completely offset the loss of revenue the
cash discount policy can be introduced.

III. Credit Analysis:

The company must have to evaluate the capability of the customer and his strengths to fulfill
the promise of paying the bills in time, they must analyze the risk of paying late or risk of
default before extending credit.

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 48

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

i. Character
It reflects the willingness of the customer to honor his obligations.
ii. Capacity
It reflects the ability of the customer to meet credit obligations from the operating cash flows.
iii. Condition
The market condition play an important role when one is doing credit analysis. The expected
recessionary trends in the market, growing competition and other market factors should be
taken into account when doing credit analysis of the customers. Given a particular set of
conditions, the cost associated with extending the credit may sometimes be high.
iv. Capital
It reflects the financial reserves or net worth of the customer, as when the customer face
difficulty in meeting his credit obligations from its operating cash flow, the focus shifts to its
v. Collateral
The security offered by the customer in the form of pledged assets.
The firm can use financial statements, bank references, experience of the firm, prices and
yields on securities etc. to get information on the five C’s.
Companies use more quantitative techniques in form of discriminant analysis to prepare
credit rating index to base their judgment about the credit worthiness of a customer and can
take decision regarding whether to grant credit or not.

IV. Control and Monitoring of Accounts Receivables:

It is important to design the collection policy and procedures so as to speed up the collections
as and when become due. Once the company has set the credit standards, credit policy, and
its collection policy, it is important for the company to watch and monitor the effectiveness of
In one of the methods for controlling and monitoring of accounts receivables, various targets
in terms of average collection period and bad debts to sales ratio get defined and accounts
receivables were monitored with reference to these ratios.
One traditional method for monitoring collection pattern associated with credit sales and
resulting accounts receivables is the aging schedule, which we use to observe the possible
changes in account receivables. But in situation when the company is in a seasonal business,
the aging schedule provides misleading signals. This would provide the appropriate signals
only in a situation when the company has got stable sales throughout the period.
In situation of seasonal business, receivables balance pattern or collection pattern is used to
monitor the account receivables of the company and this is done by preparing a collection
matrix which is concerned with the proportion of any month’s sales that remain outstanding

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 49

at the end of each following or subsequent month. Thus one can easily judge whether the
collection is improving, stable or deteriorating. Another benefit is that it provides a historical
record of collection percentage that can be useful in projecting monthly receipts for each
budget period.

2. Cash Management:

Cash is king- especially at a time when fund raising is harder than ever, as it is the most
liquid asset and is of vital importance to the daily operations of business firms and so the cash
management is one of the most critical aspects of working capital management to ensure
solvency of the firm.

Objectives of cash management

There are two basic objectives of cash management:
 To meet the cash disbursement needs as per the payment schedule;
 To minimize the amount locked up as cash balances.

Cash management involves the following four basic problems:

• Controlling levels of cash

• Controlling inflows of cash
• Controlling outflows of cash
• Optimum investment of surplus cash

• Controlling Levels of Cash:

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

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 50

• Controlling inflows of cash

Having prepared the cash budget, the finance manager should also ensure that there is no
significant deviation between the projected cash inflows and the projected cash outflows.
This requires controlling of both inflows as well as outflows of cash.
Speedier collection of cash can be made possible by adoption of the following techniques,
which have been found to be quite useful and effective:

Concentration banking is a system of decentralizing collections of accounts receivables in

case of large firms having their business spread over a large area. According to this system, a
large number of collection centers are established by the firm in different areas selected on
geographical basis. The firm opens its bank accounts in local banks of different areas where it
has its collection centers. The collection centers are required to collect cheques from their
customers and deposits them in the local bank account. Instructions are given to the local
collection centers to transfer funds over a certain limit daily telegraphically to the bank at the
head office. This facilitates fast movements of funds.
The company’s treasurer on the basis of the daily report received from the head office bank
about the collected funds can use them for disbursement according to needs.

Lock-box system, According to this system, the firm hires a post-office box and instructs its
customers to mail their remittances to the box. The firm’s local bank is given the authority to
pick the remittances directly from the post-office box. The bank picks up the mail several
times a day and deposits the cheques in the firm’s account. Standing instructions are given to
the local bank to transfer funds to the head office bank when they exceed a particular limit.
Thus it helps in further speeding up the collection of cash.

• Controlling Outflow of Cash:

An effective control over cash outflows or disbursements also helps a firm in conserving cash
and reducing financial requirements. However, there is a basic difference between the
underlying objective of exercising control over cash inflows and cash outflows. In case of the
former, the objective is the maximum acceleration of collections while in the case of latter; it
is to slow down the disbursements as much as possible. The combination of fast collections
and slow disbursements will result in maximum availability of funds.
Firms generally use the technique of “playing float” for maximizing the availability of
funds. The term float refers to the period taken from one stage to another in the cash
collection process.
These floats can be Billing Float, Capital Float, Cheque Processing Float and Bank
Processing Float.

• Investing Surplus Cash:

Managing surplus cash starts with determining the surplus cash and then identifying and
analyzing various sources of investment.
Surplus cash is the cash in excess of the firm’s normal cash requirements. While determining
the amount of surplus cash, we must take into account the minimum cash balance that the

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 51

firm must keep to avoid risk or cost of running out of funds. Such minimum level may be
termed a “safety level of cash”.
The safety level of cash is determined separately both for normal periods and peak periods.

During Normal period:

Safety level of cash = Desired days of cash x average daily cash outflows

During Peak Periods:

Safety level of cash = (Desired days of cash at the busiest period) x
(Average of highest daily cash outflows)

Desired days of cash is the number of days for which cash balance should be sufficient to
cover payments.
Average daily cash outflows mean the average amount of disbursements, which will have to
be made daily.
The “desired days of cash” and “average daily cash outflows” are separately determined for
normal and peak periods

Once the surplus is projected, it has to be determined how it should be split between
marketable securities and cash holdings. There are several outlets for short term
investments like inter corporate advances, inter corporate bills financing, stock market
operations, investment in units of mutual funds, treasury bills, commercial papers, etc.
The return on such investments is different and depends on money market conditions, amount
to be invested, period of investment and transaction cost.

The risks associated with a certain investment determine its safety, marketability and hence,
its yield. Thus there would be a need to maintain a trade-off between investment income and
transaction costs of investing and disinvesting.
Cash Management tools-There are certain optimization models that help in determining
optimum cash balance and optimum strategies’ for investment and disinvestment when
transaction costs play an important part. The two most popular models are as follows;
a) Miller –Orr
b)The Stone model

These are discussed below:

a)Miller –Orr cash management model is basically an application of control-limits theory

to the cash/investment decision. When the firm’s total cash goes outside the upper control
limit, investments are made to bring the cash balance back to the return point, when the
firm’s cash balance goes below the lower control limit, disinvestment are made to bring the
balance back to the return point.

b)The Stone model uses two sets of control limits i.e. inner control limits and the outer
control limits. The firm performs no evaluation until its cash balance fall outside the outer
control limits. When this occurs, the firm looks ahead by adding the expected cash flows for

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 52

the next few days to the current balance. If the sum falls outside the inner control limits, a
transaction is made; otherwise, the transaction is foregone. Investments are made to bring the
cash balance back to the return point if the upper control limit is exceeded; corresponding
disinvestments are made if the lower control limit is exceeded.

3. Inventory Management:

Inventory means tangible property which is held:

• For sale in the ordinary course of business; Or
• In the process of production (i.e. WIP) for sale; Or
• For consumption in the production of goods and services which will be used for sale in
the ordinary course of business.

In short inventory includes raw material, finished goods, work in progress, spares,
consumables etc.
Managing inventory is crucial for the successful working capital management as the
inventories constitute a major amount of investment in current assets.
Working capital requirements are influenced by inventory holding- the period during which
raw materials remain in store, that during which processing takes place and that during which
finished goods lie in the warehouse prior to sale. The level of inventory affects the total
investment in working capital. Inventory management i.e. ensuring that the optimum level of
investment is made and avoiding unnecessary blockage of funds in inventory will make room
for reduction in the investment and thus pave the way for a higher return on investment.

Motives for holding inventories:

There are three major motives for holding inventories:

• Transaction motive- so that there are no bottlenecks in production and/or sales.
• Precautionary motive- so that there is a cushion against unpredictable events.
• Inventories may also be held so that advantage can be taken of price fluctuations
By carrying inventories a firm can address to a large extent demand and lead time
uncertainties, and certain advantages can be derived from holding a large inventory, such as
economies in production and purchasing and flexibility in operations.
However, there are several disadvantages and costs associated with carrying large
inventories like ordering costs, cost of materials purchased, and carrying costs such as
insurance charges, rent of the floor, heating & lighting of the space, cost of wastage and
material losses etc.

Thus, there are two basic questions relating to inventory management:

• What should be the size of the order?
• At what level should the order be placed?
Thus the basic objective for inventory management is to ensure timely and adequate
availability of material, promotion of manufacturing efficiency and minimizing the wastages,
maintaining efficient production level, optimum investment and efficient use of capital, better
service to customers, etc.

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 53

Now to answer these questions, economic order quantity models helps a lot as it helps in
determining an order quantity, reorder quantity and safety level of inventory, thus ensuring
uninterrupted production and minimum carrying and ordering cost of inventory.

EOQ Model-:
The basic purpose behind such modeling is to arrive at the level of optimum investment in
inventories, which allow us to figure out the optimum lot size i.e. the number of units that
should be ordered each time.
There exist basically two kinds of models, deterministic and stochastic/ probabilistic.
Deterministic models are built on the premise that there is no uncertainty associated with the
demand and replenishment or lead times.
The probabilistic models take cognizance of the fact that there is always some uncertainty
associated with the demand pattern and lead times.
EOQ is an important concept which helps us to arrive at determining the optimal order
quantity of an item of inventory so that the total cost associated with the inventory will be
the least.
The EOQ model is useful in so far as it tells us the amount to order and the best timing of our
orders in the case of raw materials. With respect to finished goods inventories it enables us to
exercise better control over the timing and size of production runs. As a whole this model
provides a decision rule regarding the replenishment of inventories indicating the time and
the amount to be replenished.
There are occasions when a firm is able to take advantage of quantity discounts provided the
order size reaches a certain level. It’s necessary to analyze these cases as well as it can result
in lower cost of inventory.

Selective Inventory Management Technique:

Selective inventory management techniques are:

• A-B-C analysis
• Pareto analysis
• V-E-D analysis
• F-S-N analysis

These approaches are based on the logic that in any large number we usually have
“significant few” and “insignificant many”
In a study conducted sometimes ago, an automobile company found that it’s most expensive
or “A” parts constitute only 9% of its total number of parts but account for 57% of the
inventory value. Its next most expensive or “B” category items make up 10% of the total
number of parts, but account of 18% of the inventory value. The “C” category items account
for 20% in number and 15% in value terms.
Thus economies will be attainable when stringent control is imposed on “A” items maintain
bare minimum necessary level of inventories of these. Relatively larger quantities of the
cheaper items may be maintained without compromising the goal of financial management.
The F-S-N and V-E-D analysis are similar to A-B-C analysis is principle.

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 54

Under the F-S-N analysis goods are classified into fast-moving, slow moving and non-
moving categories.
Under the V-E-D analysis goods are classified into vital, essential and desirable categories.
A firm according to the circumstances obtaining in it, can use combination of these
techniques to control and monitor inventories and to achieve the goals of working capital

4. Payable management-:
Payable constitute a current or short term liability representing the buyer’s obligation to pay a
certain amount on a date in the near future for value of goods or services received. Trade
credit is extended in connection with goods purchased for resale or for processing and resale,
and hence excludes consumer credit provided to individuals for purchasing goods for ultimate
use and installment credit provided for purchase of equipment for production purposes. They
provide a spontaneous source of capital that flows in naturally in the course of business in
keeping with established commercial practices or formal understandings. It constitute major
segment of current liabilities.

Types of trade credit-:

Trade credit or payable could be of three types:
 Open accounts,
 Promissory notes, and
 Bills payable.

Open account or open credit operates as an informal arrangement wherein the supplier,
after satisfying himself about the credit worthiness of the buyer, dispatches the goods as
required by the buyer and sends the invoice with particulars of quantity dispatched, the rate
and total price payable and payment terms. The buyer records his liability to the supplier in
his books of accounts and this is shown as payable on open account. The buyer is then
expected to meet his obligation on the due date.

The promissory note is a formal document signed by the buyer promising to pay the amount
to the seller at a fixed or determinable future time. The promissory note is thus an instrument
of acknowledgment of debt and a promise to pay. The supplier may even stipulate an interest
payment for the delay involved in payment.

Bills payable or commercial drafts are instruments drawn by the seller and accepted by the
buyer for payment on the expiry of the specified duration. The bill or draft will indicate the
banker to whom the amount is to be paid on the due date, and the goods will be delivered to
the buyer against the acceptance of the bill.

Documents against payment and documents against acceptance are methods of deferring
payments vide release of documents against endorsement on the commercial drafts leading to
delivery of goods without payment, in case of documents against acceptance.

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 55

Determinants of trade credit:

The various determinants of trade credit are as follows:

• Size of the firm

• Industrial categories
• Nature of product
• Financial position of seller
• Financial position of the buyer
• Cash discount
• Degree of risk
• Nature and extent of competition.

Trade credit is a built-in source of financing that is normally linked to the production cycle of
the purchasing firm. If payments are made strictly in accordance with credit terms, trade
credit can be regarded as a cost free, non discretionary source of financing. But where the
buyer takes the privilege of delaying payment beyond the due date, it assumes the form of
discretionary financing and if this becomes a regular feature resulting in delinquency, trade
credit will cease to be cost free. The supplier may stop credit or may charge a higher price for
the product, to cover the risk.

Effective management of payables:

The salient points to be noted on effective management payables are:

1. Negotiate and obtain the most favorable credit terms consistent with the prevailing
commercial practice pertaining to the concerned product line
2. Where cash discount is offered for prompt payment, take advantage of the offer and
derive the saving there from.
3. Where cash discount is not provided, settle the payables on its date of maturity and not
4. Do not stretch payable beyond due date, except in inescapable situation, as such delay in
meeting obligations have adverse effects on buyer’s credibility and may result in more
stringent credit terms, denial of credit or higher prices on goods and services procured.
5. Sustain healthy financial status and a good track record of past dealings with the supplier
such as would maintain his confidence.
6. In highly competitive situations, supplier may be willing to stretch credit limits and
period. Assess your bargaining strength and get the best possible deal
7. Avoid the tendency to divert payables. Maintain the self liquidating character of payables
and do not use the funds obtained there from for acquiring fixed assets.
8. Provide full information to suppliers and concerned credit agencies to facilitate a frank
and fair assessment of financial status and associated problems
9. Keep a constant check on incidence of delinquency. Delays in settlement of payables with
reference to due dates can be classified into age groups to identify delays exceeding one
month, two months, three months etc.

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 56


1. Conservative Policy:
Conservative policy includes large investment in current asset. This policy yields low rate of
return but it also bears the lowest amount of risk i.e. there is a very low rate of probability of
running out of working capital.

2. Aggressive Policy:
Aggressive policy includes small investment in current asset. This policy yields high rate of
return but it also carries a huge amount of risk interrupted production & sales because of
frequent stock outs, inability to pay the creditors in time.

3. Average Policy:
Average policy is a middle way between conservative way & aggressive policy. It yields a
moderate rate of return with a moderate amount of risk.
It is also to be noted that, under perfect certainty Current asset holding is minimum.

Graphical Representation of various Policies of Working Capital Management:

Asset Level

Policy: A

Policy: B

Policy: C

Current asset


Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 57

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

Policy Type Liquidity Profitability Risk

A Conservative HIGH LOW LOW
C Aggressive LOW HIGH HIGH

• Profitability varies inversely with liquidity

• Profitability and risk go hand in hand i.e. Risk & Return

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

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 58



Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 59

The first part of the project deals with the analysis of working capital requirement of IOCL. I
have tried to analyze the working capital statement as well as schedules provided, subject to
various constraints.
raints. The first part of my analysis deals with the working capital statement of
IOCL; a comparative analysis of working
worki capital of IOCL over the five financial years:
years 2009-
10, 2008-09, 2007-08, 2006-007, 2005-06.. I have studied the differences in working capital
requirement over the five years and analyzed the reasons for such variances. My study
includes all components, the reasons for these variances and provides suggestions to improve
over every aspect so that the variances can be minimized.

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

(Rs. in Crore)
2005-06 2006-07 2007-08 2008-09 2009-10
Total CA 36482.56 39057.17 52,931.30 44812.17 59388.80
Total CL 25676.36 29705.87 34,580.98 35551.72 44751.73
Net Working 10806.20 9351.30 18,350.32 9260.45 14637.07




30000 CL


2005-06 2006
2006-07 2007-08 2008-09 2009-10

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

BBSR/2009-11 Page 60
(Rs. in Crore)

Items 2005-06
2005 2006-07 2007-08 2008-09 2009-10
Inventories 24277.79 24702.69 30,941.48 25149.6 36404.08
Debtors 6698.03 6736.06 6,820.54 5937.86 5799.28
Cash & Bank 744.17 925.97 824.43 798.02 1315.11
Loans & Adv. 4731.02 5917.1 13,554.71 11875.11 14728.83
Other CA 31.55 775.35 790.14 1051.58 1141.5




25000.00 Inventory
Cash & Bank
15000.00 Loans & Adv.
Other CA


2005-06 2006
2006-07 2007-08 2008-09 2009-10


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

 Sundry debtors are in decreasing

de trend in the last two years due to decrease in credit
periods given to the debtors.

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

 Loans & advances in 2009-10

2009 0 was the most due to more advance given by the
company to the employees for housing purpose, car loan, education, etc.

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

BBSR/2009-11 Page 61
(Rs. in Crore)

Items 2005-06
2005 2006-07 2007-08 2008-09 2009-10
Current 23697.85 26576.76 32896.39 32754.58 34480.17
Provisions 1978.51 3129.11 1684.59 2603.46 10271.56




Current Liabilities
15000 Provisions



2005-06 2006
2006-07 2007-08 2008-09 2009-10


 Among the two components of the block of current liabilities & provisions,
provisions current
liabilities account for approximately 90% over the five years, where the balance
balan is
contributed by provisions whereas in 2009-10,
2009 10, it is approx. 80% and the rest is
provisions. Current Liabilities increased nearly 45% from the year 2005-06
2005 to 2009-
10 where ass provisions has increased by 420%
420 from the year 2005-006 to 2009-10.

 The sundry creditors are the highest contributor in the block of current liabilities over
the last five years.

 Sundry creditors
ditors have increased from the year 2005-06 to 2009-110. Creditors figure
shows that the company is getting fair amount of credit from its suppliers and

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

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

BBSR/2009-11 Page 62

The increasing cost of crude oil in the international market is the main reason behind the
increasing trend of amount of inventory in the current asset block. On the other hand, the
steady increase in the block of sundry debtors indicates that the sales (credit) of IOCL are
increasing over the years.

Conclusion of the study:

At the conclusion of the study we can say that, the working capital management in IOCL is
quite impressive & management has a strong control over the various aspect of working
capital management such as working capital cycle period, ratios regarding working capital,
etc. But some scopes are still present for further improvement, such as:-

 Control over the increasing cash & bank balance,

 Increasing the credit sales of the firm because the growth of credit sales in IOCL is very
low over the years,

 The amount of credit sales & credit purchase in IOCL needs to e disclosed separately in
the annual reports of the firm.

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 63

A firm would like to know its financial standing vis-à-vis its major competitors and the
industry group. The analysis of financial performance of all firms in an industry and their
comparison at a given point of times is referred to the cross-section analysis or the inter-
firm analysis.

To ascertain the relative financial standing of a firm, its financial ratios are compared either
with its immediate competitors or with the industry average. We have used the data from
annual reports of the companies to illustrate the inter-firm comparison.

The financial statements of Indian Oil Corporation Ltd. over last five years can be analyzed
by applying the Ratio analysis method. The financial statements of IOCL over last five years
is also compared with its close competitors like Bharat Petroleum Corporation Ltd. and
Hindustan Petroleum Corporation Ltd.

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 64

Comparative Financial Statement

Comparison with Competitors

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

Contingent Liabilities 26,317.31 36,432.69 5,862.61 6,430.35 5,588.88

Book Value (Rs) 368.86 727.66 335.45 29.05 316.23

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 65

Ratio Analysis
1. Liquidity Ratios:

1.1 Current Ratio:

2005 2006 2007 2008 2009
IOCL 0.84 0.83 0.79 0.84 0.61
BPCL 0.77 0.67 0.61 0.74 0.5
HPCL 0.89 0.91 0.82 1.03 0.93



0.4 HPCL


2005 2006 2007 2008 2009


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

Current Ratio = Current Assets : Current Liabilities

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

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

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

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 Here current ratios show

sho a decreasing trend and it is not at all nearer to 2:1 (general
norm). So the company does not have a sound liquidity position.

 The company should maintain at least constant rate of current ratio over the years to
gain trust from investors and creditors.

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

1.2 Quick Ratio:

2005 2006 2007 2008 2009

IOCL 0.56 0.5 0.47 0.54 0.47
BPCL 0.4 0.39 0.45 0.61 0.67
HPCL 0.45 0.34 0.29 0.51 0.53






2005 2006 2007 2008 2009


Quick ratio, also called acid--test

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

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

Quick Ratio = (Current assets - Inventories) : Current Liabilities

Generally, a quick ratio of 1 to 1 is considered to represent a satisfactory current financial

condition. Although quick ratio is a more penetrating test of liquidity than the current ratio,
yet it should be used cautiously. A quick ratio of 1 to 1 or more does not necessarily imply
sound liquidity position.

In IOCL, the quick ratios are comparatively lower than other companies in oil sector and the
there is also a decreasing trend which is a not a good sign for the company. IOCL should look
after its quick asset position in near future.

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 68

2. Solvency Ratios:

2.1 Debt-Equity Ratio:

2005 2006 2007 2008 2009

IOCL 0.67 0.9 0.78 0.86 1.02
BPCL 0.61 0.92 1.05 1.29 1.75
HPCL 0.26 0.76 1.1 1.59 2.12




2005 2006 2007 2008 2009


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

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2.2 Long Term Debt Equity Ratio:

2005 2006 2007 2008 2009

IOCL 0.27 0.49 0.39 0.35 0.43
BPCL 0.2 0.18 0.21 0.34 0.31
HPCL 0.02 0.51 0.9 1.19 1.79


0.8 BPCL

0.6 HPCL

2005 2006 2007 2008 2009


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

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

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3. Management Efficiency Ratios:

3.1 Inventory Turnover Ratio:

2005 2006 2007 2008 2009

IOCL 7.19 7.26 8.84 9.09 13.98
BPCL 9.32 8.4 11.24 11.64 21.91
HPCL 10.63 9.18 11.14 9.47 15.31




2005 2006 2007 2008 2009

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

Inventory Turnover Ratio = Cost of goods sold : Average inventory

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

We see that the inventory turnover ratios of the above three companies are more or less close
to each other. BPCL has the highest
hi inventory turnover in 2009.. IOCL has maintained the
low inventory turnover among other companies through out o last five years, which indicates
the inefficient inventory management among the well off companies. BPCL B has a good
inventory management amongst the three.
Thus we can see that value of inventories mainly depend on two factors: international oil
prices and the cost of holding inventory. IOC has no control over the international oil prices
as it is determined by the external market forces. However IOCL should keep an accurate
check on their inventory holding period.

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 It shows the rapidity with which the inventory transforms into receivables through
 A highly inventory turnover ratio implies low inventory level and quick conversion of
inventory into sales. It is the sign of efficient inventory management.
 A low inventory turnover ratio indicates maintenance of a high level of inventory,
slow rotation of inventory in the operating cycle process. It is indicative for poor
 A too low inventory turnover ratio indicates holding of excessive inventory i.e.,
blocking of funds which increase cost and reduce profit.
 It is always desirable for a firm to maintain a balanced level of inventory. So a firm
must fix up an optimum inventory turnover level and try to maintain it.


 From the graph, we see that the firm’s utilization of inventory in generating sales has
improved marginally.
 Synchronization between production department and marketing division should be
there to avoid over or under stock situation. For e.g., like ABC analysis can be taken
as tools to reduce the excess working capital blockage.

Inventory Holding Period:

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

Days of Inventory Holding = 365 / Inventory Turnover

2005 2006 2007 2008 2009
IOCL 50.76495 50.27548 41.28959 40.15402 26.10873
BPCL 39.16309 43.45238 32.47331 31.35739 16.65906
HPCL 34.33678 39.76035 32.76481 38.54277 23.84063
From the above table, we can see that the inventory holding period of IOCL is the highest
among other companies for last five years which indicates high inventory blockage. So,
IOCL should control the cost of capital and measures should be taken.

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 72

3.2 Debtor Turnover Ratio:

2005 2006 2007 2008 2009

IOCL 28.81 28.23 32.23 36.5 48.15
BPCL 69.08 69.6 68.13 70.48 88.37
HPCL 58.73 58.53 60.42 63.44 63.23

2005 2006 2007 2008 2009

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

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

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

Debtors Turnover Ratio = Net credit sales/average debtors.

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

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

Average Collection Period = 365 / Debtors Turnover


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

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

• Poor collection efforts

• A receivable turnover may imply a strict credit policy or a reluctance or inability to
extent credit.
• Delay in customer payments.
• Customers in financial distress.

Average Collection Period:

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

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

 DGS & D (Directorate General Suppliers & Distributors)

 Non-DGS & D (Other than DGS & D)
 OMC (Oil Marketing Companies)

DGS & D:

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

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 74

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

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


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

3.3 Fixed Assets Turnover Ratio:

2005 2006 2007 2008 2009

IOCL 4.7 5.26 6.01 4.38 4.98
BPCL 7.34 7.8 8.47 5.15 5.98
HPCL 8.15 8.23 7.92 5.35 6.22




2005 2006 2007 2008 2009

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

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

3.4 Total Assets Turnover Ratio:

2005 2006 2007 2008 2009

IOCL 3.22 3.15 3.51 3.24 3.47
BPCL 5.64 4.32 4.59 4.14 4.04
HPCL 5.68 4.65 4.47 3.83 3.74



2005 2006 2007 2008 2009


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

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

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

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3.5 Investments Turnover Ratio:

2005 2006 2007 2008 2009

IOCL 8.21 8.26 10.1 9.09 13.98
BPCL 10.3 9.58 12.58 11.64 21.91
HPCL 11.84 10.14 12.31 9.47 15.31




2005 2006 2007 2008 2009


HPCL has the highest figure in the emerging trends.

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

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

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4. Profitability Ratios:

4.1 Net Profit Margin:

2005 2006 2007 2008 2009

IOCL 3.48 2.78 3.43 2.78 0.95
BPCL 1.65 0.38 1.85 1.42 0.54
HPCL 2.11 0.56 1.74 1.08 0.45


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

Net Profit Margin = Profit after tax / Sales

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

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




1.5 BPCL


2005 2006 2007 2008 2009

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During the year 2008-09 profit decreases. This is mainly due to

• Increasing crude oil prices in the global oil market especially from 2004.
• Pressure from Ministry of Finance, Govt. of India to keep the retail prices of SKO &
LPG low to avoid situation of sky-
sky rocketing inflation.
• Increase in manufacturing expenses and other expenses over the years has been another
reason for decrease in profit.
• In the year 2006-0707 every company’s net profit increases. This has resulted in the
increase in the market price/share (MPS), which is highly influential for the company.
• Dependence on government bonds (special oil bonds) has been another reason.

The other reason behind decreasing profit are-

Government is reluctant to pay higher subsidy year after year.
But if we compare between the three oil companies we can say that IOCL has fared well than
the two.

4.2 Gross Profit Margin(%):

2005 2006 2007 2008 2009

IOCL 5.66 4.68 5.09 3.47 3.46
BPCL 3.41 1.73 4.11 1.86 2.58
HPCL 3.75 1.33 2.85 0.95 1.84



2005 2006 2007 2008 2009

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

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

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

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

4.3 Operating Profit Margin(%):

2005 2006 2007 2008 2009

IOCL 5.32 4.46 4.97 4.56 4.4
BPCL 2.92 1.45 3.85 2.85 3.38
HPCL 3.49 1.14 2.8 1.77 2.63



2005 2006 2007 2008 2009


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

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

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4.4 Return on Capital Employed:

2005 2006 2007 2008 2009

IOCL 14.92 12.6 15.97 14.06 14.64
BPCL 14.94 4.53 16.97 11.37 14.88
HPCL 15.89 2.75 11.41 6.23 9.48







2005 2006 2007 2008 2009


It is the relationship between EBIT and Capital employed. The shareholders and long term
fund providers are very much concerned about return on capital employed (ROCE). It
measures how well the firm is using all of its assets. The higher the ratio the more favourable
the interpretation of the firm’s ability to use the available resources to generate income.
We see that IOCL has a constant return from 2005-2009,
2005 2009, whereas BPCL one time and HPCL
three times are in single digit.
IOCL has shown a good return as compared to industry average which is a good sign for the

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4.5 Return on Networth:

2005 2006 2007 2008 2009

IOCL 18.82 16.77 21.51 16.99 6.71
BPCL 15.12 3.19 17.57 13.53 6.06
HPCL 15.13 4.64 16.37 10.74 5.35




2005 2006 2007 2008 2009


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

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4.5 Earnings Per Share:

2005 2006 2007 2008 2009

IOCL 41.88 42.08 64.21 58.39 24.74
BPCL 32.19 9.72 49.94 43.72 20.35
HPCL 37.64 11.95 46.3 33.44 16.94






2005 2006 2007 2008 2009


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

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

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

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

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4.6 Dividend Per Share:

2005 2006 2007 2008 2009

IOCL 14.5 12.5 19 5.5 7.5
BPCL 12.5 2.5 16 4 7
HPCL 15 3 18 3 5.25

2005 2006 2007 2008 2009


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

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

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

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5. Debt Coverage Ratios:

5.1 Interest Coverage:





2005 2006 2007 2008 2009


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

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

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

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

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Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 86


The working capital requirement of IOCL as in most public sector enterprises are generally
met through cash credits and advances arranged with the State Bank of India and other
nationalized banks. Besides this short term borrowings against securities is taken from
nationalized and foreign banks and Collateralized Borrowings and Lending Obligation
(CBLO) from Clearing Corporation of India. On day to day basis. This process of taking term
loans is undertaken at the Corporate Office.


 It is evident from the above analysis that IOCL follows a conservative policy i.e. a greater
amount of investment in current assets.

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

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

 This is also due to discrepancies between the international market price of crude oil and
government controlled domestic prices.

 As IOCL being a public enterprise, it has to follow the government’s orders and can not
increase the prices of its products to international market rates.

 Hence, it should focus on improving its working capital condition by reducing

investments in current assets thereby reducing its losses.

 Thus IOCL should follow an average policy that provides the optimum combination of
the three issues of working capital management liquidity, profitability and return.

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 87


The requirement of oil is every where. All talk everywhere trickles down to nothing else, but
crude. Even as the man on the streets frets over the snowball effect of rising prices, number-
crunchers work at a hypnotic pace to figure out its next milestone. And governments across
the world, options at their disposal to deal with a catch-22 situation.

The current spike in the crude oil prices is hurting the industry and the economy. Crude
prices are rising at a soaring pace over the past 24 months. While the government’s not to
pass on rising costs to the retail consumers has shielded them against the run-away inflation,
it has encouraged wasteful consumption of petroleum products and left oil marketing
companies without money. The India’s biggest marketer and refiner is facing an acute
liquidity crunch which has forced to put all new projects on hold. If not checked in time, this
can seriously jeopardize the government’s capital expenditure and in turn India’s future
economic growth. Thus, although only the public sector oil companies and their shareholders
are bearing the burnt of the alarming spike in oil prices, currently investors in general may
have to pay for rising crude oil prices, through slower growth and resultant bearish trend on
the bourses. Crude oil represents nearly 35% of India’s energy basket. India imports 75% of
crude requirement, which add to its woes.

The above situation is reflected in the company’s recent working capital. But still it has a
better position than any other public sector oil company. IndianOil supplies its oil to other
companies in the eastern region like HPCL which do not have any refinery in the eastern
region. In way it has taken a part of its inventory in this respect. The inventory management
of IOCL can be improved upon because it is seen by the analysis that it’s inventory
management has scope for further improvement in comparison to the industry. Moreover,
most of the product of the other companies like BPCL and HPCL goes to the retail outlets
which are generally on cash and carry system and thus has high debtors turnover whereas
IOCL’s most of its product goes to other consumers which are mostly on credit basis.

After having done the analysis of working capital of IndianOil it is seen that working capital
is decreasing in last three years. The main reason for this decrease is the increase in liabilities.
It is increasing year after year. The private companies on the other hand are away from this
danger because they exports their products. They are not impelled to sell their products at low
prices and thus their progress is not hindered and they proceed without incurring high losses.

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 88


From the entire analysis what Indian Oil can do is simply strengthening their marketing
efforts and creates more demand for their product and also tries to use optimum level of
inventory. Besides they can implement certain plans so as to develop their business in future.

After doing the project the recommendation to IOCL may be to sustain with dignity as
discussed below:

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

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

 IOCL should approach Government to allow it to increase the prices of

regulated products especially LPG (Domestic) has to be marginally increased so
that loss on account of that is reduced. This is because loss per unit of LPG
(Domestic) is highest among the other products.

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

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

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 89


MMTPA - Million Metric Tonne per Annum

KL - Kiloliters
LSHS - Low Sulphur High Speed
FO - Furnace Oil
MS - Motor Spirit
SKO - Superior Kerosene Oil
LDO - Light Diesel Oil
LPG - Liquefied Petroleum Gas
ATF - Aviation Turbine Fuel
AFS - Aviation Fuel Stations
KSK - Kisan Seva Kendras
JV - Joint Venture
NELP - New Exploration Licensing Policy
E&P - Exploration & Production
R&D - Research and Development

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 90

Besides valuable inputs and suggestions from Finance Managers in Indian Oil Corporation
Ltd., following books and journals help me a lot in preparing this project report:-

 Annual Reports of IndianOil : 2004-05 to 2009-10

 Annual Reports of BPCL : 2004-05 to 2008-09
 Annual Reports of HPCL : 2004-05 to 2008-09


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


IOCL Intranet

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 91

Key Financial Ratios of Indian Oil Corporation
Financial Ratios
------------------- in Rs. Cr. -------------------
Particulars Mar '05 Mar '06 Mar '07 Mar '08 Mar '09
Investment Valuation Ratios:
Face Value 10 10 10 10 10
Dividend Per Share 14.5 12.5 19 5.5 7.5
Operating Profit Per Share (Rs) 63.47 66.86 92.14 94.73 113.42
Net Operating Profit Per Share (Rs) 1,191.89 1,497.37 1,853.57 2,074.51 2,575.73
Free Reserves Per Share (Rs) 207.99 231.37 279.23 324.13 343.01
Bonus in Equity Capital 91.29 91.29 91.29 89.42 89.42
Profitability Ratios:
Operating Profit Margin(%) 5.32 4.46 4.97 4.56 4.4
Profit Before Interest And Tax Margin(%) 3.8 3.18 3.74 3.43 3.43
Gross Profit Margin(%) 5.66 4.68 5.09 3.47 3.46
Cash Profit Margin(%) 4.96 4.03 4.62 3.61 3.5
Adjusted Cash Margin(%) 4.89 3.65 3.73 3.61 3.5
Net Profit Margin(%) 3.48 2.78 3.43 2.78 0.95
Adjusted Net Profit Margin(%) 3.41 2.4 2.49 2.78 0.95
Return On Capital Employed(%) 14.92 12.6 15.97 14.06 14.64
Return On Net Worth(%) 18.82 16.77 21.51 16.99 6.71
Adjusted Return on Net Worth(%) 18.47 14.49 15.71 14.83 17.4
Return on Assets Excluding Revaluations 6.51 5.36 7.36 5.95 --
Return on Assets Including Revaluations 6.51 5.36 7.36 5.95 --
Return on Long Term Funds(%) 19.62 16.18 20.59 19.54 20.72
Liquidity And Solvency Ratios:
Current Ratio 0.84 0.83 0.79 0.84 0.61
Quick Ratio 0.56 0.5 0.47 0.54 0.47
Debt Equity Ratio 0.67 0.9 0.78 0.86 1.02
Long Term Debt Equity Ratio 0.27 0.49 0.39 0.35 0.43
Debt Coverage Ratios:
Interest Cover 11.08 7.24 6.75 6.94 3.3
Total Debt to Owners Fund 0.67 0.9 0.78 0.86 1.02
Financial Charges Coverage Ratio 14.13 9.28 8.42 8.63 4.04

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 92

Financial Charges Coverage Ratio Post 12.53 8.16 7.82 7.23 2.53
Management Efficiency Ratios: Mar '05 Mar '06 Mar '07 Mar '08 Mar '09
Inventory Turnover Ratio 7.19 7.26 8.84 9.09 13.98
Debtors Turnover Ratio 28.81 28.23 32.23 36.5 48.15
Investments Turnover Ratio 8.21 8.26 10.1 9.09 13.98
Fixed Assets Turnover Ratio 4.7 5.26 6.01 4.38 4.98
Total Assets Turnover Ratio 3.22 3.15 3.51 3.24 3.47
Asset Turnover Ratio 3.5 4.02 3.97 4.38 4.98

Average Raw Material Holding 52.5 49.57 38.7 48.65 22.88

Average Finished Goods Held 28.6 27.21 22.26 21.49 16.43
Number of Days In Working Capital 14.52 13.35 6.7 18.93 4.38
Profit & Loss Account Ratios:
Material Cost Composition 88.52 90.91 89.28 90.23 89.12
Imported Composition of Raw Materials 75.68 80.46 84.09 84.46 82.7
Selling Distribution Cost Composition 4.21 3.84 3.57 3.53 3.15
Expenses as Composition of Total Sales 2.55 3.21 4.21 4.63 4.87
Cash Flow Indicator Ratios:
Dividend Payout Ratio Net Profit 39.47 33.87 34.83 10.51 36.11
Dividend Payout Ratio Cash Profit 27.72 23.35 25.6 7.39 17.32
Earning Retention Ratio 59.72 60.73 52.06 87.96 86.08
Cash Earning Retention Ratio 71.88 74.2 67.96 91.89 90.19
AdjustedCash Flow Times 2.52 4.09 3.32 3.94 4.15

Earnings Per Share 41.88 42.08 64.21 58.39 24.74

Book Value 222.47 250.88 298.22 344.58 368.86

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 93

Key Financial Ratios of Bharat Petroleum Corporation
Financial Ratios
------------------- in Rs. Cr. -------------------
Particulars Mar '05 Mar '06 Mar '07 Mar '08 Mar '09
Investment Valuation Ratios
Face Value 10 10 10 10 10
Dividend Per Share 12.5 2.5 16 4 7
Operating Profit Per Share (Rs) 56.41 36.71 102.83 87.15 125.59
Net Operating Profit Per Share (Rs) 1,929.25 2,517.78 2,670.69 3,048.28 3,708.38
Free Reserves Per Share (Rs) 194.39 277.22 273.74 312.56 316.74
Bonus in Equity Capital 92.33 92.33 76.61 76.61 76.61
Profitability Ratios
Operating Profit Margin(%) 2.92 1.45 3.85 2.85 3.38
Profit Before Interest And Tax 1.87 0.43 2.89 1.84 2.55
Gross Profit Margin(%) 3.41 1.73 4.11 1.86 2.58
Cash Profit Margin(%) 2.67 1.39 2.78 2.2 2.65
Adjusted Cash Margin(%) 2.68 1.57 3.13 2.2 2.65
Net Profit Margin(%) 1.65 0.38 1.85 1.42 0.54
Adjusted Net Profit Margin(%) 1.65 0.56 2.2 1.42 0.54
Return On Capital Employed(%) 14.94 4.53 16.97 11.37 14.88
Return On Net Worth(%) 15.12 3.19 17.57 13.53 6.06
Adjusted Return on Net Worth(%) 15.14 4.74 20.92 11.58 20.85
Return on Assets Excluding 4.71 1.02 5.3 3.67 1.53
Return on Assets Including 4.71 1.02 5.3 3.67 1.53
Return on Long Term Funds(%) 20.03 7.4 28.81 19.46 31.19
Liquidity And Solvency Ratios
Current Ratio 0.77 0.67 0.61 0.74 0.5
Quick Ratio 0.4 0.39 0.45 0.61 0.67
Debt Equity Ratio 0.61 0.92 1.05 1.29 1.75
Long Term Debt Equity Ratio 0.2 0.18 0.21 0.34 0.31
Debt Coverage Ratios
Interest Cover 10.98 3.21 7.5 4.51 2.29
Total Debt to Owners Fund 0.61 0.92 1.05 1.29 1.75
Financial Charges Coverage Ratio 15.24 6.32 9.4 6.15 2.78
Financial Charges Coverage Ratio 12.17 5.28 6.68 4.98 1.84
Post Tax

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 94

Management Efficiency Ratios Mar '05 Mar '06 Mar '07 Mar '08 Mar '09
Inventory Turnover Ratio 9.32 8.4 11.24 11.64 21.91
Debtors Turnover Ratio 69.08 69.6 68.13 70.48 88.37
Investments Turnover Ratio 10.3 9.58 12.58 11.64 21.91
Fixed Assets Turnover Ratio 7.34 7.8 8.47 5.15 5.98
Total Assets Turnover Ratio 5.64 4.32 4.59 4.14 4.04
Asset Turnover Ratio 4.57 4.36 4.98 5.15 5.98

Average Raw Material Holding 21.69 22.38 12.43 27.65 10.14

Average Finished Goods Held 34.05 31.28 25.74 20.66 12.79
Number of Days In Working Capital 1.52 12.15 7.02 15.05 6.93
Profit & Loss Account Ratios
Material Cost Composition 94.28 94.6 91.9 92.31 90.98
Imported Composition of Raw 55.18 71.52 72.14 70.99 --
Materials Consumed
Selling Distribution Cost 2.57 2.16 1.94 1.86 1.8
Expenses as Composition of Total 3.35 5.67 5.78 6.75 4.89
Cash Flow Indicator Ratios
Dividend Payout Ratio Net Profit 44.21 35.33 37.12 9.72 38.66
Dividend Payout Ratio Cash Profit 27.34 9.72 24.73 5.74 15.7
Earning Retention Ratio 55.87 76.08 68.82 88.64 88.75
Cash Earning Retention Ratio 72.69 91.41 78.05 93.73 92.11
AdjustedCash Flow Times 2.48 6.99 3.55 6.13 5.87

Earnings Per Share 32.19 9.72 49.94 43.72 20.35

Book Value 212.95 302.6 284.16 322.97 335.45

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 95

Key Financial Ratios of Hindustan Petroleum Corporation
Financial Ratios
------------------- in Rs. Cr. -------------------
Particulars Mar '05 Mar '06 Mar '07 Mar '08 Mar '09
Investment Valuation Ratios
Face Value 10 10 10 10 10
Dividend Per Share 15 3 18 3 5.25
Operating Profit Per Share (Rs) 61.96 24.02 74.23 54.42 96.99
Net Operating Profit Per Share (Rs) 1,773.04 2,105.05 2,644.18 3,074.09 3,681.81
Free Reserves Per Share (Rs) 238.76 247.31 272.74 301.17 306.11
Bonus in Equity Capital 78.01 78.01 78.01 78 78
Profitability Ratios
Operating Profit Margin(%) 3.49 1.14 2.8 1.77 2.63
Profit Before Interest And Tax 2.39 0.17 2.01 0.94 1.83
Gross Profit Margin(%) 3.75 1.33 2.85 0.95 1.84
Cash Profit Margin(%) 3.2 1.52 2.52 1.31 1.42
Adjusted Cash Margin(%) 2.9 1.18 2.07 1.31 1.42
Net Profit Margin(%) 2.11 0.56 1.74 1.08 0.45
Adjusted Net Profit Margin(%) 1.81 0.22 1.29 1.08 0.45
Return On Capital Employed(%) 15.89 2.75 11.41 6.23 9.48
Return On Net Worth(%) 15.13 4.64 16.37 10.74 5.35
Adjusted Return on Net Worth(%) 12.98 1.87 12.2 5.01 7.61
Return on Assets Excluding 6.7 1.63 4.94 2.73 --
Return on Assets Including 6.7 1.63 4.94 2.73 --
Return on Long Term Funds(%) 19.54 3.22 12.6 7.38 10.59
Liquidity And Solvency Ratios
Current Ratio 0.89 0.91 0.82 1.03 0.93
Quick Ratio 0.45 0.34 0.29 0.51 0.53
Debt Equity Ratio 0.26 0.76 1.1 1.59 2.12
Long Term Debt Equity Ratio 0.02 0.51 0.9 1.19 1.79
Debt Coverage Ratios
Interest Cover 20.69 2.67 5.43 2.15 1.53
Total Debt to Owners Fund 0.26 0.76 1.1 1.59 2.12
Financial Charges Coverage Ratio 28.39 6.92 7.04 3.22 2
Financial Charges Coverage Ratio 24.41 7.81 6.34 3.5 1.75
Post Tax

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 96

Management Efficiency Ratios Mar '05 Mar '06 Mar '07 Mar '08 Mar '09
Inventory Turnover Ratio 10.63 9.18 11.14 9.47 15.31
Debtors Turnover Ratio 58.73 58.53 60.42 63.44 63.23
Investments Turnover Ratio 11.84 10.14 12.31 9.47 15.31
Fixed Assets Turnover Ratio 8.15 8.23 7.92 5.35 6.22
Total Assets Turnover Ratio 5.68 4.65 4.47 3.83 3.74
Asset Turnover Ratio 4.87 5.32 5.76 5.35 6.22

Average Raw Material Holding 20.4 26.06 19.07 32.6 18.05

Average Finished Goods Held 26 27.98 23.65 27.93 18.31
Number of Days In Working Capital 6.81 8.42 -0.3 18.18 7.59
Profit & Loss Account Ratios
Material Cost Composition 90.44 95.11 92.36 96.28 91.75
Imported Composition of Raw 73.25 81.74 82.32 77.3 79.39
Materials Consumed
Selling Distribution Cost 3.22 3.06 2.88 2.11 2.01
Expenses as Composition of Total 2.68 3.94 5.29 6.1 4.81
Cash Flow Indicator Ratios
Dividend Payout Ratio Net Profit 45.41 28.61 45.09 10.47 36.17
Dividend Payout Ratio Cash Profit 29.97 10.6 31.14 5.98 13.36
Earning Retention Ratio 47.08 29.25 39.5 77.57 74.54
Cash Earning Retention Ratio 66.94 86.4 62.22 91.4 88.44
AdjustedCash Flow Times 1.25 7.81 5.61 12.16 12.65

Earnings Per Share 37.64 11.95 46.3 33.44 16.94

Book Value 248.75 257.44 282.87 311.3 316.23

Amit Kumar Shaw/09DM095/Institute of Management & Information Science, BBSR/2009-11 Page 97