Ratio Analysis and Comparative Study of Financials of IOCL With Its Competitors

Summer Training Project Report
On
Ratio Analysis and Comparative Study of Financials of IOCL with its
Competitors
Submitted for partial fulfilment of the Award

Of
Master of Business Administration
DEGREE
(2011-2013)
SUBMITTED BY
ARUSHIBHUTANI
1103270034
UNDER THE GUIDANCE OF
Internal Guide:JayaPandey
School of Management
ABES ENGINEERING COLLEGE,
GHAZIABAD
(ISO 9001:2000
AFFILIATED TO
certified)
MAHAMAYA TECHNICAL UNIVERSITY, NOIDA

Candidates Declaration/Certificate
I ARUSHI BHUTANI hereby declare that the work which is being presented in this report entitled Ratio
Analysis and Comparative Study of Financials of IOCL with its Competitors is an authentic record of
my own work carried out under the supervision of Ms. JAYA PANDEY.
The matter embodied in this report has not been submitted by me for the award of any other degree.
Dated:
ARUSHI BHUTANI
MBA Department
This is to certify that the above statements made by the candidate are correct to the best of my knowledge.
Prof. Rakesh Passi JAYA PANDEY

Head of Department Designation:
Date: Department:
Date:
2
ACKNOWLEDGEMENT
Interdependence is a higher value than independence
Some says Managers are born and some says managers are made. I was also in some dilemma before
commencing my Summer Internship Project. But after the successful completion of my summer internship
project, I came to know that managers are made if they are guided properly and are motivated to walk
willingly towards fulfillment of specific goals.
First of all, I express my sage sense of gratitude and indebtedness to H.O.D Prof. Rakesh Passi and my
mentor Ms. Jaya Pandey(Faculty) for her valuable guidance and intellectual suggestions during this project.
I express my sage sense of gratitude to my company mentor Mr. Shantanu Saxena (Senior Manager) for his
kind advice, suggestions and constant help in a lot of various ways during project course and I also thankful
to Mrs. Shweta Gupta (Manager) who was kind enough to give an opportunity to work under their immense
expertise.
Last but not the least I would like to express my heartily gratitude to my parents without their support and
blessings that work was not possible.
DATE:
PLACE: (ARUSHI BHUTANI)
3
CONTENT
PART 1
CHAPTER-1 6
INTRODUCTION 7
NEED OF THE STUDY 21
SCOPE OF THE STUDY 22
OBJECTIVE OF THE STUDY 23
PART 2
CHAPTER-2 25
RESEARCH METHODOLOGY 26
LIMITATIONS 28
CHAPTER-3 29
DESCRIPTIVE WORK 30
CHAPTER-4 64
DATA ANALYSIS AND INTERPRETATION 65
CHAPTER-5 87
CONCLUSION AND SUGGESTION 88
CHAPTER-6 102
REFERENCES 103
4
PART I
5

CHAPTER-I
INTRODUCTION
NEED OF THE STUDY
SCOPE OF THE STUDY
OBJECTIVE OF THE STUDY
6
INTRODUCTION
Introduction to IOCL
ESTABLISHMENT OF IOCL
In order to ensure greater efficiency and smooth working, the Government of India decided to merge the
refining and distribution activities.
The Indian Refineries and Indian Oil Company were combined to form the giant Indian Oil Corporation
Limited (IOCL) on 1st September 1964 with its registered office at Bombay. In 1967, the pipeline division
of the corporation was merged with the refineries division. Research and Development centre of Indian Oil
came into existence in 1972. In October 1981, Assam Oil Company was nationalized and has been
amalgamated with IOCL as Assam Oil Division (AOD).
7
IOCL TODAY
Indian Oil is not only the largest commercial enterprise in the country; it is the flagship corporate of
the Indian Nation. It is the highest ranked Indian Corporate in the prestigious FORTUNE GLOBAL
500listing. One of the NAVRATNAcompanies. Besides having a dominant market share, Indian Oil is
widely recognized as Indias dominant energy brand and customers perceive Indian Oil as a reliable
symbol for high quality products and services.
Indian Oil has been meeting Indias energy demands for over 5 decades. This oil concern is
administratively controlled by India's Ministry of Petroleum and Natural Gas, a government entity that
owns just over 90 percent of the firm. Since 1959, this refining, marketing, and international trading
company served the Indian state with the important task of reducing India's dependence on foreign oil and
thus conserving valuable foreign exchange. That changed in April 2002, however, when the Indian
government deregulated its petroleum industry and ended Indian Oil's monopoly on
crude oil imports.
Indian Oil is currently moving ahead through vertical integration- upstream into oil exploration &
production and downstream into petrochemicals- and diversification into natural gas marketing and
alternative energy, besides globalization of its downstream operations.
IOCL is Indias largest company by sales turnover of Rs. 3,28,744 crores and a profit of Rs.7445 crores for
the financial year 2010-2011.It is a major player in Oil and Gas Sector. It is mainly into downstream oil
business. The main operation of IOCL is refining crude oil and selling of subsidized products. India generally
imports around 70 % of its crude oil to cater the huge domestic demand.It is the major supplier to core
sector: Supplier of fuel (more than 80% of requirement) to Government organizations i.e. army, railways,
state road transport, air force & navy.
8
Key sectors like fertilizer, power & aviation are largely supplied by IOCL. The Diversified Customer
Base includes: Railways, Power House, Fertilizer Plants, Defence, Aviation, Coal, and Transport.
VISION
Care stands for: - Passion stands for: - Trust stands for: -
Concern Commitment Delivered Promises

Empathy Dedication Reliability
Understanding Pride Dependability
Co-operation Inspiration Integrity
Empowerment Ownership Truthfulness
Zeal & Zest Transparency
MISSION
o To maximize creation of wealth, value and satisfaction for the stakeholders.

o To attain leadership in developing, adopting and assimilating state-of-the-art technology for
competitive advantage.
o To provide technology and services through sustained Research and Development.
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o To foster a culture of participation and innovation for employee growth and contribution.
o To cultivate high standards of business ethics and Total Quality Management for a strong
corporate identity and brand equity.

o To help enrich the quality of life of the community and preserve ecological balance and
heritage through a strong environment conscience.
OBJECTIVES
o To serve the national interests in oil and related sectors in accordance and consistent with
Government policies.
o To ensure maintenance of continuous and smooth supplies of petroleum products by way of
crude oil refining, transportation and marketing activities and to provide appropriate
assistance to consumers to conserve and use petroleum products efficiently.

o To enhance the country's self-sufficiency in crude oil refining and build expertise in laying
of crude oil and petroleum product pipelines.

o To further enhance marketing infrastructure and reseller network for providing assured service to
customers throughout the country.

o To create a strong research & development base in refinery processes, product formulations,
pipeline transportation and alternative fuels with a view to minimizing/eliminating imports
and to have next generation products.

o To optimize utilization of refining capacity and maximize distillate yield and gross refining
margin.
o To maximize utilization of the existing facilities for improving efficiency and increasing
productivity.
o To minimize fuel consumption and hydrocarbon loss in refineries and stock loss in marketing
operations to effect energy conservation.

o To earn a reasonable rate of return on investment.
o To avail of all viable opportunities, both national and global, arising out of the Government of
Indias policy of liberalization and reforms.

o To achieve higher growth through mergers, acquisitions, integration and diversification by
harnessing new business opportunities in oil exploration &production, petrochemicals,
natural gas and downstream opportunities overseas.

10
o To inculcate strong core values among the employees and continuously update skill sets for
full exploitation of the new business opportunities.

o To develop operational synergies with subsidiaries and joint ventures and continuously
engage across the hydrocarbon value chain for the benefit of society at large.
RISKS & CONCERNS
Because of rise in the prices of crude oil and delays in receipt of
compensation from Government, there is an increased pressure on the
Corporation to raise debt which may
affect its capital expenditure
plans. In addition,
large scale
foreign
currency transactions with wide fluctuations in foreign
exchange always pose a risk.Even the supply disruption
poses a risk to the smooth operations of the corporations.

The Corporation has also to take strong action to strengthen its safety systems so as to minimize the
risk of accidents. And also upgrade its security systems.
CORPORATE SOCIAL RESPONSIBILITY
The Indian Oil Corporation makes continuous investments in innovative technologies and solutions
for a sustainable energy flow and economic growth and in developing techno-economically viable
and environment friendly products & services for the benefit of its consumers.
OPERATIONS
The companys operations are strategically structured along business verticals -Refineries, Pipelines, Marketing,
R&D and Business Development.

11
INDIANOIL GROUP REFINERIES AND PIPELINES NETWORK
12
CAPITAL ASSET PRICING MODEL (CAPM)
COMPARISON OF FUTURE EXPECTED RATE OF RETURN BASED ON CAPITAL ASSET PRICING
MODEL (CAPM) USING NSE DATA FOR PREVIOUS :-

13
COMPANY IOCL
COVARIANCE= 0.0069
BETA= 0.2606
MARKET RETURN= 0.2012
RISK FREE RETURN= 0.0828
FUTURE EXPECTED RATE OF RETURN= 0.1136
The snapshots of calculations of IOCL have already been shown in company analysis and that of BPCL and
HPCL are shown below:-
The covariance of IOCL and BPCL is more in comparison to HPCL which shows IOCL and BPCL stock
have a More strong correlation with BSE market in comparison to HPCL whose covariance is .0074 in
comparison to .0079 that of IOCL and BPCL. The beta component is the highest in case of IOCL which is .
9375 in comparison to BPCL which is .9367 and HPCL which is .8839 depicting IOCL is more prone to
systematic risk in comparison to others which depicts IOCL portfolio has to provide a greater return in order
to compensate greater risk. The market return for the industry is at .0034 and the risk free rate of return is .
0085 which is taken as the rate of return of Treasury bills of Central Government which is considered the
most secured security. The Future expected rate of return is the maximum in case of HPCL which is .0129
which shows HPCL portfolio is more risky portfolio in comparison to BPCL .Therefore HPCL and IOCL
needs to provide a higher return in comparison to BPCL since the beta component is more In case of IOCL
and HPCL.
SWOT Analysis With Respect To Marketing Division

Strengths:
o Indias highest ranked Fortune 500 Company and a market leader with 50% share ofpetroleum
products.
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o Possess the largest Pipeline Network; and thus has a vital competitive edge intransportation
costs and thus helps to access in deficit markets.

o IOC controls 10 refineries, by virtue of which it has a total share of around 34% ofIndias
overall refining capacity.

o There are more than 35600 sale points all over India which is 55% of industry.
o There are about 5096 distributors of Indane Cooking gas for catering 56 millionhouseholds.
o Reaching the doors of bulk customers : Bulk Consumer Pumps 7,593 (89%)
o Strong Brand name for its products (For example, SERVO which covers 42% marketshares,
with more than 450 grades).

o Excellent credibility and international corporate image for raising funds.
o IOC also acquired management control of the marketing company IBP, therebystrengthening
its position in these activities.

o There are around 229 active Patents which includes 125 international patents.
o 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 intalks with Caliak
of Turkey to set up an I0 million TPA grassroots refinery with aninvestment of $2 billion and
establish retail business. IOC is also weighing thepossibility of entering Indonesia.

o IOC has also started exploring the overseas markets for increasing its scope ofoperations. 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.
15
Weaknesses:
o The functioning of IOC is greatly influenced by the government policy andregulation. The
government has 82% stake in the company, thus gaining the control ofthe company. There is
always a risk of its proposals being rejected as there isuncertain political environment
prevailing in the country.

o The Advertisement strategy of IOCL is not extremely effective. For example, XtraPremium is
the best petrol available in the market, but due to lack of effectiveadvertisement, the sale of
the product is not in the desired level, where as Castrol isknown for its celebrity
advertisement.
o Even though IOC controls most retail outlets it has market share of only 33.8% in thepetrol
and 39.6% in diesel registering an increase of 0.5% and 0.3% respectively overthe last year.
o This is comparatively very small as compared to its size, reach and production. This isbecause
of the fact that its retail outlets are concentrated more in semi-urban area andrural area.
Opportunities:
o Enhancement of the distribution network must be made especially in the deficitregions.

o Distribution / sale of alternative products through existing retail network can bechalked out.
o With gas emerging as an attractive alternative fuel due to the twin benefits of lowpollution and
better economics, IOCL has planed to quickly establish itself in the gasmarket also. The LNG
and Hydrogen business offers an attractive environment for itsfuture business. Gas is steadily
growing into the most preferred fuel among utilityproviders such as power, fertilizers and
transportation. IOC plans to set up a

o Nationwide gas distribution network for serving major Indian cities to market CNG fo
automobiles and to import LNG.

o IOC signed a MOU with the National Iranian Oil Company (NIOC) for importing 2.5MMTPA
LNG and also for taking part in the LNG midstream projects in Iran. Theinitial efforts turned
successful with IOC already becoming the lead supplier of LNGtoEssar Steel and Gujarat
State Petroleum Corp. IOC has procured Exxon Mobilsregas from Qatar for a period of
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twenty five years from April 2004 to meet risingdemand. All these efforts would stimulate the
growth and profitability of the companyin the near term.

o Improvement of customer management services at the retail end (a customersatisfaction has
shown only 65% customer satisfaction level.
Threats:
o In the post APM scenario, IOC will face competition in the area of crude / productimport.
Consequently it has affected the margin of Rs.5000crore which it earns fromtrading
operations.
o Increase in number of players, specialization in lube marketing (such as HPCL,BPCL,
Reliance).Introduction of LNG / CNG in some metro cities (eg, Delhi) can reduce the
demandof petrol or diesel in near future.

o Consumption of marine fuel procured by some major public sector shippingcompanies is
showing a decreasing trend.

o Deregulation of Indian Petroleum sector: The deregulation of the petroleum sector inIndia
during 2002 abolished the monopoly stakes of IOC. The company is now
facingstiffcompetition from several players, striving to gain market share. There exists aclose
competition between ONGC and IOC in the Indian oil market. RIL has alsoemerged as an
important player competing in the upstream sector subsequent to thederegulation of the
petroleum sector.
17
SWOT Analysis With Respect To Refineries Division
Strengths:
o 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.
o 58% of IOCs refining capacity is located in the Northern and Western regions, which are high
demand and high growth areas.

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

o High quality LOBS produced by refineries contribute to world class lubes.
o No financial constraints in modernizing and improving facilities for refineries.
Weaknesses:
o Operating cost is comparatively higher than new refineries of competitors (e.g. Jamnagar
Refinery of Reliance Petroleum).

o There is less flexibility option of handling various types of crude (both sweet & sour) unlike
new refineries of competitors.
Opportunities:
o Need for additional refining capacity to meet rising demand in petroleum product.
o 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.
o Improvement / creation of new infrastructure storage, transportation and distribution.
o Globalization in refining, pipeline and consultancy.
Threats:
o The decontrol in Hydrocarbon sector is likely to bring in new players specially the MNCs,
with new refining capacity having the flexibility to improvise the product mix according to
the nature of market demand.

18
o Growth of merchant refining can be a new source of competition.
o Higher Capital needs to modernize existing infrastructure.
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NEED OF THE STUDY
IOCL is Indias largest company by sales turnover of Rs. 3, 28,744crores and a profit of Rs. 7445 crores for
the financial year 2010-2011.It is a major player in Oil and Gas Sector. It is mainly into downstream oil
business. The main operation of IOCL is refining crude oil and selling of subsidized products. India generally
imports around 80 % of its crude oil to cater the huge domestic demand. Thus, it would be really challenging
and beneficial to conduct a study on its corporate finance.
The Topic of my project is RATIO ANALYSIS AND COMPARATIVE STUDY OF FINANCIALS OF
IOCL WITH ITS COMPETITORSThis topic is of particular interest to me as in the current scenario of
globalization and increasing cross border transactions, the companies are getting more prone to risks.
Because of the great volatility and sensitivity of markets the companies today faces many types of risks for
which the management must take proper steps in order to reduce or overcome such risks.
The risks a company faces can be of two types: Business risk and financial risk. Business risk refers to the
possibility of the firm being unable to generate the revenues and operating cash flows it would ideally target.
Either the firm may not be able to sell enough of its products and services or it may find it difficult to sell at
the right price or both. Financial risk refers to the uncertainty associated with changes in interest rates,
foreign exchange rates, defaults, etc.
The Treasury Department of IOCL deals with both the risks. In this project I basically dealt with Foreign
Currency Risk and Interest Rate Risk. In this project I explained the various instruments that can be used to
hedge these risks. IOCL mainly uses forwards, options, swaps (instruments) to reduce/hedge foreign
currency risk
Thus, in this project report first of all an attempt is made to analyze the financial statements of IOCL using
various analytical tools followed by studying in detail various treasury functions being implemented at
IOCL.
20
SCOPE OF THE STUDY
The scope of the project is limited to corporate finance. It includes access to finance and treasury department
at IOCL.
21
OBJECTIVE OF THE STUDY
To have an overall picture of Treasury financing at IOCL this includes its risk hedging technique with
the help of few examples of loans taken.

To make an analysis of the consolidated financial statements of IOCL using financial analytical tools.
To make a comparative analysis of IOCL with its major competitors HPCL and BPCL with the help
of financial analytical tools thereby understanding where does IOCL stands in the industry.
Usage of SWOT analysis and Porters 5 forces model.
To use techniques like ratio analysis, forecasting, Capital Asset Pricing Model (CAPM), etc on live
data.
22
PART - II
23
CHAPTER-II
RESEARCH METHODOLOGY
LIMITATIONS
24
RESEARCH METHODOLOGY
1 Define the objective Clearly understanding the objective of the project and its
exact requirements.
2 Background study Reading the annual reports of IOCL for the period 2007 to
2011, various accounting and treasury manuals, and
standard FM text books to have a better understanding of
the project.
3 Preparation of financial models Preparing Financial models to enable proper and
exhaustive analysis. These financial models include
formats, graphs and key financial indicators.

4 Preparation of other analytical Preparing other analytical models like SWOT analysis,
models Porters 5 forces model better analysis and interpretation.

5 Collection of data Collecting the required data from various websites,
intranet of the company, interaction with the seniors in the
treasury department,
6 Analysis and review Analyzing and interpreting the data using the prepared
models followed by reviewing the output to ensure proper
and exhaustive analysis. Understanding the factors which
affect the organization favourably or adversely and
provide recommendations to use the factors towards the
growth of the organization.

7 Preparing the report The theoretical framework, findings, analysis, conclusions
and recommendations presented to the organization in the
form a project report to enable proper reporting of the
findings.
25
LIMITATIONS
Lack of access to information due to the discomfort in disclosure of financials as they are highly
confidential especially for the treasury department.

Detailed data regarding certain specific questions/problems may not be obtained because some data is
considered to be too sensitive to disclose by the company.

The analytical models used helps to best interpret the data. However, the analysis is based on certain
assumptions and cannot be fully depended upon.

All the calculations and analysis have been done till financial year 2010-11 because the data for
financial year 2011-12 are yet to be made public by the company.
26
CHAPTER-
III
DESCRIPTIVE WORK
27
DESCRIPTIVE WORK
ECONOMY INDUSTRY ANALYSIS
DOMESTIC ECONOMIC CONDITIONS
The Economy of India is the ninth largest in the world by nominal GDP and the third largest by purchasing
power parity (PPP). The country is one of the G-20 major economies and a member of BRICS (Brazil,
Russia, India, China, and South Africa). In 2011, the country's GDP PPP per capita was $3,703 IMF, 127 th in
the world, thus making a lower-middle income economy.
The independence-era Indian economy (before and a little after 1947) was inspired by the Soviet model of
economic development, with a large public sector, high import duties combined with interventionist policies,
leading to massive inefficiencies and widespread corruption. However, later on India adopted free market
principles and liberalized its economy to international trade under the guidance of Dr. Manmohan Singh, who
then was the Finance Minister of India under the leadership of P.V. NarasimhaRao the then Prime Minister.
Following these strong economic reforms, the country's economic growth progressed at a rapid pace with
very high rates of growth and large increases in the incomes of people.
India recorded the highest growth rates in the mid-2000s, and is one of the fastest-growing economies in the
world. The growth was led primarily due to a huge increase in the size of the middle class consumer, a large
labour force and considerable foreign investments. India is the fourteenth largest exporter and eleventh
largest importer in the world. Economic growth rates are projected at around 6.9% for the 2011-12 fiscal
year.
A combination of protectionist, import-substitution, and Fabian socialist-inspired policies governed India for
sometime after India's Independence from the British. The economy was then characterized by extensive
regulation, protectionism, public ownership, pervasive corruption and slow growth. Since 1991, continuing
economic liberalization has moved the country towards a market-based economy. A revival of economic
28
reforms and better economic policy in first decade of the 21st century accelerated India's economic growth
rate. In recent years, Indian cities have continued to liberalize business regulations. By 2008, India had
established itself as one of the world's fastest growing economies. Growth significantly slowed to 6.79% in
200809, but subsequently recovered to 7.4% in 200910, while the fiscal deficit rose from 5.9% to a high
6.5% during the same period. Indias current account deficit surged to 4.1% of GDP during Q2 FY11 against
3.2% the previous quarter. The unemployment rate for 2010-11, according to the state Labour Bureau, was
9.8% nationwide. As of 2011, India's public debt stood at 62.43% of GDP which is highest among the
emerging economies.
India's large service industry accounts for 57.2% of the country's GDP while the industrial and agricultural
sectors contribute 28.6% and 14.6% respectively. Agriculture is the predominant occupation in Rural India,
accounting for about 52% of employment. The service sector makes up a further 34%, and industrial sector
around 14%. However, statistics from a 200910 government survey, which used a smaller sample size than
earlier surveys, suggested that the share of agriculture in employment had dropped to 45.5%.
Major industries include telecommunications, textiles, chemicals, food processing, steel, transportation
equipment, cement, mining, petroleum, machinery, software and pharmaceuticals. The labour force totals to
500 million workers. Major agricultural products include rice, wheat, oilseed, cotton, jute, tea, sugarcane,
potatoes, cattle, water buffalo, sheep, goats, poultry and fish. In 20092010, India's top five trading partners
are United Arab Emirates, China, United States.
As of 2011, India imported about 80% of its crude oil requirements. In 2011, India is the fourth largest
producer of electricity and oil products and the fourth largest importer of coal and crude-oil in the world.
Coal and oil together account for 66 % of the energy consumption of India.
India's oil reserves meet 25% of the country's domestic oil demand. As of 2009, India's total proven oil
reserves stood at 775 million metric tonnes while gas reserves stood at 1074 billion cubic meters. India is the
fourth largest consumer of oil in the world and imported $82.1 billion worth of oil in the first three quarters
29
of 2010, which had an adverse effect on its current account deficit. The petroleum industry in India mostly
consists of public sector companies such as Oil and Natural Gas Corporation (ONGC), Hindustan Petroleum
Corporation Limited (HPCL) and Indian Oil Corporation Limited (IOCL). There are some major private
Indian companies in the oil sector such as Reliance Industries Limited (RIL) which operates the world's
largest oil refining complex .
India produces just over 26% of its total crude consumption. Government-run ONGC is the countrys largest
oil producer, contributing about 78% to the total production. The other state-run player involved in
exploration and crude production is Oil India.
RIL, Essar Oil and Cairn India are the major private sector participants in Indias oil production business.
While ONGC has accounted for nearly 75% of the oil and gas output in India till recently, its share has been
declining, with private sector participants eating into its pie. After the government opened up the refining
sector in 1991, private participants like RIL and Essar Oil set up refineries.
GLOBAL ECONOMIC ENVIRONMENT
The oil industry is one of the most profitable on Earth, but it is not risk free. Oil prices vary daily and depend
on a variety of factors over which individual governments and industry have limited to no control. These
include worldwide rates of consumption and production, the overall health of the global economy, and socio-
political developments in nations that buy or sell petroleum and its products. Global fuel consumption has
30
increased in recent decades, due in part to population growth, increased urbanization, and the rapid economic
development of populous countries like China and India. As more people live in industrialized urban centres,
energy consumption increases alongside the demand for petroleum products. Since the mid-1990s, the
worlds demand for crude oil has steadily climbed from about 60 million barrels per day to 88 million
barrels per day.
If the demand for oil becomes greater than the industrys ability to supply it, then prices will likely rise
sharply. This occurred at the start of the 21st century, when above-average global economic growth created a
surge in energy demands. The price of crude oil more than doubled from $11.11 per barrel at the start of 1999
to $25.66 per barrel at the end 2000. In the coming years, hurricane-related supply disruptions, a weakening
American dollar, war in Iraq (which decreased that oil-rich countrys production rate), industrialization,
population growth, rising fuel demands in emerging economies, and other factors caused oil prices to climb
steadily higher, until they reached a record-setting $147.27 per barrel on 11 July 2008.
However, the situation reversed in the coming months, as the world entered a financial crisis and crude prices
tumbled. This was in large part due to the collapse of the American mortgage market in September 2008,
which led to significant stock markets losses around the world and forced several large financial institutions
in the United States and Europe to collapse or receive government monies to remain solvent. By the end of
November, the Unites States, Japan, and many European countries had entered into a recession, while
Canada announced it may also be headed for a recession in 2009. A country is in recession if it experiences
negative economic growth for a period of six months or longer.
Unemployment and the threat of unemployment became increasingly widespread in late 2008 as industries
around the world struggled to remain profitable in a weakening and unstable economy. With less money to
spend, individuals, industries, and countries may buy less oil in 2009 than they did in recent years, causing
global fuel consumption to decrease. Concerns in the marketplace that the oil industry may produce more
petroleum than it can sell have pushed prices down significantly. Light crude dropped to $43.93 a barrel on 4
31
December 2008 and industry officials expect it to continue falling in the coming months as demand shrinks
in oil-consuming regions.
High oil prices threaten to worsen a global economic slowdown and crude producers should consider
boosting output, The current high oil prices have the potential to strangle the economic recovery in many
countries, everyone is hoping that high oil prices don't slow down Chinese economic growth and the negative
effect that would have on the global recovery."
Crude has jumped to $106 a barrel from $75 in October amid signs the US economy will likely avoid a
recession. Most economists expect global growth to slow next year as Europe's debt crisis threatens to drag
the continent into recession. Crude producers should boost output amid growing demand in developing
countries and falling inventories in wealthy nations. But seeing that oil prices are still high today and the
negative effect that has on the recovery of the global economy, I hope the energy producing countries will
take these things into account and make their decision accordingly."
It is expected that crude prices could rise to $150 per barrel by 2015 if oil-producing countries in the Middle
East and North Africa don't invest $100bn a year to maintain existing fields and develop new ones. More
than 90% of global crude production growth during the next 20 years will come from that region, led by
Saudi Arabia, Iran, Iraq, Kuwait, Algeria and United Arab Emirates.
Recent developments, including the Arab spring, have changed the mindset of many governments. In some
countries, oil investments have been diverted to social spending. Oil policies are taking on a more
nationalistic tone, which means not to increase production as much as is needed in the world market.
32
PORTERS 5 FORCES MODEL
Porter identified five competitive forces that shape every single industry and market. These forces help us to
analyze everything from the intensity of competition to the profitability and attractiveness of an industry.
Threat of New Entrants. There are thousands of oil and oil services companies throughout the world, but
the barriers to enter this industry are enough to scare away all but the serious companies. Barriers can vary
depending on the area of the market in which the company is situated. Companies in oil industries such as
these have higher barriers to entry than ones that are simply offering drilling services or support services.
Having ample cash is a barrier - a company had better have deep pockets to take on the existing oil
companies.
Power of Suppliers. While there are plenty of oil companies in the world, much of the oil and gas business
is dominated by a small handful of powerful companies. The large amounts of capital investment tend to
weed out a lot of the suppliers of rigs, pipeline, refining, etc. There isn't a lot of cut-throat competition
between them, but they do have significant power over smaller drilling and support companies.
Power of Buyers. The balance of power is shifting toward buyers. Oil is a commodity and one company's oil
or oil drilling services are not that much different from another's. This leads buyers to seek lower prices and
better contract terms.
Availability of Substitutes. Substitutes for the oil industry in general include alternative fuels such as coal,
gas, solar power, wind power, hydroelectricity and even nuclear energy. Oil is used for more than just
running our vehicles, it is also used in plastics and other materials Also, companies offering more obscure or
specialized services such as seismic drilling or directional drilling tools are much more likely to withstand
the threat of substitutes.
Competitive Rivalry. Slow industry growth rates and high exit barriers are a particularly troublesome
situation facing some firms. Oil refineries were a particularly good example. At the same time, exit barriers
33
in the refinery business are quite high. Besides the scrap value of the equipment, a refinery that does not
operate has no value-adding capability. Almost every refinery can do one thing - produce the refined products
they have been designed for
Porters Five competitive forces model
34
FISCAL & MONETARY POLICY
Oil and Gas sector
NELP
The oil and gas industry is one of the most important sectors for any economy and directly impacts the
energy security of a country. It assumes all the more importance for a country with scarce oil & gas reserves,
such as India. Any change in supply and pricing of petroleum products directly impacts cost of day-to-day
economic activities and is a large contributor to Inflation.
The oil & gas industry is a sector that requires huge capital outlay as well as state of the art technology for
optimum utilization of country's limited oil & gas reserves. The Government recognizes the strategic
importance or Indian oil & gas sector and thus regularly invites the global oil & gas companies to bid for
license for exploration & production of oil & gas blocks in India under the New Exploration Licensing
Policy (NELP) scheme. Recently, the Government has launched the Ninth round of NELP (NEPL-IX),
wherein the Government is offering 34 oil & gas blocks.
However, to make such policy initiatives successful and to attract global players, it is important that the
Government gives adequate fiscal incentives to such players for investing in Indian oil & gas industry as well
as also removes any existing uncertainties/ambiguities around taxation of such companies in India.
Appropriate fiscal incentives will attract more companies to invest in the Indian oil & gas sector.
From policy standpoint, the Government took an important decision last year i.e. deregulation of
petrol prices. This step was in a right direction towards reducing the losses of oil marketing companies in
India and also reducing the burden of oil subsidy on government coffers. However, the steep rise in crude oil
prices and inflation trends are likely to impact the plan of fully de-regulating the downstream sector.
35
Inflation and Fiscal Policy affects the level of economic activities of a country. Inflation can be specified as
an increase in the general level of prices for goods and services that eventually declines the purchasing power
of money. Fiscal policy is the Governments expenditure policy that influences macroeconomic conditions.
Inflation
Inflation is a monetary phenomenon, which is usually measured by changes in Consumer Price Index (CPI).
When a persistent increase occurs in the level of prices that lowers the purchasing power of money, we call it
inflation.
Causes of Inflation
When too much money is in circulation in comparison to the production of goods and services, then inflation
occurs. It can also be said that inflation occurs when the supply of money per unit of output increases. The
consequence is the fall of purchasing power of money. Inflation also brings down the rate of savings.
Measurement of Inflation
It is necessary to understand the changes of relative and absolute price, at the time of evaluating inflation
rate. One of the vital factors to be considered, while evaluating inflation, is the GNP (Gross National
Product) of the country. Generally inflation is calculated by changes in the Consumer Price Index.
Fiscal policy
The fiscal policy is basically the revenue generating policy of the Government. The government finances
expenditures on the basis of this fiscal policy. The two methods of financing are borrowing and taxation.
Taxation can be of several forms like taxation of personal and corporate income, value added taxation and the
collection of royalties. A government not having sufficient tax revenue to finance its expenditure borrows
money to provide goods and services to its people. The government borrows money through the issuance of
securities.
36
Impact of fiscal policy
The fiscal policy influences interest rates, tax rates and government spending strategy.
Economic effects of fiscal policy
The fiscal policy has the power to affect the level of overall demand in the economy. The primary objective
of fiscal policy is to maintain the price stability, economic growth and employment of the country. Hence an
appropriate fiscal policy can help in combating rising inflation rate.
37
NEW EXPLORATION LICENSING POLICY (NELP)
New Exploration Licensing Policy (NELP) provides an international class fiscal and contract framework for
Exploration and Production of Hydrocarbons. In the first seven rounds of NELP spanning 2000-2009,
Production Sharing Contracts (PSCs) for 203 exploration blocks have been signed. Under NELP, 70 oil and
gas discoveries have been made by private/joint venture (JV) companies in 20 blocks.
With a view to accelerate further the pace of exploration, the eighth round of NELP was launched in April
2009.In the eighth round of NELP,70 exploration blocks comprising of 24 deepwater blocks,28 shallow
water blocks and 18 on land blocks will be offered.
38
EXPLANATION OF THE POLICY
In reducing the CRR, the Reserve Bank has attempted to address the structural pressures on liquidity in a
way that is not inconsistent with the prevailing monetary stance. In the previous two guidance, it was
indicated that the cycle of rate increases had peaked and further actions were likely to reverse the cycle.
Based on the current inflation trajectory, including consideration of suppressed inflation, it is premature
to begin reducing the policy rate. The reduction in the policy rate will be conditioned by signs of
sustainable moderation in inflation. However, the persistence of tight liquidity conditions could disrupt
credit flow and further exacerbate growth risks. In this context, the CRR is the most effective instrument
for permanent liquidity injections over a sustained period of time. The reduction can also be viewed as a
reinforcement of the guidance that future rate actions will be towards lowering them.
1. However, it must be emphasized that the timing and magnitude of future rate actions is contingent on
a number of factors. Policy and administrative actions, which induce investment that will help
alleviate supply constraints in food and infrastructure, are critical. Initiatives to narrow skill
mismatches in labour markets will help ease the pressure on wages. The anticipated fiscal slippage,
which is caused largely by high levels of consumption spending by the government, poses a
significant threat to both inflation management and, more broadly, to macroeconomic stability.
2. Strong signs of fiscal consolidation, which will shift the balance of aggregate demand from public to
private and from consumption to capital formation, are critical to create the space for lowering the
policy rate without the imminent risk of resurgent inflation. In the absence of credible fiscal
consolidation, the Reserve Bank will be constrained from lowering the policy rate in response to
decelerating private consumption and investment spending. The forthcoming Union Budget must
exploit the opportunity to begin this process in a credible and sustainable way.
REFINING
39
REFINING CAPACITY
At present, there are 20 refineries operating in the country, out of which 17 are in the public sector and 3 in
the private sector. Out of 17 public sector refineries, 9 are owned by Indian Oil Corporation Limited (IOCL),
2 each by Chennai Petroleum Corporation Limited (a subsidiary of IOCL), Hindustan Petroleum Corporation
Limited (HPCL), Bharat Petroleum Corporation Limited (BPCL) and Oil and Natural Gas Corporation
Limited, and 1 by Numaligarh Refinery Limited (a subsidiary of BPCL). The private sector refineries belong
to Reliance Industries Limited and Essar Oil Limited.
Refinery Production Performance
Qty. in MMT
Surplus(+)
Planne Actual
%age Surplus(+) Shortfall Shortfall(-
d Productio
Month / Period achievemen (-) Vis--vis target ) over last
Target n
t (%age) year
(MMT) (MMT)
(%age)
November 2011 13.71 14.42 105.2 5.2 11.2
Apr-Nov 2011-12 107.09 111.37 104.0 4.0 4.5
Apr-Nov 2010-11 106.56
Source: Ministry of Petroleum & Natural Gas
Refinery Capacity Utilization [excluding RPL (SEZ)]
Month Utilization (%)

November 2011 109.4
November 2010 101.6
April-November 2011-12 104.2
April-November 2010-11 102.6
40
Source: Ministry of Petroleum & Natural Gas
41
INDIAS FOREIGN TRADE POLICY
EXPORTS
Within manufacturing, other commodities groups, viz., leather & manufactures, chemicals & related products
and textiles & textile products witnessed higher growth during April-June 2011 as against the corresponding
period of 2010-11. However, petroleum products and ores and minerals were the sectors which recorded
decelerated growth during April-June 2011. Lower growth in commodities, viz., ores & minerals possibly
reflects reduced demand for basic inputs due to concerns with regard to global slowdown.
Imports during January, 2012 were valued at US$ 40.11 billion representing a growth of 20.25 per
cent in Dollar terms over the level of imports valued at US$ 33.35 billion in January, 2011.
Cumulative value of imports for the period April-January, 2011-12 was US$ 391.46 billion as against
US$ 302.53 billion registering a growth of 29.40 per cent in Dollar terms over the same period last
year.
Oil imports during January, 2012 were valued at US$ 12.32 billion which was 26.78 per cent higher than oil
imports valued at US$ 9.72 billion in the corresponding period last year. Oil imports during April-January,
2011-12 were valued at US$ 117.91 billion which was 38.83 per cent higher than the oil imports of US$
84.93 billion in the corresponding period last year.
Non-oil imports during January, 2012 were estimated at US$ 27.78 billion which was 17.56 per cent
higher than non-oil imports of US$ 23.63 billion in January, 2011. Non-oil imports during April-
January, 2011-12 were valued at US$ 273.54 million which was 25.71 per cent higher than the level
of such imports valued at US$ 217.59 billion in April - January, 2010-11.
The trade deficit for April-January, 2011-12 was estimated at US$ 148.67 billion which was higher
than the deficit of US$ 105.89 billion during April-January, 2010-11.
42
(Figures in US$ billion)
DEPARTMENT OF COMMERCE
ECONOMIC DIVISION
EXPORTS & IMPORTS
April-
January
January
EXPORTS (including re-exports)
2010-2011 23.02 196.63
2011-2012 25.35 242.79
% Growth 2011-2012/ 2010-
6.71 25.84
2011
IMPORTS
2010-2011 33.35 302.53
2011-2012 40.11 391.46
% Growth 2011-2012/ 2010-
2011 19.81 30.37

TRADE BALANCE
2010-2011 -10.33 -105.89
2011-2012 -14.76 -148.67
Source: Ministry of Commerce and Industry, Government of India.

India's Imports of Principal Commodities.
(US$ million)
Commodity/Group
April-June Percentage
Variation
2009-10 2010- 2011- (3)/ (4)/(3)
11R 12P (2)
1 2 3 4 5
43
I. Bulk Imports 25,069. 37,769. 50,224.3 50.7 33.0
8 7
A. Petroleum, Petroleum Products & 16,649. 25,855. 37,658.8 55.3 45.7
Related Material 0 5
44
MONETARY POLICY
The Reserve Bank of India (RBI) on Tuesday admitted that its own tight monetary policy, besides rising
crude oil prices and uncertain global environment, poses a threat to India's growth momentum in the current
fiscal. The slackening of global recovery, high oil and commodity prices, deceleration in domestic industrial
growth, uncertainty about continuation of strong growth in agricultural sector and impact of monetary policy
actions pose downside risks to India's GDP, the Reserve Bank said in a report. The slowdown in growth
momentum may affect the quality of the assets of financial sector, according to the RBI's Financial Stability
Report-June 2011 released here on Tuesday.
The central bank, which has raised key interest rates nine times since March 2010 to check price rise, has
pegged India's gross domestic product (GDP) growth rate for the current fiscal at 8 per cent, down from 8.6
per cent recorded in 2010-11.
45
KEY REGULATORY POLICIES
Over the years various policies have been implemented by the Government to regulate and develop the oil
and gas sector. The Petroleum Act to control issues relating to import, transport, storage, production, refining
and blending of petroleum was already in place since 1934. Further, the Oil Fields (Regulation and
Development) Act, 1948 and the Petroleum and Natural Gas Rules, 1959 provided regulatory framework for
domestic exploration and production of Oil & Gas. The Directorate General of Hydrocarbons (DGH) was set
up under the administrative control of the Ministry of Oil and Natural Gas in April 1993, as an upstream
advisory and technical regulatory body to promote effective management of domestic oil and gas resources
keeping in view the environmental safety, technological and economic aspects of upstream activities. In
September FY06, the DGH was designated as an authority or agency to exercise statutory powers to carry out
its functions under the Oil Fields (Regulation and Development) Act, 1948.
Further, the Administered Pricing Mechanism (APM) has been dismantled from April 2002. The measures
announced by the Government for dismantling of Administered Pricing Mechanism include:
Market determined pricing of petroleum.

Dismantling of Oil Pool Account, which was the balancing tool used under the APM.
Private companies were permitted for retail distribution of petro-products; subject to specified
guidelines such as a minimum investment of Rs 20 bn is required in the petroleum sector.

Set up of Petroleum Regulatory Board.
Reduction in subsidies on LPG and Kerosene to 15% and 33% respectively by 1-Apr-02. LPG and
kerosene subsidies to be phased out in the next 3 to 5 years.
Besides, the process of de-licensing was initiated in 1998 and now, 100% FDI is allowed in petroleum
refining, oil exploration in both small and medium sized fields pipelines (both petroleum products & gas)
marketing/retail through the automatic route. Moreover, marketing of transport fuels (petrol, diesel &
aviation fuel) is also permitted subject to an investment of Rs 20 bn in exploration and production (E&P),
refining, pipelines, or terminals. At present 100% Foreign Direct Investment (FDI) is allowed through the
46
FIPB route for both LNG projects and natural gas pipeline projects. Also, Natural Gas Pipeline Policy has
been enacted to promote competition. Moreover, the planning Commissions thrust to meet the demand for
energy through - safe, clean and convenient forms of energy at the least cost in a technically efficient,
economically viable and environmentally sustainable manner - is laid down in the report on Integrated
Energy Policy in August 06.
In order to empower the Oil PSU in matters of import, the Government approved the continuance by Indian
Oil Corporation Ltd. (IOCL) of the system of direct chartering of ships without going through
TRANSCHART in March 2007. Besides, it also allowed BPCL and HPCL to charter ships for oil imports
directly, instead of going through TRANSCHART 5.The introduction of New Exploration & Licensing Policy
NELP in 1999 is the key initiative of the Government in terms of Indian oil & gas sector reforms. NELP was
formulated to provide a level playing field to both Public and private sector companies in exploration and
production of hydrocarbons with Directorate General of Hydrocarbons as a nodal agency for its
implementation.
47
OIL PRICING IN INDIA
Prior to 2002, pricing of transport and domestic fuels were administered under the Administered Pricing
Mechanism (APM). As a step towards free market pricing, the APM was dismantled on April 1, 2002.
Further, increasing oil deficit and the need for attracting fresh investments necessitated the process of price
deregulation. The key objectives of oil sector deregulation are 1) increasing competition in the industry by
allowing entry of more players; 2) attracting private capital; and 3) removing constraints on economic pricing
of products and services to enable the industry to earn a reasonable return on investment.
Currently, industrial fuels such as Aviation Turbine Fuel (ATF), kerosene (SKO), Motor Spirit (MS) remain
un-administered; while prices of domestic LPG, Kerosene (Public Distribution System), petrol and diesel are
administered.
International prices of global crude oil and petroleum products have been consistently rising, especially
during the last three years. This steep increase in global oil prices and the resultant increase in under
recoveries of oil companies and rising fiscal burden due to issuance of oil bonds necessitated the Government
to increase the domestic prices of petrol, diesel & LPG twice within a span of five months. The Central
Government decided to increase domestic fuel prices first in Feb 08 (February 14, 2008) and then
subsequently in Jun 08 (June 4, 2008) when the prices of international crude oil crossed US$ 100 and US$
130 per barrel mark, respectively. Prices of industrial fuels such as naphtha and bitumen, (which are not
subsidized) also soared. These developments led the WPI inflation in fuel group to surge from 3.8% in Jan-
08 to 16.3% in Jun-08. From Aug-08, global oil prices started receding and plunged to US$ 41.5 per barrel
during Dec-08 from a peak of US$ 147.0 per barrel during Jul-08. With declining global oil prices, prices of
imported minerals oils, particularly aviation turbine fuel (ATF), naphtha and furnace oil (which are not
administered) also witnessed a substantial decline. Further, with the substantial fall in global crude oil prices
and cut in prices of petrol & diesel by the Government during Dec-08, the fuel group inflation plummeted to
a territory of deflation during Dec-08. Fuel group has been witnessing deflation since last ten months.
Although fuel group continues to witness deflationary trends primarily due to the high base effect, the rate of
48
decline in fuel group prices has witnessed considerable moderation since Jun-09. With a rise in global crude
oil prices, inflation in fuel group turned positive, after a gap of almost 1 year to 4.3% during Dec-09.In India,
oil remains largely subsidised. The subsidy provided for PDS Kerosene and Domestic LPG is shared by the
Government and the OMCs. This mechanism for sharing the loss was formulated by the Government in the
financial year 2003-04
49
INDUSTRY STRUCTURE
The Indian petroleum industry is mainly divided into upstream and downstream companies. While the up-
stream segment includes exploration of oil and gas, downstream companies are involved in refining and
marketing of the products. Refineries distil crude oil and process it into fuel and lubricating products, the
important among these being petrol, diesel, LPG, kerosene, ATF and lubricating oil.
The upstream companies in India include ONGC, Oil India, Essar Oil, Hindustan Oil Exploration, Selan
Exploration Technology and Cairn Energy. The downstream segment involves refining of crude oil
(distillation, conversion and treating) into final products and marketing of these products.
Those entities involved only in refining and not marketing are known as standalone refineries. Chennai
Petroleum, Bongaigaon Refinery and Numaligarh Refinery are examples of this category.
Companies which both refine and market are known as integrated refineries-- Indian Oil Corporation,
Hindustan Petroleum, Bharat Petroleum, Mangalore Refinery and Kochi Refinery.
Reliance Industries could be broadly put in a third category, as the company is present along all points of the
value chain from oil exploration to polyester [the main textile derivative of petroleum] to fabrics.
There are standalone marketingcompanies too such as Indo Burma Petroleum Company.
Some companies are also involved in production and marketing of lubricants, petroleum coke, paraffin wax,
bitumen and asphalt. For instance, Castrol India, Bharat Shell and Goa Carbon among others.
In the past few years the Indian petroleum refining industry has witnessed consolidation, with oil marketers
taking over standalone refineries.
ONGC bought out the total share of the initial promoters, A V Birla Group, in Mangalore Refineries (MRPL)
and infused further equity capital, in the process making MRPL its subsidiary. IBP Co also got merged with
50
its parent company Indian Oil Corporation. Also, Kochi Refinery was merged into its parent Bharat
Petroleum.
51
MAJOR KEY PLAYERS
Indian Oil
Reliance
Bharat Petroleum
HP
ONGC
52
COMPANY ANALYSIS
FINANCIAL PERFORMANCE
The year 2010-11 was special for Indian Oil, for it was during this year that the company regained its
position as the nations largest refiner. While our business went through a tumultuous and demanding phase
during the year, to say the least, we were able to surmount the challenges and record a superlative
performance. We witnessed an improved performance on all operational parameters refining and pipeline
throughputs rose and our sales went up. The year also saw the successful commissioning of some of our most
ambitious projects; such as the expansion of Panipat refinery, fuel quality up-gradation facilities, besides the
sustained expansion of our marketing and pipeline network.
The company was able to leverage their formidable supply chain to meet the challenge of making BS-III and
IV compliant fuels available at the pump nozzle. Our efforts to build the petrochemicals business gained
traction with logistics and channel partners firmly in place. We covered vital ground in the alternative energy
business too. However, the year was also a test of perseverance as we continued to contend with tight
margins at the pump nozzle while doing a tightrope act between fund raising and capital expenditure on
projects.
Globally, the year witnessed enhanced energy consumption driven by a strong economic recovery. High oil
prices reshaped energy policy and the focus once again turned to ensuring oil security in the face of
disruptions in some producing nations. Bio-fuels, Shale gas, Oil sands and other unconventional oil sources
continued to receive added attention. Global natural gas consumption grew at a record 7.4% in 2010 with the
United States moving to Shale gas. India witnessed a boost in domestic gas availability led by the KG basin
output, before it began to slide by the end of the year. With the economy showing positive signs, we
continued to remain the second fastest growing economy in the world. However, our energy landscape is still
dominated by Coal, which accounts for 42% of energy use and that perhaps will continue to be the case.
While there is a realization that we need to increase the share of clean energy like gas as the fuel of choice,
53
the availability, especially of LNG, is yet to unfold fully in the face of global price levels and affordability of
prices in the country.
Despite the growth of gas and possibly alternative energy options, liquid fuels will continue to dominate as
the fuel that will drive the growth of the nation. Hence, we have to invest and the oil industry has to generate
a justifiable return oninvestments in terms of robust profits. This calls for constant efforts to improve our
secondary processing capacity to generate value out of the bottom of the barrel.
Turnover
The turnover of your Corporation (inclusive of excise duty) for the year 2010-11 was INR 3,28,744 crore as
compared to INR 2,71,095 crore in the previous year, registering an increase of 21.3%. The total sales of
products (including gas and petrochemicals) for 2010-11 was 72.92 MMT as against 69.92 MMT during
2009-10, registering an increase of 4.3%.
Profit Before Tax
The Corporation has earned a Profit Before Tax of INR 9,096 crore in 2010-11 as compared to INR14,106
crore in 2009-10, registering a decrease of 35.5%.
Provision for Taxation
An amount of INR1,651 crore has been provided towards income tax for 2010-11 considering the applicable
income tax rates as against INR 3,885 crore provided during 2009-10.
Profit After Tax
The Corporation has earned a Profit After Tax of INR7,445 crore during the current financial year as
compared to INR 10,221 crore in 2009-10 ,registering a decrease of 27.2%.
54
Depreciation &Amortisation
Depreciation for the year 2010-11 was INR4,567 crore as against INR 3,240 crore for the year 2009-10.
Interest (Net)
Net Interest Expenditure of the Corporation for the current year was INR 1,121 crore as against net interest
income of INR 446 crore during 2009-10.
Borrowings
The borrowings of your Corporation were INR 52,734 crore as on March 31 , 2011 as compared to INR
44,566 crore as on March 31 , 2010. The Total Debt to Equity ratio as on 31 March, 2011 works out to 0.95:1
as against 0.88:1 as on 31 March, 2010 and the Long Term Debt to Equity ratio stands at 0.34:1 as on 31
March, 2011 as against 0.36:1 as on 31 March, 2010.
55
Capital Assets
Gross Fixed Assets (including Capital Works in Progress) increased from INR 93,358 crore as on 31.03.2010
to `INR 1,05,785 crore as on 31.03.2011.
Investments
Investments as on 31 March, 2011 were INR 19,545 crore as compared to INR 22,370 crore as on 31 March,
2010. The decrease in investments during the year ismainly due to sale of Government of India Special Oil
Bonds. The aggregate marketvalue of quoted investments as on 31 March, 2011, i.e., investments made
inONGC Ltd., GAIL (India) Ltd., Oil India Ltd., Chennai Petroleum Corporation Ltd.,Petronet LNG Ltd. and
Lanka IOC Plc., is INR 25,141 crore (as against the acquisitionprice of INR3,828 crore).
Net Current Assets
Net Current Assets stood at Rs.24,008 crore as on March 31 , 2011 as against Rs.14,637 crore as on March
31 , 2010.
Earnings Per Share
Earnings Per Share works out to Rs.30.67 for the current year as compared to Rs.42.10 in the previous year.
Earnings in Foreign Currency
During the year, the Corporation earned Rs. 16,968 crore in foreign currency as against Rs.13,743 crore in
2009-10, which is mainly on account of export of petroleum products.
Following are some ratios calculated to further analyze the liquidity position of IOCL:-
56
A) Operating Profit Ratio =Operating Profit / Net Sales (Rs. in Crores)
Year Mar '11 Mar '10 Mar '09 Mar '08 Mar '07
Operating profit 11,769.00 15,632.00 8,281.00 11,626.00 11,990.00
3,02,954.3 2,49,271.3 2,62,654.4 2,24,428.1 1,99,396.1
Net Sales 7 5 2 4 7
OPERATING RATIO 0.04 0.06 0.03 0.05 0.06
OPERATING RATIO
0.07
0.06
0.05
0.04
0.03
0.02
0.01
0.00
Mar '11 Mar '10 Mar '09 Mar '08 Mar '07
Operating margin is a measurement of what proportion of a company's revenue is left over after paying for
variable costs of production such as wages, raw materials, etc. A healthy operating margin is required for a
company to be able to pay for its fixed costs, such as interest on debt. The analysis shows that the
Operating profit ratio has been been almost constant around 0.05, but the company should make provisions
to increase the ratio as the Debt (loan amount) has been constantly increasing since 2007 (fluctuating
around 25%) and thus Interest has consequently increased too, however PAT has decreased over time
except for the period 2009-10.
57
B) Return on Fixed Asset = Net Income/Net Fixed Asset (Rs. in Crores)
Net Income 7,445.48 10,221.00 2,950.00 6,963.00 7,499.00
Net Fixed Asset 57,189.02 41,132.99 34,392.45 32,558.56 33,141.41
RETURN ON ASSET 0.13 0.25 0.09 0.21 0.23
RETURN ON ASSET
0.30
0.20
0.10
-
An indicator of how profitable a company is relative to its Fixed assets. It gives an idea as to how
efficient management is at using its assets to generate earnings from its Fixed Assets. Calculated by dividing
a company's annual earnings by its Fixed assets, ROFA is displayed as a percentage. Sometimes this is
referred to as "return on fixed assets". The ROFA ratio has been decreasing since 2007(except for period
2009-10 during which net income increased from INR 2950 Cr to INR 10221 Cr) which shows that the
company has not been successful in either utilising its Fixed assets resources properly or the Profit Margin
over Sales has decreased since 2007. The company should try and improve their resources as PAT has been
negative i.e. -7.16%,-57.64%, and -27.15% f0r 2008,09 and 2011 respectively.
58
C) Net Profit Margin Ratio = Net Profit/Net Sales (Rs. in
Crores)
Net Income 7,445.48 10,221.00 2,950.00 6,963.00 7,499.00
Net Sales 3,02,954.37 2,49,292.79 2,62,654.42 2,24,405.8 1,99,396.17
NET PROFIT MARGIN RATIO 0.02 0.04 0.01 0.03 0.04
NET PROFIT MARGIN RATIO

0.05
0.04
0.03
0.02
0.01
0.00
A financial performance ratio calculated by dividing Net profit by net sales, which gives investors an idea
that how much the company is able to earn profit from 1 unit sale. This ratio is imprtant because it
considers PAT which includes tax deductions, so it makes more authentic and more transparent ratio to
decide for a company's financial performance. For IOCL Net profit margin ratio has almost constant
fluctuating a bit around 0.03, but if we go in for detailed study we find that IOCL has failed to keep its
profit margin in proportion with its increase in sales, as the profit margin has decreased since 2007
(except for 2010).The company should take measures to try and enhance its profit margin over its sales.
59
D) Return on Capital Employed = Net Profit / Net Worth(Capital Employed (Rs. in Crores)
Net Income 7,445.48 10,221.00 2,950.00 6,963.00 7,499.00
1,08,066.1
95,119.18 88,970.24 76,609.42 61,939.98
Capital Employed or Net Worth 9
RETURN ON CAPITAL EMPLOYED 0.07 0.11 0.03 0.09 0.12
RETURN ON CAPITAL EMPLOYED

0.14
0.12
0.10
0.08
0.06
0.04
0.02
0.00
A ratio that indicates the efficiency and profitability of a company's capital investments. ROCE should
always be higher than the rate at which the company borrows, otherwise any increase in borrowing will
reduce shareholders' earnings. For IOCL the ROCE has reduced over years since 2007(except for period
2010) which indicates that the shareholder have been benefited less compare to its previous years. As
Micro and Macro environment is uncertain in the current scenario the company still able to give a good
return to its shareholder when compared to its competitors like HPCL and BPCL.
60
CHAPTER-
IV
DATA ANALYSIS AND INTERPRETATION
61
DATA ANALYSIS AND INTERPRETATION
Analysis of financial performance of IOCL and its comparison with its major competitors BPCL and HPCL
using financial analytical tools.
COMPARITIVE RATIO ANALYSIS
Liquidity Ratios
Current ratio =Current assets / Current Liabilities
Curre nt Ratio
2.00
1.50
1.00
0.50
0.00
Comparison
IOCL in comparison to its competitors ,i.e.,HPCL and BPCL has a better liquidity position depicts a
stronger liquid position apart from two yearsi.e.,2007-08, 2008-09 where HPCL has a better position. In
between HPCL and BPCL , HPCL has a better position in comparison to BPCL apart from one year i.e.
2009-10 and HPCL and BPCL has been fluctuating in their liquidity position over the years following a
zigzag trend. Although the required ratio for current ratio is 1.5:1 which has not been touched by none of the
companies since in these companies long term resources contributes majorly to their balance sheet .This
ratio also represents margin of safety for creditors. The trend of current ratio is represented in the bar chart
above for a better understanding.
62
Quick ratio or Acid-test ratio = (Current Assets - Inventories)/Current liabilities
Quick Ratio
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
Comparison
In this analysis, a fluctuating trend can be noticed in case of IOCL. However, IOCL has a better ratio
compared to its competitors apart from the year ending Mar' 09 and Mar' 08.Thus, IOCL has a better short
term solvency position than HPCL and BPCL even though it has not reached the ideal ratio, i.e.,
1:1.However, considering the company's dependency on the government grants and subsidies, IOCL is in a
safe zone and also enjoys a good creditworthiness and goodwill. We can also get a bird's eye overview
from the comparative bar chart.
63
Cash Ratio =( Cash + Marketable securities)/Current liabilities
Cash Ratio
0.08
0.07
0.06
0.05
0.04
0.03
0.02
0.01
This ratio measures the immediate amount of cash available to satisfy short term liabilities.A cash
0.00
Mar
ratio of 0.5 :1 or '11 Mar '10
higher is generally considered asMar '09
ideal.Though Mar
none of '08
the companiesMar '07a ideal
have
ratio apart from HPCL in yr2009, but considering the industry, all the three companies are ina safe
position.Cash ratio of IOCL has been following a zigzag trend,i.e., it has been increasing and
decreasing but the variation between the years have not been much.In between the three companies
Comparison
BPCL has the best ratio for all the years depicting a better reserve borrowing position with a
greater variation between the years.None of the company has been following a uniform trend to
64
forecast for upcoming ratio.
65
Net Working Capital Ratio = Net Working Capital/Net assets
Ne t Working Capital Ratio
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
66
Comparison
This ratio is also a measure of firms liquidity. It measures the firm's potential reservoir of funds.
IOCL has a better Net Working Capital than BPCL and HPCL in all years except year ending Mar'
and Mar' 09Profit

Operating whichRatio
means it has a greater
=Operating Profit /ability to meet its current obligations compared to its
Net Sales
competitors. IOCL has its NWC ratio within the the range .21 to .29 except for year ending
Mar'08.HPCL had a very low ratio in the year ending Mar '07 but then there was a sudden hike in the
following year and thereafter, it ranged between .20 to .26.HPCL had the maximum NWC ratio in the
year ending Mar' 10 and remained within the range of .20 to .27 in rest of the years.In the overall
scenario IOCL has stands in the best position.However, all companies have their ratio less than the
ideal.
Ope rating Profit Ratio
0.07
0.06
0.05
0.04
Operating Profit Ratio =Operating Profit
0.03
/ Net Sales
0.02
0.01
0.00
Among the three companies, IOCL has the highest operating ratio.A healthy operating margin is
required for a company to be able to pay for its fixed costs, such as interest on debt. The analysis
shows that the IOCL has a good consisting operating ratio as it is able to meet the expenses of it with
Comparison
the increase in the Sales. IOCL has a greater variation of increasing and decreasing trend,i.e., it is
changing from 0.06 to 0.03.BPCL and HPCL have more or less same operating ratio indicating same
operational efficiency in their operations.

67
Return on Fixed Asset = Net Income/Net Fixed Asset
Re turn on Asse t Ratio
0.25
0.20
0.15
0.10
0.05
-
Comparison
IOCL has been providing greater return on Asset to its provider of capital in comparison to its
competitors except in year 2011 and year 2009 where HPCL return exceeded the return provided by
IOCL. Higher the ratio, greater is the intensive utilization of fixed assets.However the returns have
been falling due to increase in fixed asset and decrease in net income. It depicts that company is in
the growing phase and ratio will improve as soon as projects are fully operational and
commercialised. This will increase its revenues and ratio in future. Incase of BPCL and HPCL
returns have been fluctuating. The variation between different companies was the minimum in two
years which are 2010-11 and 2006-07.
68
Net Profit Margin Ratio = Net Profit/Net Sales
Ne t Profit Margin Ratio
0.05
0.04
0.04
0.03
0.03
0.02
0.02
0.01
0.01
0.00
Comparison
Clearly, it can be seen that IOCL has a better Net Profit Margin throughout as compared to BPCL
and HPCL. It shows that the company has a higher margin of profit as company's expenses are much
lower. It also signifies that the company is having a better management team which executes the
strategy as it has been formulated. Thats why IOCL has been able to benchmark itself better
compared to the other companies of the same Industry.
69
Return on Capital Employed = Net
Profit / Capital Employed
Re turn on Capital Employe d
0.18
0.16
0.14
0.12
0.10
0.08
0.06
0.04
0.02
0.00
Comparison
It can be observed that HPCL has the best ROCE whereas IOCL stands second.This implies that
though IOCL is in a better position than BPCL but considering HPCL's ROCE, we can see that
better opportunities exist in the market for IOCL and it can better utilize its funds so as to earn a
higher return on capital employed.This ratio measures the profitability and level of efficiency of the
company and directly effects the returns to shareholders.Thus, IOCL needs to improve upon its fund
procurement and utilization so as to minimize cost of funds and maximize returns on them.However,
previously we have seen that IOCL has a decent return on fixed asset,thus it needs to concentrate
more on other areas like investments, funding decisions,financingdecisions,etc.
70
Earnings per share (EPS) =
PAT/Number of ordinary shares
Earning Pe r Share
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
Comparison
The earnings per share of IOCLhas remain the highest among HPCL and BPCL for first three years
which are 2007, 2008 and 2009 which is due to large share capital. However in the past two years
which are 2010 and 2011 the eps of IOCL has decreased in comparison to HPCL and BPCL which is
due to increase in number of shares from 119.47 to 242.7 Billion in the last two years. EPS of IOC is
appreciable and it has been increasing continuously every year but it showed a downfall in 2009 and
2010 due to increase in the number of shares.The share capital of IOCL is quite large in comparison to
BPCL and HPCL , i.e., IOCL capital employed is 242.795 shares and that of HPCL is of 33.86 and of
BPCL is .but the Profit earned by the company is not much in contrast to each other so EPS of IOCL
is in same range as of HPCL andBPCL.In between HPCL and BPCL, BPCL has been providing
higher returns in comparison to HPCL except for year 2011.IOCL needs to increase its PAT or
decrease its number of shares to provide better EPS to its investor.
71
Dividends per share (DPS) =
Dividend/Number of ordinary shares
Divide nd Pe r Share
20.00
15.00
10.00
5.00
0.00
Comparison
The dividend per share of IOCL is the highest among the three companies till 2009 but has
decreased in comparison to other companies in later years whereas in between HPCL and
BPCLHPCL has the highest DPS for Year 2007 and 2008 but for remaining years BPCL has
been providing greater DPS to its investor in comparison to HPCL. However, IOCL in
comparison to BPCL and HPCL has amuch larger base of shareholders and a comparatively
large amount of dividend to distribute to its share holder going by actual numbers.
72
Dividend payout ratios = DPS/EPS
or Dividends/PAT
Divide nd Payout Ratio
0.40
0.30
0.20
0.10
0.00
Comparison
The dividend payout Ratio of IOCL is in accordance with the industry trend paying almost the same
amount of earning which is to be distributed among its shareholders.A very low payout ratio indicates
that a company is primarily focused on retaining its earnings rather than paying out dividends. The
payout ratio also indicates how well earnings support the dividend payments: the lower the ratio, the
more secure the dividend because smaller dividends are easier to pay out than larger dividends. BPCL
has provided the highest Dividend Payout to its shareholders for the years 2011,2009, 2008.Since the
amount not distributed as dividend is retained earning which is 1-dividend payout ratio.So almost 70% of
earning are retaining by the companies which is required for research , exploration and development
purposes as it continuously needs to plan and develop new products to meet new and changing
demands.the dividend payout ratio is increasing, this implies that the company is maturing and planning
73
Price/Earnings ratio = Market value
per share/ EPS
Price Earning Ratio
20.00
15.00
10.00
5.00
0.00
Comparison
IOCL is a moderately valued firm in the industry as its been shown by PE ratio of IOCL.Higher the
price earnings ratio, the better it is. The PE ratio of IOCL has gradually increased over the years
expect for year 2010.This was because the company increased its share base so the value of its stock
declined. However, this shows market is ready to pay a high price for Share of IOCLover the years
which is due to investor high expectation and market appraisal of IOCL.This is due to a higher Eps
for the years 2007,2008 and 2009 in comparison to HPCL and BPCL whereas the market value of
share of IOCL is in tandom with other companies.Among HPCL and BPCL, BPCL has a higher PE
ratio which is even evident in its share price which has remain highest among the three companies
throughout the period.The refining companies have an average PE of around 7.5 with the leading
companies like IOC, HPCL and BPCL at around the 10 mark
74
Debt Ratio = Total Debt / Total Asset
De bt to Total Asse tRatio
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
Comparison
Clearly HPCL has the maximum proportion of debt in comparison to its total assets and is most highly
levered and IOCL is least levered.This signifies that IOCL follows a conservative approach compared
to its competitors whereas HPCL follows comparatively aggressive approach assuming maximum risk.
BPCL follows a moderate approach to risk and returns.However return on capital employed is least in
case of HPCL and maximum in case of BPCL.Thus, it is observed that the usual risk and return
relationship is not true for this industry and a more conservative approach is preferred as it does not
pays for assuming higher risk.
75
Interest Coverage Ratio = EBIT /
Interest Expenses
Inte re st Cove rage Ratio
12.00
10.00
8.00
6.00
4.00
2.00
0.00
Comparison
The lower the ratio, the more the company is burdened by debt expense. When a company's
interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable.
An interest coverage ratio below 1 indicates the company is not generating sufficient revenues
to satisfy interest expenses. However, all the three companies are very much in the safe zone
with regard to this ratio even in the year of recession. Comparatively, IOCL is most competent
in this case and had the highest ratio in the year ending Mar' 2010.
76
De gre e of Financial Le ve rage Debt/Equity Ratio = Debt/ Equity
3.50
3.00 Degree of Financial Leverage = %
Change in EPS/ % Change in EBIT or

2.50
EBIT / EBT
2.00
1.50
1.00
0.50
0.00
Comparison Comparison
It is observed that BPCL has the highest debt equity Again it is very clear that BPCL has the highest
ratio eventhough its proportion to total assets is DFL and HPCL comes after it.This signifies
least.Thus it signifies that it has a low DOL and a high increased use of debt financing in comparison to
DFL. BPCL has the lowest debt equity ratio.A high equity which leads to increased financial risk,
debt/equity ratio generally means that a company has greater fluctuations in return on equity and an
been aggressive in financing its growth with debt. This increase in the interest rate of debt.
can result in volatile earnings as a result of the
additional interest expense. If a lot of debt is used to
finance increased operations (high debt to equity), the
company could potentially generate more earnings than
it would have without this outside financing. If this
were to increase earnings by a greater amount than the
debt cost (interest), then the shareholders benefit
as more earnings are being spread among the same
amount of shareholders. However, the cost of this debt
financing may outweigh the return that the
company generates on the debt through investment and
business activities and become too much for the
company to handle. This can lead to bankruptcy, which
77
Proprietary Ratio = Shareholders funds/Total Assets
Propre itary Ratio
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
Comparison
The proprietary ratio determines the long-term solvency of the firm. IOCL has a more or less constant
ratio whereas BPCL is the only company which is able to sustain the proprietary ratio during the
preceding five years at the approximate level of 0.5 by maintaining the level of profitability and
increase in acquisition of assets on similar lines and HPCL faces the maximum risk regarding its long
term solvency position.
78
Activity Ratios
Working Capital Turnover Ratio = Sales

/ Working Capital
Working Capital Turnove r Ratio
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
It measures the efficiency with which the working capital is being used by the firm. In this graph it is
clearly shown that the working capital turnover ratio of all the three companies is least in the year
2008.IOCL is having the lowest working capital turnover ratio out of the three companies which
means IOCL is not as efficient in converting working capital in sales which is more incase of HPCL
and BPCL .This ratio shows that only a apart of sales in generated through working capital.However
in 2009 BPCL has the highest working capital turnover andHPCL has highest working capital in 2007
about the normal turnover. Gradually the working capital contribution to sales has been decreasing
over the years.
79
Debtors turnover Ratio = Net Credit Debtors Collection Period= 365/Debtors
Sales / Average Accounts Receivable turnover Ratio
De btors Colle ction Period (In Days) De btors Turnove r Ratio
12.00 90.00
80.00
10.00
70.00
60.00
8.00
IOCL
50.00
HPCL
6.00 40.00
BPCL
30.00
4.00
20.00
10.00
2.00
0.00
7
0
9
0.00
'1
'1
'0
'0
'0
ar
ar
ar
ar
ar
IOCL has the lowest debtors turnover ratio and BPCL has the maximum. By maintaining accounts
receivable, firms are indirectly extending interest-free loans to their clients. A high ratio implies either
Comparison Comparison
that a company operates on a cash basis or that its extension of credit and collection of accounts
receivable is efficient. A low ratio implies the company should re-assess its credit policies in order to
ensure the timely collection of imparted credit that is not earning interest for the firm. Debtors
collection period has an inverse relationship with debtors turnover ratio. Thus, we can see that IOCL
has the maximum debtors collection period and BPCL has the least. The average debtor days have
increased for BPCL which signifies greater inefficiency, for IOCL it has remained more or less constant
80
since Mar' 2009.In case of HPCL, the trend is fluctuating. Looking at the overall scenario IOCL needs
to improve upon the terms of its credit policies.

Creditors turnover Ratio = Net Credit Creditors Payment Period= 365
Purchases / Average Accounts Payable /Creditors turnover Ratio
Cre ditors Payme nt Period Cre ditors Turnove r Ratio

60.00 25.00
50.00 20.00
40.00
15.00
30.00
10.00
20.00
10.00 5.00
0.00 0.00
Mar '11 Mar '10 Mar '09 Mar '08 Mar '11 Mar '10 Mar '09 Mar '08
The creditor turnover of IOCL is the least among the three companies depicting rationalization
being being followed by creditors of IOCL in comparison to BPCL and HPCL. However the
creditors waiting time for payment is the least for IOCL in comparison to BPCL and HPCL.It
shows IOCL has to make payment more often in comparison to its competitors. IOCL should
81 more time to make payment to its creditors.
increase its creditors collection period in order to have
Comparison
Inventory Turnover Ratio= Sales /
Average Inventory
Inve ntory Turnove r Ratio
16.00
14.00
12.00
10.00
8.00
6.00
As 4.00
can be seen, a BPCL has the maximum inventory turnover ratio and IOCL has the least. A low
2.00
turnover
0.00 implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or
ineffective buying. In this case, this ratio seems to be too high for BPCL and is because of ineffective
buying. IOCL and HPCL are more near to the industry average. This interpretation is also supported by
the fact the net profit to sales is maximum for IOCL than the other two competitors. High inventory
levels are unhealthy because they represent an investment with a rate of return of zero. It also opens the
company up to trouble should prices begin to fall. 82

However, both HPCL and BPCL have managed to
lower their ratioComparison

to some extent gradually.
83
Capital Turnover Ratio = Sales / Capital
Employed
Capital Turnove r Ratio
5.00
4.00
3.00
2.00
1.00
0.00
This is another ratio to judge the efficiency and effectiveness of the company like profitability ratio. Higher
the ratio, better it is. IOC is having lesser capital turnover ratio than rest two oil companies and that of
HPCL and BPCL. IOCL is having a moderate Capital turnover ratio throughout in comparison to HPCL
and BPCL which have been providing the highest return for years 2007,2008 and BPCL for remaining
years. This shows a large part of capital employed is converted into saleswhichdepict effective utilization
of capital.
Comparison
84
Note: During the year 2008-09 profit decreases. All the ratios move in a negative direction. This is mainly due
to :-
Increasing crude oil prices in the global oil market especially from 2004.
Pressure from Ministry of Finance, Govt. of India to keep the retail prices of SKO &LPG low to avoid
situation of sky- rocketing inflation.

Increase in manufacturing expenses and other expenses over the years has been another reason for
decrease in profit.
In the year 2006-07 every companys 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.
85
CHAPTER-
V
CONCLUSION AND SUGGESTION
86
CONCLUSION AND SUGGESTION
The Oil industry is very volatile and is in a transitionary stage. The steady increase in demand for oil and its
products needs to be taken care of keeping in view the Policy Framework and Global requirements. The
discovery of new exploration fields and the entry of foreign player under the NELP Policy highlight the
importance of this sector. The variation in international oil prices and inflation has increased the burden of
pricing pressure on OMCs which are already reeling under the burden of under recovery.
IOCL has been the pioneer of the Oil Industry for past five decades which has made it a market leader. The
asset block of IOCL is quite large in comparison to other OMCs which are HPCL and BPCL. The key ratios
that define a companys financial position are activity, liquidity, leverage and profitability ratios which are
been better than other OMCs apart from a few activity ratios. In the capital structure of IOCL the share of
reserve and surplus has been the maximum. In the cost revenue structure, Common size and Trend analysis
of Profit and Loss statements throws light on the expense that have been increasing over the years (e.g.
Manufacturing expenses) and needs to be controlled. It also shows the relative proportion of various items of
profit and loss account to that of sales. As per the comparative ratio analysis of IOCL, BPCL and HPCL over
5 years, IOCL is doing fairly better. However there are some areas where IOCL needs to improve. Some of
the areas which need improvement are as follows:-
Measures should be taken to regulate some policies which would gradually increase the return so as
to maximize operating margin, PAT, return on fixed assets and return on capital employed.
The Company needs to improve its dividend policy so as to attract shareholders which would
ultimately improve companys future expansion plans.

Control over the increasing cash & bank balance.
Increasing the credit sales of the firm.
The amount of credit sales & credit purchase in IOCL needs to be disclosed separately in the annual
reports of the firm.

The company needs to improve its PAT and EPS to improve its profitability.
87
Considering the strength of the IOCL with regard to debt equity ratio and interest coverage ratio, it is
recommended that corporation may lay more emphasis on upstream business i.e. exploration and
production. It may go for further diversification in petrochemicals, natural gas business according to
the demand of the country.

It has been observed that current ratio is higher mainly because of funds blocked in claims
recoverable from government of India. It is therefore recommended that IOCL may further attempt to
recover the amount from government of India (subsidy from government).

The company should lay more emphasis on free-pricing where prices are left to float freely as
determined by unregulated supply and demand (Deregulation by government).

The company may lay emphasis on value chain analysis. In this process, every step a business goes
through, from raw materials to the eventual end-user is looked after. The goal is to deliver maximum
value at the least possible total cost.

The CAGR of IOCL sales has been increasing at the rate .0873 which is second highest among
OMCs on the basis of which projection for the coming years have been done for the coming years ,
i.e. , 2011-12, 2012-13. This has helped forecast the external financing requirement in order to funds
its increasing sales.

The strength of IOCL its refining sector and it has a strong advantage over its major competitors i.e.
HPCL & BPCL, due to its massive network of pipelines, refining and being a leader in retailing of
petroleum products. IOCL is enjoying a advantage over its competitors. However with the changes in
economic condition the strengths of IOCL is being put to test especially with the entry of foreign
players and increasing burden of under recoveries plus strict environmental laws. IOCL can further
improve its position by:-

Increasing marketing of its product to increase the reach of its products in the market.
Acquiring more of strategically located sites to further enhance its reach.
Increase its presence in Lube Production, refinery and jet fuels.
The Company would be able to earn profit if its product are correctly priced. The Pricing policy can
be changed from APM to TPP owing to the increasing under recovery amount of OMCs. These
Companies have been compensated for the subsidy offered to the public in the form of OIL Bonds,
Cash Transfer, Issue of debentures. The pricing mechanism of petroleum product has been structured
88
to benefit the poor people but has been benefiting the well off section of the society. It needs to be
revised to the changes taking place in the industry. Some changes needed are as follows:-
IOCL should lay on gradually phasing out subsidy on kerosene as it is not majorly used as a fuel for
lightning in rural sector as there are other alternative of lightning such as bio gas.
The add on taxes on petroleum products should be removed to reduce its prices and thereby reduce
the under recoveries.

The use of auto gas should be encouraged.
However the overall outlook of the company looks good, but still as per current scenario of the entire
industry the company needs to take measures regarding crucial issues like pricing, under recovery amount,
profitability and explore more policies to enhance its profit seeking opportunities.
89
OUTCOME/ CONTRIBUTION
The outcome/contributions made are as follows:-
Prepared an Industry analysis for the company.

Made the Porters five forces model for IOCL.
Analyzed different aspects of IOCL like its cost revenue structure, capital structure and financing,
share performance, working capital management, etc in details.

Prepared the trend analysis as well as the common size analysis.
Prepared a comparative study of IOCL with its major competitors BPCL and HPCL based on ratio
analysis, forecasting, Capital Asset Pricing Model (CAPM), price multiples, and SWOT analysis.
Prepared an overview of the pricing policy at IOCL and analyzed the trend of under-recovery for Oil
Marketing Companies (OMCs) and for IOCL as well.

Recommended the best possible options to counter the factors having adverse effect on the
organization.
90
SUMMARY OF FINDINGS
Reason for dip in ratios in 2010-11
Economic slowdown around the world.

Political instability in Middle East countries which are the major suppliers of crude oil including
political unrest in Libya, Iran and Egypt . Also the dispute between newly formed South Sudan and
North Sudan. This affected the supply of crude oil leading to soaring prices of crude oil and its
product in the market.

Number of scams being discovered in recent years which have eluded the confidence of Public and
Investor in general.
Depreciation of Rupee in comparison to Dollar which reached all time low.
The Overall standing of the company looks good after analysing the ratios which includes Liquidity
ratio, Activity ratio, Profitability ratio and Leverage ratio.

The ratios of IOCL have dipped after year 2008-09 due to recession which has affected the
environment in which IOCL operates. But started to improve from year 2010-11.
The overall position of IOCL is better in comparison to HPCL and BPCL. The liquidity position has
improved after recession for IOCL. However it has not reached the benchmark standards in case of
liquidity ratios.
The profitability position of IOCL is better than BPCL and HPCL but there are some grey areas
where it needs to improve which are P/E ratio, EPS Ratio and Return on Capital employed where it is
behind HPCL and BPCL. Also these are the key ratios from investor point of view which are
generally considered before making an investment.

The leverage position of IOCL is quite good , i.e. , the company is playing safe by not involving too
much debt in its capital structure although the figures have risen over the years but still it is less in
comparison to others. This has given the company more flexibility in its operations and also enjoyed
reduced debt burden. There is also saving of interest payment.

However, the Turnover ratios of IOCL are less than that of BPCL and HPCL, but as can be seen it is
still ahead of them in terms of profitability. This shows ineffective buying in case of the other two
91
companies. Therefore, it can be concluded that IOCL is having a more rational inventory
management.
92
CURRENT UNDER RECOVERY CRISIS SCENARIO
The last price revision of Motor Spirit (MS) was effected by Indian Oil on 1st Dec. 2011 when the Company
reduced the price by Rs. 0.65 per litre on top of an earlier price reduction of Rs.1.85 per litre effected on 16th
Nov. 2011. These two price reductions were effected as a result of calming down of the international MS
prices which fell from USD 120.83 per barrel to USD 115.03 per barrel and further to USD 109.03 per barrel
in the relevant pricing periods.
The international MS prices have since gone up progressively and stand at USD 132.45 per barrel in the
current pricing period. This is much higher than the price of USD 109.03 per barrel at which Indian Oil and
other OMCs are selling MS (excluding State levies). The Company should have increased the MS price by
Rs.1.89 on 01.01.12; Rs.4.08 on 16.01.12; Rs.3.13 on 01.02.12, Rs.3.47 on 16.02.12, Rs.5.09 on 01.03.12;
Rs.6.43 on 16.03.12 and Rs.7.66 on 01.04.12. The increase now called for is Rs.8.04 per litre (excluding
State levies).
The Companys inability to effect the price increases during the period 16th Dec. 2011 to 31st Mar. 2012 has
resulted into total under-recoveries of Rs.1036 crore (for all OMCs about Rs. 2287 crore). The under-
recoveries suffered by IndianOil during the year 2011-12 due to its inability to pass the increase to
consumers, has resulted in total under-recoveries of Rs.2236 crore (Rs.4859 crore for all OMCs).
In the current year beginning 1st April 2012 too, IndianOil has suffered under-recoveries of Rs.331 crore
(Rs.745 crore for all OMCs) in the first 15 days of April 2012. The Company, along with other Oil Marketing
Companies has, therefore, requested the Government to:-
93
1. Declare MS a regulated product temporarily and provide hundred percent cash compensation to the
OMCs, or
2. Reduce the Excise Duty on MS from Rs.14.78 per litre by an amount equivalent to the under-recoveries on
MS and simultaneously advise the States to reduce the rates of Sales Tax, which vary from 15% to 33% (that
works out and varies from Rs.10.30 per litre to Rs.18.74 per litre).
In the earlier periods also, IndianOil, along with other OMCs, has approached the Government several times
on the issue of MS prices with the suggestion that MS may be brought under the ambit of controlled
products temporarily or statutory levies on MS may be lowered to the extent of loss being suffered by OMCs
due to their inability to pass the increase in MS prices to consumers for various reasons.
The current situation where OMCs have to import crude oil at a price of USD 121.29 per barrel (relevant for
the second fortnight of April 2012) and sell at USD 109.03 per barrel is not sustainable and therefore cannot
continue. Continuation of such pricing will only impede the ability of the Company to import crude oil and
may affect product supply-demand balance; or else the Company increase the price of petrol by Rs.8.04 per
litre (excluding State levies) with immediate effect. The Company is awaiting for Governments response to
its requests and should no relief come forward, it will have no option but to effect the aforesaid increase in
MS prices.
It may also be added that the total under-recoveries suffered by IndianOil during the year 2011-12 on the
three sensitive and regulated products, viz. Diesel, LPG and SKO against which Government has to provide
hundred percent cash compensation, are Rs.75,620 crore (all OMCs about Rs.1,38,800 crore). The prices of
sensitive products were revised only once during the year, i.e. on 25.06.2011. Since the last revision, the
94
international prices of these products have shown a sharp increase. The under-recovery on HSD has gone up
from Rs.6.13/litre to Rs.14.29/litre, for SKO (PDS) from Rs.24.16/litre to Rs.31.03/litre and for LPG
(Domestic) from Rs.331.13/cylinder to Rs.570.50/cylinder as on 16th April 2012. This work out to an under-
recovery of Rs.305 crore per day for IndianOil (for all OMCs Rs. 573 crore per day). At the current rates, the
under-recoveries of the Company during the year 2012-13 is estimated to be over Rs.1,08,000 crore (for all
OMCs over Rs.2,04,000 crore).
FORECASTING
CAGR Mar-07 PROJECTION CAGR Mar-08 to PROJECTION
Item to Mar-11 2012 Mar-12 2013
Net sales (IOCL) 0.0873 329389.2 0.0798 355660.6
Net sales (BPCL) 0.0921 165499.1 0.0841 179409.5
Net sales (HPCL) 0.0817 133886.7 0.0678 142965.4
EFR (IOCL) 4217.16 3743.15
EFR (BPCL) 1784.87 1669.76
EFR (HPCL) -560.66 -1793.4
The actual Net sales of IOCL has been increasing at a compounded annual growth rate of 0.087% which
places IOCL is second in terms of growth among the PSUs companies which going by actual figures is
massive in comparison to BPCL and HPCL owing to large-scale operations of IOCL. The growth rate of
BPCL is the highest in percentage whereas HPCL has the least growth rate. The projected growth rate
(CAGR) of IOCL is 1.0789 which is the second highest growth rate going by the trend displayed over the
years. The Projected sales of IOCL are more than double than that of other two companies.
95
IN case of HPCL the amount of total asset is exceeding total liabilities based on % of sales method ,so
external funds requirement is negative which means company do not need to borrow from outside. On the
contrary, funds can be invested in a better way for more profits.
In case of IOCL and BPCL the amount of total liabilities is exceeding total current asset based on % of sales
method, so in order to finance the increasing part of asset the firm needs external funds to carry on the
projected sales.
PRICE MULTIPLE
EBITDA Margin 3.41% 3.75% 5.41%
Net Profit Margin 1.02% 1.24% 2.46%
The EBITDA Margin of IOCL is the highest among the three companies at 5.41 % which is nearly 4 times
that of other companies where as the sales are only 2 times the other companies. So IOCL has more earning
at its disposal in comparison to other companies . Similarly the net profit margin is also double that of other
companies.
Earning multiple determinants BPCL HPCL IOCL

EPS 42.78 45.45 30.67
Sales Per Share 4191.63 3655.42 1247.78
Book Value Per Share 388.83 370.49 227.90
CF Per share.(approx.) 75.97 35.65 24.06
The EPS of HPCL is the highest among the three companies which is due to similar net income as of BPCL
but with a lesser number of shares.
However the sales per share of BPCL is the highest among the three companies at 4191.63 and that of IOCL
is the lowest at 1247.78 which shows BPCL generates greater sales per share in comparison to IOCL. This
shows BPCL has been more active in the business.
96
The Book Value per share of BPCL is the highest at 388.83 and that of IOCL is the lowest at 227.90. Also the
Cash Flow per share of BPCL is the highest which is due to highest balance of non cash charges and cash and
bank balance which is more liquid in operation in comparison to other firms. BPCL has been generating high
cash flow per share which is due to increasing sales per share.
(Figures in Crores for FY ending March 11)

EARNING MULTIPLES Industry
Parameters BPCL HPCL IOCL Min Max Average
P/E 14.29 7.85 10.9 7.85 14.29 11.01
P/S 0.15 0.1 0.27 0.1 0.27 0.17
P/BV 1.92 0.3 1.5 0.3 1.92 1.24
P/CF(Approx.) 8.05 4.53 6.77 4.53 8.05 6.45
The PE ratio average has been around 1.01 with BPCL having maximum PE and HPCL having the lowest which shows
BPCL has been giving a greater return to its share holder. Also the P/S ratio of BPCL is lower in comparison to IOCL
as it is generating more sales per stock so it is able to sell its product more easily in comparison to IOCL. The price per
cash flow has been the highest for BPCL which shows it is trading at a high price but has not been generating sufficient
cash flow to support its multiple operations.
VALUE MULTIPLES Industry

Parameters BPCL HPCL IOCL Min Max Average
EV/Sales 0.14 0.1 0.27 0.1 0.27 0.17
EV/EBITDA 4.08 2.63 4.92 2.63 4.92 3.88
EV/EBIT 6.01 3.77 6.86 3.77 6.86 5.55
The EV/Sales of IOCL is Greater than others so the funding cost of IOCL by sales is greater in comparison to
others which it needs to improve. Same is the case with EV/ EBITDA and EV/EBIT of IOCL which has been
greater than the industry average.
97
CAPM
Comparison of future expected rate of returns based on Capital Asset Pricing Model (CAPM) using NSE data
for previous:-
COMPANY IOCL
COVARIANCE= 0.0069
BETA= 0.2606
MARKET RETURN= 0.2012
RISK FREE RETURN= 0.0828
FUTURE EXPECTED RATE OF RETURN= 0.1136
The covariance of IOCL and BPCL is more in comparison to HPCL which shows their stock has a strong
correlation with NSE market in comparison to HPCL.
The beta component is the highest in case of IOCL depicting IOCL is more prone to systematic risk in
comparison to others which depicts IOCLs portfolio has to provide a greater return in order to compensate
greater risk.
The market return for the industry is at .0034 and the risk free rate of return is .085 which is taken as the rate
of return of treasury bills of Central Government which is considered the most secured security.
The future expected rate of return is the maximum for HPCL which shows HPCL portfolio is more risky
portfolio in comparison to BPCL and IOCL.
However the return offered by OMCs is less than risk free return. Therefore the return offered by OMCs is
not adequate and it is advisable to look out for other portfolio of investment.
98
SWOT ANALYSIS
The Strength of IOCL is its refining sector and it has a strong advantage over its major competitors i.e. HPCL
& BPCL, due to its massive network of pipelines, refining and being a leader in retailing of petroleum
products.
It needs to increase its presence in Lube Production and refinery plus it also needs to enhance its presence in
jet fuels.
IOCL is enjoying an advantage over its competitors. However with the changes in economic conditions, the
strengths of IOCL is being put to test especially with the entry of foreign players and increasing burden of
under recoveries plus strict environmental laws.
99
CHAPTER-
VI
REFERENCES
100
REFERENCES
LITERATURE
Financial Management Text Problems And Cases, M.Y khan, Tata Mgraw Hill, New Delhi,
2010
Financial Management, I M Pandey, Vikas Publication House Pvt Ltd, Noida, 2010
Security Analysis And Portfolio Management, P Pandian, Vikas Publishing House, Noida,
2008
Financial Management, R.P Rustagi, Taxmann Publications Pvt, Haryana, 2010
OTHER SOURCES
Annual Report 2006-07, of Indian Oil Corporation Ltd.

Monthly Journals of Indian Oil Corporation Ltd.
Special issue on Oil & Gas Conservation of Indian Oil Corporation Ltd.
Other manuals of Indian Oil Corporation Ltd.
Indian Oil Corporation Ltd. Intranet service
WEBSITES
http://www.iocl.com/aboutus.aspx
www.dnb.co.in/IndiasEnergySector/OilPrice.asp
www.dnb.co.in/IndiasEnergySector/KeyRegu.asp
http://petroleum.nic.in/psinst.htm
http://www.researchandmarkets.com/reports/575102/indian_oil_corporation_limited_swo
t_analysis
http://www.indiainbusiness.nic.in/industry-infrastructure/industrial-sectors/oil-gas.htm
http://dpe.nic.in/sites/upload_files/dpe/files/survey1011/survey01/volume1/vol1ch3.pdf
http://beforeitsnews.com/economy/2012/01/reserve-bank-of-india-holds-rate-at-8-50-cuts-crr-50bps-
1665971.html
http://en.wikipedia.org/wiki/Indian_Oil_Corporation
101

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Summer Training Project Report

Submitted for partial fulfilment of the Award

ABES ENGINEERING COLLEGE,

MAHAMAYA TECHNICAL UNIVERSITY, NOIDA

Prof. Rakesh Passi JAYA PANDEY

Interdependence is a higher value than independence

willingly towards fulfillment of specific goals.

blessings that work was not possible.

refining and distribution activities.

amalgamated with IOCL as Assam Oil Division (AOD).

symbol for high quality products and services.

crude oil imports.

alternative energy, besides globalization of its downstream operations.

state road transport, air force & navy.

Care stands for: - Passion stands for: - Trust stands for: -

Concern Commitment Delivered Promises

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

corporate identity and brand equity.

heritage through a strong environment conscience.

assistance to consumers to conserve and use petroleum products efficiently.

of crude oil and petroleum product pipelines.

customers throughout the country.

pipeline transportation and alternative fuels with a view to minimizing/eliminating imports

and to have next generation products.

operations to effect energy conservation.

Indias policy of liberalization and reforms.

harnessing new business opportunities in oil exploration &production, petrochemicals,

natural gas and downstream opportunities overseas.

full exploitation of the new business opportunities.

RISKS & CONCERNS

Because of rise in the prices of crude oil and delays in receipt of

compensation from Government, there is an increased pressure on the

Corporation to raise debt which may

affect its capital expenditure

currency transactions with wide fluctuations in foreign

exchange always pose a risk.Even the supply disruption

poses a risk to the smooth operations of the corporations.

risk of accidents. And also upgrade its security systems.

CORPORATE SOCIAL RESPONSIBILITY

R&D and Business Development.

COMPARISON OF FUTURE EXPECTED RATE OF RETURN BASED ON CAPITAL ASSET PRICING

MODEL (CAPM) USING NSE DATA FOR PREVIOUS :-

MARKET RETURN= 0.2012

RISK FREE RETURN= 0.0828

FUTURE EXPECTED RATE OF RETURN= 0.1136

HPCL are shown below:-

SWOT Analysis With Respect To Marketing Division

costs and thus helps to access in deficit markets.

overall refining capacity.

with more than 450 grades).

its position in these activities.

establish retail business. IOC is also weighing thepossibility of entering Indonesia.

prevailing in the country.

o Enhancement of the distribution network must be made especially in the deficitregions.

transportation. IOC plans to set up a

automobiles and to import LNG.

growth and profitability of the companyin the near term.

shown only 65% customer satisfaction level.

Consequently it has affected the margin of Rs.5000crore which it earns fromtrading

demandof petrol or diesel in near future.

showing a decreasing trend.

important player competing in the upstream sector subsequent to thederegulation of the

demand and high growth areas.