[FROM 11th JUNE 2012 TO 10th AUGUST 2012]

A PROJECT REPORT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF THE DEGREE OF

MASTER OF BUSINESS ADMINISTRATION TO GUJARAT TECHNOLOGICAL UNIVERSITY, AHMADABAD.

Submitted By JUGAL R. PATEL S.Y.M.B.A (Semester -III) En_No: - 117420592042 [FINANCE] Under the guidance of Faculty Guide PROF.AASHKA PATEL
[assistant prof.]

Company Guide MR. JALAJ CHHAYA Submitted To

I/C PRINCIPAL

PARUL INSTITUTE OF ENGINEERING &TECHNOLOGY (UNDER AFFILIATION OF G.T.U) P.O. LIMDA, TA. WAGHODIA - 391760, DIST. VADODARA, GUJARAT, YEAR 2012-13

Institutes Certificate

Certified that this Comprehensive Project Report Titled CAPITAL STRUCTURE ANALYSIS OF IOCL is the bonafide work of Mr. JUGALKUMAR RAMANBHAI PATEL(Enrollment No 117420592042), who carried out the research under my supervision. I also certify further, that to the best of my knowledge the work reported herein does not form part of any other project report or dissertation on the basis of which a degree or award was conferred on an earlier occasion on this or any other candidate.

Signature of the Faculty Guide:

(Name and Designation of Guide):

(Certificate is to be countersigned by the Director/HoD):

Students Declaration
I, Jugalkumar Ramanbhai Patel hereby declare that the report for Comprehensive Project entitled CAPITAL STRUCTURE OF IOCL is a result of our own work and our indebtedness to other work publications, references, if any, have been duly acknowledged.

Place: Date:

(Signature): (Name of Student): JUGAL PATEL

PREFACE

Training word include everything from training the mind observing, experiencing ,including ideas, establishing objectives after understanding ones role, it is also include training the attitude, behavior and ultimately it is a learning process. Now-a-days only theoretical knowledge is not enough to success in life but most important we must have practical knowledge. With the help of this training I came to know whatever we learn theoretically how its imply in practical.

Finance & its functions are the part of economic activity. Finance is very essentially needed for all type of organization viz; small, medium, large scale industries & service sector. Hence the role of finance manager &the subject finance accounting gained maximum importance. Liberalization, globalization, privatization created new challengers to entrepreneur & corporate in carrying theyre day to day activities. So, Finance is regarded as the life blood of business organization. Main purpose of this training is to get knowledge of the industrial environment and to know about function of different department like human resource, finance, production, and marketing.

Furthermore, I have studied capital structure manual of Gujarat refinery (IOCL) and I have done SWOT analysis of the company also. I have got the knowledge of SAP system which is very useful and important for the organization.

I got an opportunity for conducting my summer training in IOCL. While on training my knowledge got updated. Such practical aspect of business world is really going to me for my bright future in management. The information provided is derived with reference from various books, websites and professional guidance from people related to this field.

ACKNOWLEDEMENT

This project has been made possible through direct and indirect co-operation of some person for whom I express my heart full gratitude.

I express my sincere thank to our Director Dr. Bijal zaveri, Coordinator Prof. Aashka Patel and other Faculties of Parul Institute Of Engineering &Technology for guiding me and assisting at various stages and thus sharing his valuable knowledge with me to enhance my knowledge and helping me in preparing a project.

I would like to thanks to Mr. Banik Sir Finance Manager and Mr. Jalaj Chhaya accountant in Indian Oil Corporation Ltd Vadodara. IOCL has been source of constant inspiration and encouragement to me, who have from time to time offered valuable suggestion and ideas.

I want to express my heart full gratitude to Parul Institute of Engineering &Technology for providing me to opportunity to prepare this project in their Institute.

Finally its my foremost duty to thank all staff members and my friends who helped me directly or indirectly to complete my work, without their co-operation these project would not been possible.

Thank you. Jugal Patel

Table of content

INDEX
CHAPTERS NUMBER
CH-1

1.1 1.8 1.10 1.12 1.16 1.18 1.20 1.21

CH-2

2.1 2.2 2.3 2.4 2.5

CH-3

3.1
3.2 3.3 3.4 3.5 CH-4

SUBJECTS Executive summary COMPANY PROFILE Introduction of oil & refinery History of IOCL Vision Mission & Value Competitor comparisons Major units and products Present business process flow IOCL today and future plans SWOT analysis THEORETICAL FRAMEWORK OF CAPITAL STRUCTURE Basic theory Optimal capital structure Framework for capital structure CAPM model theory Financial leverage RESEARCH METHODOLOGY Research objective Research topic Data collection
Data analysis tools

PG. NO. 9 11 15 17 20 22 25 28 30

34 35 36 39 41 43 44 44 45 45 49 50 52 53 54 55 57-70 72 74 76 78

4.2 4.3 4.5 4.6 4.7 4.8 4.9

...

Limitation of study DATA ANALYSIS AND INTERPRETATION Value of IOCL (NI Approach ) Cost of capital (NI Approach) Value of IOCL (if unlevered) WACC of IOCL(NOI Approach) Cost of capital by CAPM model Financial leverage Leverage ratios FINDING AND SUGGESTION CONCLUSION BIBLIOGRAPHY ANNEXURE

LIST OF TABLE.
NO.

TOPIC Table showing DEMAND- SUPPLY GAP Table showing NET PROFIT RATIO Table showing VALUE OF FIRM (NI APPROACH) Table showing COST OF CAPITAL Table showing LEVERED VERSUS UNLEVERED Table showing WACC (NOI APPROACH) Table showing COST OF EQUITY BY CAPM MODEL Table showing FINANCIAL LEVERAGE Table showing DEBT-EQUITY RATIO Table showing DEBT TO TOTAL CAPITAL RATIO Table showing PROPERIETARY RATIO Table showing FIXED ASSETS TO NET WORTH Table showing FIXED ASSETS TO LONG TERM DEBT Table showing DEBT SERVICE RATIO

PAGE NO.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

12 32 49 50 52 53 54 55 59 61 63 65 67 69

EXECUTIVE SUMMERY
Training is for development and enhancement of knowledge in particular field. It can never be possible to make a mark in todays competitive era only with the theoretical knowledge when industries in India are developing at global pace.

The project report mainly consists of two parts with different chapter. The first part contains information about organization i.e. Indian Oil Corporation Ltd and one of its refining divisions Gujarat Refinery. It also contains the management information regarding its various departments.

The other part of the report covers the capital structure of the company. Earlier due to the conventional practices, one was not able to get the rightful claim due to insufficient data but now, due to the SAP practices one is able to get more accurate and reliable data.

Analysis of capital structure is not useful for company only but also useful for share holders, investors, bankers, advisors, and government.

In this reports contain analysis of some leverage ratios and cost of capital of firm. In the case of IOCL results of analysis are continuous growth and their benefit to share the actual owner of the company as share holders.

Capital structure analysis is also include financial leverage which is very useful for comparison of other competitors and past evaluation of organization because of this company increase their performance

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1.1 WHAT IS A REFINERY?

A refinery is a factory. Just as a paper mill turns into paper, a refinery takes crude oil and turns it into gasoline and hundreds of other useful products. Thus an oil refinery is an industrial process plant where crude oil is processed and refined into more useful petroleum product, such as gasoline, diesel fuel, and asphalt base, heating oil, kerosene, and liquefied petroleum gas. Oil refineries are typically large sprawling industrial complexes with extensive piping running throughout, carrying stream of fluids between large chemical processing units.

1.2 WHAT IS OIL?

Technically speaking, oil can be both refined and unrefined. Refined oil is transformed into familiar products such as gasoline, kerosene, diesel fuel, motor oil, etc. Unrefined oil is known simply as crude oil due to the presence of various amounts of impurities that have mixed with the oil dip down in the earth.

Crude oil typically ranges from black to brown to green color and can have a waxy feel to it. It also has a strong sent. When oil is produce from wells it is known as crude oil until that time when it is delivered to a refinery and is processed into some of the refined products mentioned above. But, there are other terms for oil. The most common term not mentioned already is petroleum (the literal oil definition: Petra = rock,oleum = oil. Petroleum is a name pretty much synonymous with oil but differs primarily in that petroleum can be a gas (i.e., vapor), a liquid, a solid, a semi solid. These different forms are known as phases.

Therefore, crude oil is a liquid phase of petroleum. Some of the other terms for petroleum are called natural gas, and bitumen

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1.3 OIL SECTOR IN INDIA

The Indian oil & gas sector has been initially a regulated sector, dominated by government undertakings. But now, the private players gaining a presence in the oil &gas sector, the existing public sector oil companies are getting exposed to market forces and competition. India is sixth largest consumer of oil. There is huge gap between the demand and supply of oil and gas in India. Hence imports more than 70% of its crude oil requirements. The oil industry comprises of 19 refineries with a total refining capacity of 132.47 MMTPA (million metric tons per annum). India is recently emerging as net exporter of petroleum products.

1.4 THE DEMAND AND SUPPLY GAP:

Oil companies comprises of about 33% of primary energy consumption. Growth in demand is projected to catapult the overall demand to 199 MMT in 2011-12 and 376 MMT in 2024-25.

Table:1.4.1
Year 2001-02 2002-03 2005-06 2011-12 2024-25 Demand 99.70 114.30 140.00 199.60 376.50 Supply 32.03 33.05 33.98 33.47 61.4 Gap 67.67 81.25 106.02 166.13 315.10

Here we can see that demand of oil is increase at high rate in that comparison of demand increase so that the gap between demand and supply is increase at high rate which can adversely affect to the pricing and demand of oil. It is estimated that gap will increase 365.64% up to 2025.

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1.5 UP & DOWN STREAM IN OIL SECTOR:

The oil sector is usually divided into three major components: upstream, midstream and downstream. Midstream operations are usually included in the downstream category.

UPSTREAM: Exploration & Production.

The upstream oil sector is a term commonly used to refer to the searching for and the recovery and production of crude oil and natural gas. The upstream oil sector is also known as the exploration and production (E&P) sector. The upstream sector includes the searching for potential underground or underwater oil and gas fields, drilling of exploratory wells, and subsequently operating the wells that recover and bring the crude oil and/ or raw natural gas to the surface.

MID STREAM:
The mid stream industry processes, stores, markets and transports commodities such as crude oil, natural gas, natural gas liquids ( LNGs, mainly ethane, propane and butane) and sulphur.

DOWN STREAM: Refining & Marketing,

The downstream oil sector is a term commonly used to refer the refining of crude oil and the selling and distribution of natural gas and products derived from crude oil. Such products include liquefied petroleum gas (LPG), gasoline or petrol, jet fuel, heating oil, asphalt and petroleum coke.

The downstream sector includes oil refineries, petrochemical plants, petroleum product distribution, retail outlets and natural gas distribution companies. The downstream industry touches consumers through thousands of products such as petrol, diesel, jet fuel, heating oil, asphalt, lubricants, synthetic rubber, plastics, fertilizers, antifreeze, pesticides, pharmaceuticals, natural gas and propane.

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1.6 INSTITUTIONAL ARRANGEMENTS IN INDIA

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1.7 ABOUT INDIAN OIL CORPORATION LTD

INTRODUCTION
Indian Oil Corporation Ltd. is Indias largest company by sales with a turnover of Rs. 3, 28,744 crore ($ 72,125 million) and profit of Rs. 7445 crore ($ 1,633 million) for the year 2010-11. Indian Oil is the highest ranked Indian company in the latest Fortune Global 500 listings, ranked at the 98th position. Indian Oils vision is driven by a group of dynamic leaders who have made it a name to reckon with. In this section, read about Indian Oils business and its spread across the country & abroad. You can also know about Indian Oils current financial performance, special initiatives and recognitions & awards that have come its way.

1.8 HISTORY
Indian Oil was incorporated on June 30, 1959 under the name and style of Indian Oil Company Ltd. Upon merger with Indian Refineries Ltd. On September 1, 1964, the name of the company was changed to Indian Oil Corporation Limited. Guwahati Refinery, the first public sector refinery of the country, was built with Romanian collaboration and was inaugurated by the first Prime Minister of India, Pandit Jawaharlal Nehru, on 1st January 1962. Indian Oil refineries registered a record throughput of 35.3 million tons during the financial year@ surpassing the previous best of 33.8 million tons in 2001-2002.

Indian Oil commissioned India's first product pipeline, the Guwahati - Siliguri pipeline, in 1965. This 435-Km pipeline connecting Guwahati Refinery to different installations was designed to carry about 0.818 MMT of oil per year. From a small beginning with a sale of 0.032 million kilolitres, Indian Oil achieved sales of 10 million kilolitres with a turnover of Rs. 635 crore* and profit Rs. 22.5 crore by the late 60's. From then on, the company has grown from strength to strength and for the fiscal 2007, the Indian Oil group sold 59.29 million tones of petroleum products, including 1.74 million tones of natural gas, and exported 3.33 million tones of petroleum products.
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Indian Oil is investing Rs. 43,393 crore (US $10.8 billion) during the period 2007-12 in augmentation of refining and pipeline capacities, expansion of marketing infrastructure and product quality up gradation as well as in integration and diversification projects. Indian Oil commissioned Indias first product pipeline, the Guwahati Siliguri pipeline in 1965. These 435- km pipeline connecting Guwahati Refinery to different installations was designed to carry about 0.818 MMT of oil per year. From a small beginning with a sale of 0.032 million kilolitres, Indian Oil achieved sales of 10 million kilolitres with a turnover of Rs. 635 crore* and profit Rs. 22.5 crore by the late 60s.

From then on, the company has grown from strength to strength and for the fiscal 2007, the Indian Oil group sold 59.29 million tones of petroleum products, including 1.74 million tones of natural gas, and exported 3.33 million tones of petroleum products. Indian Oil is investing Rs. 43,393 crore ( US $10.8 billion ) during the period 2007- 12 in augmentation of refining and pipeline capacities, expansion of marketing infrastructure and product quality up gradation as well as in integration and diversification projects.

1.9 INTERNATIONAL RANKINGS:

Indian Oil is the highest ranked Indian Co. in the prestigious Fortune Global 500 listing, the 116th position (in 2008) based on fiscal 2007 performance.

It is also the 18th largest petroleum co. in the world and the no. 1 petroleum trading company among the National Oil companies in Asia Pacific region. IOCL was featured on the 2008 Forbes Global 2000 at position 303.

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1.10 VISION MISSION & VALUE

VISION
A major, diversified, transnational, integrated energy company, with national leadership and a strong environment conscience, playing a national role in oil security & public distribution

MISSION

To achieve international standards of excellence in all aspects of energy and diversified business with focus on customer delight through value of products and services, and cost reduction To maximize creation of wealth, value and satisfaction for the stakeholders

To attain leadership in developing, adopting and assimilating state of- the-art technology for competitive advantage To attain leadership in developing, adopting and assimilating stateof- the-art technology for competitive advantage To provide technology and services through sustained Research and Development

To foster a culture of participation and innovation for employee growth and contribution To cultivate high standards of business ethics and Total Quality Management for a strong corporate identity and brand equity To help enrich the quality of life of the community and preserve ecological balance and heritage through a strong environment conscience

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18

Values

Indian Oil nurtures the core values of Care, Innovation, and Passion & Trust across the organization in order to deliver value to its stakeholders.

Care Stands for Concern Empathy Understanding Co-operation Empowerment Innovation Stands for Creativity Ability to learn Flexibility Change Passion Stands for Commitment Dedication Pride Inspiration Ownership Zeal & Zest Trust Stands for Delivered promises Reliability Dependability Integrity Truthfulness Transparency

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1.11 Destination of Indian oil

Indian Oil tops FE 500 listing Indian OIL tops business listings Indian OIL tops Fortune India 500 list Indian OIL features in Platts Global Energy Top 50 companies Indian OIL features in BT500 Indian OIL in BW500 list of biggest companies Indian OIL breaks into Top 100 of Fortune Global listing, ranked 98th Indian OIL: One of The Best Companies to Work For Indian OIL in Top Ten of the Most Recognized & Respected Indian MNCs Indian OIL tops BS 1000 rankings Indian OIL - One of the Best Companies to Work For: BT Survey Indian OIL tops the Fortune India 500 Rankings Indian OIL in top five in Business India's Super 100 Indian OIL is Indias Biggest Company: ET 500

1.12 COMPETITIOR
Indian Oil Corporation has two major domestic competitors Bharat Petroleum and Hindustan Petroleum. Both are statecontrolled, like IOCL. There are two private competitors Reliance Petroleum and Essar Oil.

Indian Oil Corporation Ltd ONGC Ltd Bharat Petroleum Lt Reliance Petroleum Ltd Essar Oil Ltd

Gas Authority of India Hindustan Petroleum Corporation Ltd Oil India Ltd Tata Petro dyne

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1.13 Refining capacity of various companies in India:

ESSAR 7%

Refining market share

RIL 22% ONGC 7% HPCL 9% IOCL 40%

BPCL 15%

1.14 Petroleum product market share of various companies in India:

3%

Market share of majore players

9% IOCL BPCL 18% 21% HPCL RIL 49% OTHERS

1.15Pipeline network of various companies in India:

Mrket share in pipeline

IOCL 16% ONGC 7% 47% HPCL BPCL

30%

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1.16 MAJOR UNITS

Registered Office Corporate Office HEAD OFFICE Barauni Refinery Gujarat Refinery Guwahati Refinery Haldia Refinery Mathura Refinery Panipat Refinery : Mumbai : New Delhi REFINERIES DIVISION : New Delhi : Bihar : Gujarat : Assam : West Bengal : Uttar Pradesh : Haryana

ASSAM OIL DIVISION HEAD OFFICE Eastern Region Western Region Northern Region HEAD OFFICE Northern Region Eastern Region Western Region Northern Region

:Digboi PIPELINES DIVISION : Noida : Calcutta : Rajkot : Panipat MARKETING DIVISION : Mumbai : New Delhi : Kolkata : Mumbai : Chennai

R&D Centre Indian Oil Blending Ltd. Indian Oil Mauritius Ltd. Lanka IOC Ltd. Chennai Petroleum Corp Ltd

: Faridabad, Haryana SUBSIDIARIES : Mumbai : Mauritius : Sri Lanka : Chennai : Assam : Kolkata

Bongaigaon Refinery & Petrochemicals Ltd IBP Co. Ltd.

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1.17 PRODUCTS OF REFINERIES:

INLAND PRODUCTS

SPECIALITY PRODUCTS

EXPORT PRODUCTS

Motor sprit (MS)

Linear alkyl benzene Feed stock (LABFS)

Aviation turbine fuel (ATF)

High Speed Diesel (HSD)

Mineral turpentine (MTO)

oil Motor sprit (MS)

Liquefied petroleum gas (LPG)

Food grade heave (FGH)

High speed diesel (HSD)

Superior Kerosene oil (SKO)

Army diesel

Superior kerosene oil

Aviation turbine fuel (ATF)

Navy diesel

Furnaces oil (FO)

Light diesel oil (LDO)

Light aluminum rolling oil

Liquefied petroleum (LPG)

gas

Naphtha

benzene

Light diesel oil (LDO)

Sulphar Bitumen furnaces oil

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1.18 Pictorial Representation of Present business process flow

Crude Purchase

Distribution

Refining

Blending RRRR

Distribution

Retailing

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1.19 Objectives and obligation of company:

OBJECTIVES:
To serve the national interests in oil and related sectors in accordance and consistent with Government policies. To ensure maintenance of continuous and smooth supplies of petroleum products by way of crude oil refining, transportation and marketing activities and to provide appropriate assistance to consumers to conserve and use petroleum products efficiently. To enhance the country's self-sufficiency in crude oil refining and build expertise in laying of crude oil and petroleum product pipelines. To further enhance marketing infrastructure and reseller network for providing assured service to customers throughout the country. To create a strong research & development base in refinery processes, product formulations, pipeline transportation and alternative fuels with a view to minimizing/eliminating imports and to have next generation products. To optimize utilization of refining capacity and maximize distillate yield and gross refining margin. To maximize utilization of the existing facilities for improving efficiency and increasing productivity. To minimize fuel consumption and hydrocarbon loss in refineries and stock loss in marketing operations to effect energy conservation. To earn a reasonable rate of return on investment.

To avail of all viable opportunities, both national and global, arising out of the Government of Indias policy of liberalisation and reforms. To achieve higher growth through mergers, acquisitions, integration and diversification by harnessing new business opportunities in oil exploration & production, petrochemicals, natural gas and downstream opportunities overseas. To inculcate strong core values among the employees and continuously update skill sets for full exploitation of the new business opportunities. To develop operational synergies with subsidiaries and joint ventures and continuously engage across the hydrocarbon value chain for the benefit of society at large.

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OBLIGATION:

Towards customers and dealers: - To provide prompt, courteous and efficient service and quality products at competitive prices.

Towards suppliers: - To ensure prompt dealings with integrity, impartiality and courtesy and help promote ancillary industries.

Towards employees: - To develop their capabilities and facilitate their advancement through appropriate training and career planning. To have fair dealings with recognized representatives of employees in pursuance of healthy industrial relations practices and sound personnel policies.

Towards community: - To develop techno-economically viable and environmentfriendly products. To maintain the highest standards in respect of safety, environment protection and occupational health at all production units.

Towards Defense Services: - To maintain adequate supplies to Defense and other para-military services during normal as well as emergency situations.

FINANCIAL OBJECTIVES
To ensure adequate return on the capital employed and maintain a reasonable annual dividend on equity capital. To ensure maximum economy in expenditure.

To manage and operate all facilities in an efficient manner so as to generate adequate internal resources to meet revenue cost and requirements for project investment, without budgetary support. To develop long-term corporate plans to provide for adequate growth of the Corporations business. To reduce the cost of production of petroleum products by means of systematic cost control measures and thereby sustain market leadership through cost competitiveness. To complete all planned projects within the scheduled time and approved cost.

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1.20 INDIAN OIL TODAY AND FUTURE PLANS: Indian oil today :
Indian Oil is India's flagship national oil company with business interests straddling the entire hydrocarbon value chain from refining, pipeline transportation and marketing of petroleum products to exploration & production of crude oil & gas, marketing of natural gas and petrochemicals. It is the leading Indian corporate in the Fortune 'Global 500' listing, ranked at the 98th position in the year 2011. With over 34,000-strong workforce, Indian Oil has been helping to meet Indias energy demands for over half a century. With a corporate vision to be the Energy of India, Indian Oil closed the year 2010-11 with a sales turnover of Rs. 3,28,744 crore ($ 72,125 million) and profits of Rs. 7445 crore ($ 1,633 million).

Reach and Network Indian Oil and its subsidiary (CPCL) account for over 48% petroleum products market share, 34.8% national refining capacity and 71% downstream sector pipelines capacity in India. The Indian Oil Group of companies owns and operates 10 of India's 20 refineries with a combined refining capacity of 65.7 million metric tons per annum (MMTPA, .i.e. 1.30 million barrels per day approx.). Indian Oils

It has a portfolio of powerful and a much-loved energy brand that includes Indane LPG Gas, SERVO lubricants, XtraPremium petrol, XtraMile diesel, PROPEL, petrochemicals, etc. Validating the trust of 56.8 million households, Indane has earned the coveted status of 'Super brand' in the year 2009 and now has a customer base of 61.8 million.

Indian Oil has a keen customer focus and a formidable network of customer touch-points dotting the landscape across urban and rural India. It has 20,421 petrol and diesel stations, including 3517 Kisan Seva Kendras (KSKs) in the rural markets. With a countrywide network of 36,900 sales points, backed for supplies by 140 bulk storage terminals and depots, 3,960 SKO/LDO dealers (60% of the industry), 96 aviation fuel stations and 89 LPGas bottling plants.

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Indian Oil has forayed into alternative energy options such as wind, solar, bio-fuels and nuclear power. A 21 MW wind power project is operational in the Kutch district of Gujarat. Solar products such as solar lanterns and torches are being sold through the Retail Outlets in rural and urban areas. With a view to investing in the nuclear energy sector in the country, Indian Oil has entered into an agreement with the Nuclear Power Corporation of India Ltd. Indian Oil has the largest captive plantation over 1,000 hectares for bio-fuel production in India which is underway in the States of Chhattisgarh and Madhya Pradesh, generating rural employment.

Future plans:
In spite of deregulation of the oil sector and stiff competition from private players, Indian oil has maintained its position as Indias flagship national oil company. Indian oil people have been in the forefront in adapting to the changing environment and enhancing the organizations capabilities in providing innovative and value added offering to the customers. Against the backdrop of a rapidly changing business environment, Indian oil is focusing on certain key issues for sustained growth in the deregulated market. These are prudent finance and projects management, optimum capacity utilization of refineries and pipeline network, competitive business strategies, customer-focus innovations in product and service offerings, streamlining of business processes, and achieving greater synergy with group companies for enhanced efficiency and effectiveness in the market place. The rising customer aspirations for quality products and services, at par with international standards, have also thrown up myriad opportunities. Indian Oil is making the most of them mainly in expanding its existing customer base, customizing products for specific market segments, streamlining distribution infrastructure, etc. As part of the Marketing Transformation Programmed to move closer to the customers, Indian Oil has bifurcated its marketing function vertically into exclusive retail and direct consumer groups, transferred powers from the four regional offices to 16 marketing offices in State capitals, and set up exclusive groups for process & systems optimization, brand management and bio-fuels.

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1.21 SWOT ANALYSIS

STRENGTHS
Sound financial position. Good corporate image and high credit rating. Dominant presence in India with six refineries. Wide marketing infrastructure with 55% Market share. Vast pipeline network. Vast skilled manpower pool in petroleum sector. Depreciated assets having long useful life. R & D support.

WEAKNEESES

Lack of adequate commercial approach. Project planning and implementation. Bureaucratic structure leading to procedural delays. Lack of flexibility and risk taking. Information Technology and system development. Inadequate customer orientation.

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OPPORTUNITIES
High GDP growth leading to increased demand for petroleum product. Potential for growth in the field of LNG, power, petrochemicals. Government support for globalization and grant of autonomy. Flexibility for change in organizational structure and manpower deployment. Opportunity of growth through joint ventures. Opportunity for raising funds.

THREATS

Stiff competition with Multinationals and Private business houses. Strict environmental regulations. Lack of level playing field between public sector units and private sector. Poaching of manpower by multinationals and private business houses. Technical committee reports implication.

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1.22 FINANCIAL POSITION

Net profit ratio:

Net Prof it Margin

Table: 1.22.1 YEAR PROFIT BEFORE TAX 8,550.56 2,395.84 10,998.68 8,085.62

Prof it Af ter Tax Sales

NET SALES 230,505.20 288,750.61 253,636.58 312,487.70

NET PROFIT RATIO

0.037 0.008 0.043 0.026

2007-08 2008-09 2009-10 2010-11

Net profit ratio interpretation: Looking into table we can understand that net profit of the IOCL was getting decreased from F.Y 2007-08 to 2008-09, It decreases due to financial meltdown and high interest charge in comparison of 2009-10 & 2010-11. But it is highest in 2009-10. Suggestion for improvement It is advised to the company to enhance technical efficiency and the company should charge lower rate of interest. The company has to put major control on all expenses. Reductions in expenses result in more profit. As a result the net profit ratio shows increment.

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2.1 CAPITAL STRUCTURE: THEORY

Financing decisions involve raising funds for the firm. It is concerned with formulation and designing of capital structure or leverage. The most crucial decision of any company is involved in the formulation of its appropriate capital structure. The best design or structure of the capital of a company helps the management to achieve its ultimate objectives of minimizing overall cost of capital, maximizing profitability and also maximizing the value of the firm.

The capital structure decision of a firm is concerned with the determination of debt equity composition. Capital structure ordinarily implies the proportion of debt and equity in the total capital of a company. The term capital may be defined as the long term funds of the firm. Capital is the aggregation of the items appearing on the left hand side of the balance sheet minus current liabilities. The term capital structure includes, how a firm finances its overall operations and growth by using different sources of funds. And it is a mix of a company's long-term debt, specific short-term debt, common equity and preferred equity. Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings. Short-term debt such as working capital requirements is also considered to be part of the capital structure. A company's proportion of short and long-term debt is considered when analyzing capital structure. When people refer to capital structure they are most likely referring to a firm's debtto-equity ratio, which provides insight into how risky a company is. Usually a company more heavily financed by debt poses greater risk, as this firm is relatively highly levered.

In short, A mix of a company's long-term debt, specific short-term debt, common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds. Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings. Short-term debt such as working capital requirements is also considered to be part of the capital structure.

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2.2 'Optimal Capital Structure' The best debt-to-equity ratio for a firm that maximizes its value. The optimal capital structure for a company is one which offers a balance between the ideal debt-to-equity range and minimizes the firm's cost of capital. In theory, debt financing generally offers the lowest cost of capital due to its tax deductibility. However, it is rarely the optimal structure since a company's risk generally increases as debt increases.

Capital structure planning is very important to survive the business in long run. After simple watching the balance sheet of company, you see two sides of balance sheet. One side is liability side and other side is asset side. Liability side is the mixture of finance of company which company has collected from internal and external sources and it has been used or will be used for development of company.

To do adjustment according to Business Environment Company also adjusts different sources expected amount according to business environment. Suppose in future, if government of India cuts off his relation with China, from where our company is getting fund, it will definitely tough for us to get more money from China. But proper planning of capital structure of future sources will be helpful for us to enlarge our area for getting money.

To reduce the overall risk of company when we make capital structure before actual getting money from money supplier, we can do many adjustments for reducing our overall risk.
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Idea generation of new source of fund Good planning of capital structure will make versatile to finance manager for getting money from new sources.

2.3 Framework for capital structure:

Generally, the factors to be considered whenever a capital structure decision is taken are: 1) 2) 3) 4) 5) 6) 7) 8) Leverage or Trading on equity, Cost of capital, Cash flow, Control, Flexibility, Size of the company, Marketability, and Floatation costs.

1) Leverage or Trading on equity The use of sources of finance with a fixed cost, such as debt and preference share capital, to finance the assets of the company is known as financial leverage or trading on equity. If the assets financed by debt yield a return greater than the cost of the debt, the earnings per share will increase without an increase in the owners' investment. Similarly, the earnings per share will also increase if preference share capital is used to acquire assets. But the leverage impact is felt more in case of debt because (i) the cost of debt is usually lower than the cost of preference share capital, and (i i) the interest paid on debt is a deductible charge from profits for calculating the taxable income while dividend on preference shares is not.
-

Because of its effect on the earnings per share, financial leverage is one of the impor tant considerations in planning the capital structure of a company. The companies with high level of the Earnings Before Interest and Taxes (EBIT) can make profitable use of the high degree of leverage to increase return on the shareholders' equity.

2) Cost of Capital Measuring the costs of various sources of funds is a complex subject and needs a separate treatment. Needless to say that it is desirable to minimize the cost of capital. Hence, cheaper sources should be preferred, other things remaining the same.
36

3) Cash Flow One of the features of a sound capital structure is conservation. Conservation does not mean employing no debt or a small amount of debt. Conservatism is related to the assessment of the liability for fixed, charges, created by the use of debt or preference capital in the capital structure in the context of the firm's ability to generate cash to meet these fixed charges. The fixed charges of a company include payment of interest, preference dividend and principal. The amount of fixed charges will be high if the company employs a large amount of debt or preference capital.

4) Control To avoid the risk of loss of control the companies may issue preference shares or raise debt capital. Since holders of debt do not have voting right, it is often suggested that a company should use debt to avoid the loss of control. However, when a company uses large amounts of debt, lot of restrictions are imposed on it by the debt-holders to protect their interests. These restrictions curtail the freedom of the management to run the business. An excessive amount of debt may also cause bankruptcy, which means a complete loss of control.

5) Flexibility Flexibility means the firm's ability to adapt its capital structure to the needs of the changing conditions. The capital structure of a firm is flexible if it has no difficulty in changing its capitalization or sources of funds. Whenever needed the company should be able to raise funds without undue delay and cost to finance the profitable invest-ments. The company should also be in a position to redeem its preference capital or debt whenever warranted by future conditions.

6) Size of the Company The size of a company greatly influences the availability of funds from different sources. A small company may often find it difficult to raise long-term loans. If somehow it manages to obtain a long-term loan, it is available at a high rate of interest and on inconvenient terms.

37

7) Marketability Marketability here means the ability of the company to sell or market particular type of security in a particular period of time which in turn depends upon -the readiness of the investors to buy that security.

In other words capital may be expressed as follows: Capital = Total Assets Current Liabilities. Further, capital of a company may broadly be categorized into equity and debt. The total capital structure of a firm is represented in the following figure:

Total Capital

Equity Capital

Debt Capital

Equity Share Capital

Term Loans

Preference Share Capital

Share Premium Retained Earnings

Debentures
Deferred Payments Liabilities Other Long term Debt

Established companies generally have track record of their profit earning capacity, which helps them to create their creditworthiness. The lenders feel safe to invest their funds in such companies. Thus, there is ample scope for this type of companies to collect debt. But a company cannot freely i.e. without having any limit. The company must have to chalk out a plan to collect a debt in such a way that the acceptance of debt becomes beneficial for the company in terms of increase in EPS, profitability and value of the firm. If the cost of capital is greater than the return, it will have an adverse effect on companys profitability, value of the firm and its EPS. Similarly, if company is unable to repay the debt within the scheduled period it will affect the goodwill of the company in the credit market and
38

consequently may create problems in future for collecting further debt. Other factors remaining constant, the company should select its appropriate capital structure with due consideration. Capital structure involves a choice between risk and expected return. The optimal capital structure strikes the balance between these risks and returns and thus examines the price of the stock. IOCL is a levered firm and it financed all its assets by equity and debt it has perpetual expected EBIT or net operating income (NOI) of RS 12822.41 cror. And interest payment is Rs 3,017.38 by 2011.

2.4 cost of equity by the capital assets pricing model (CAPM)

Cost of equity can be calculated by the following formula:

Ke=Rf + (Rm -Rf) j

There are three parameters to estimate firms cost of capital:

a) The risk- free rate (Rf)

b) The market risk premium (Rm c) The beta of firm share(j)

-Rf)

a) The risk- free rate (Rf):

The yield on the government treasury securities are used as the risk free rate. We can use either on the short term or long term treasury securities. It is common practice to use the return on the short term treasury bills as the risk free rate. Since investments are long term decision, many analysts prefer to use long term govt bonds as the risk free rate. In India current risk free rate is 12.5%

b) The market risk premium (Rm

-Rf)

The market risk premium is measured as the difference between the long term, historical arithmetic average of market return and the risk free rate. Some people use a market risk premium based on returns of the most recent years. This is not correct procedure since the possibility of measurement error and variability in the short term, recent data high. If we use current long- term government bond as the risk free rate, then the market risk premium also be based on the historical average return of the long term bond.

39

On the other hand, if we use the current yield on long- term government bonds as the risk- free rate, then the market risk premium should also be based on the historical average yield of long term government bonds.

c) The beta of firm share(j)

Beta is the systematic risk of an ordinary share in relation to the market: A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta of a company without any debt. Unlevering a beta removes the financial effects from leverage. Beta () of equity share of IOCL is 1.27 The formula to calculate a company's unlevered beta is:

Where: BL is the firm's beta with leverage. Tc is the corporate tax rate. D/E is the company's debt/equity ratio.

What is the equity risk premium?

The equity risk premium is the "extra return" that investors collectively demand for investing their money in stocks instead of holding it in a risk less or close to risk less investment. As a consequence, it reflects both their hopes and fears about stocks, rising as the fear factor increases.

2.5 Financial Leverage

Leverage The term leverage refers to the ability of a firm in employing long term funds having a fixed cost, to enhance returns to the owners. In other words leverage is the employment of fixed assets or funds for which a firm has to meet fixed costs or fixed rate of interest obligation irrespective of the level of activities attained or the level of operating profit earned.
40

Financial Leverage
This ratio indicates the effects on earnings by rise of fixed cost funds. It refers to use the use of debt in the capital structure. Financial leverage arises when a firm deploys debt funds with fixed charge. The ratio is calculated with the following: Earnings before interest and tax / Earnings after interest The higher the ratio, the lower the cushion for paying interest on borrowings. A low ratio indicates a low interest outflow and consequently lower borrowings. A high ratio is risky and constitutes a strain on profits. This ratio is considered along with the operating ratio, gives a fairly and accurate idea about the firms earnings, its fixed costs and the interest expenses on long term borrowings. Earnings per Share Higher financial leverage leads to higher EBIT resulting in higher EPS, if other things remain constant. Financial leverage affects the variability and expected level of EPS. The more debt the firm employs the higher its financial leverage. Financial leverage generally raises expected EPS, but it also increases the riskiness of securities as the debt / asset ratio rises. When firm uses borrowed capital or creditor ship securities along with owned funds or ownership securities in the capital structure. It is said to be financial leverage. If the rate of earnings is greater than the rate of interest or dividend it is known as trading on equity. TOE always indicates favorable financial leverage.

EBIT Earnings before Interest and Tax EBT Earnings before Taxes.

41

42

3.1

OBJECTIVE OF STUDY

The purpose and scope of the project can be listed as:

To study the practical application of the theoretical framework in respect of the company. To understand the organizational structure and functioning of IOCL. To identify and analyzing the capital structure of IOCL. To identify optimum capital structure of a firm. To study cost of capital of a firm To identify what is impact of capital structure on share holders wealth. To carry out SWOT analysis of a firm

43

 WHAT IS RESEARCH?
"In the broadest sense of the word, the definition of research includes any gathering of data, information and facts for the advancement of knowledge." The goal of the research process is to
produce new knowledge or deepen understanding of a topic or issue. This process takes three main forms (although, as previously discussed, the boundaries between them may be obscure):

Exploratory research, which helps to identify and define a problem or question. Constructive research, which tests theories and proposes solutions to a problem or question. Empirical research, which tests the feasibility of a solution using empirical evidence.

There are two major research designs: qualitative research and quantitative research. Researchers choose one of these two tracks according to the nature of the research problem they want to observe and the research questions they aim to answer: There are two ways to conduct research: Primary research
Using primary sources, i.e., original documents and data.

Secondary research
Using secondary sources, i.e., a synthesis of, interpretation of, or discussions about primary sources.

3.2
ltd.

RESEARCH TOPIC:
My topic of the research is Capital structure analysis of Indian oil corporation

3.3

DATA COLLECTION

The data collected analyzed and also converted into tabular form and figures if required to reach the conclusion. Graphs and diagrams are used for the better presentation and for adding clarity to the information.

Secondary sources: 1. Documents and figures made available by the staff members. 2. From annual report, journals, manuals of the company. 3. Facts and figures made available by the company. 4. Referring different books. 5. Searching websites.

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3.4 TOOLS OF ANALYSIS

For this purpose I used statistical as well as mathematical tools. Ratio analysis and leverages has been used to study capital structure of the company. Microsoft office excel

3.5 LIMITATIONS OF THE STUDY:-

Following limitations were encountered while preparing this project

Limited data:This project has completed with annual reports; it just constitutes one part of data collections i.e., secondary. There were limitations for primary data collections because of confidentiality.

Limited period:This project is based on four years annual reports, conclusions and recommendations are based on such limited data. The trend of last four years may / may not reflect the real capital structure position of the company

Limited area The capital structure analysis is based on financial data of the company. In this study how capital structure decision financially affect to the stakeholder has been mentioned but there are also other effect of capital structure decision and so many factor affect to the capital structure decision which is difficult to trace out.

45

46

4.1 The table shows cost of equity for the last four year:

Table: 4.1.1

YEAR
2007-08 2008-09 2009-10 2010-11

Ke
0.55 0.75 1.30 0.95

4.2 VALUE OF THE FIRM UNDER THE NET INCOME APPROACH:

VALUE OF EQUITY:

Value of equity=discounted value of income

E= net income /cost of equity E=NI/Ke

Where Net income (EBT) =net operating income interest Table shows value of equity for the last four years:
Table: 4.2.1
YEAR 2007-08 2008-09 2009-10 2010-11 NET INCOME

Ke
0.55 0.75 1.30 0.95

VALUE OF EQUITY 22294.89 4218.28 11151.33 10321.08

12,262.19 3,163.71 14,496.73 9,805.03

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Interpretation:
As per above shown table we can see that value of equity is decreased by 81.08% from year 2007-08 to 2008-09. It is not good for investor as well as company. But after that it is increased in 2009-10.And finally in 2010-11 value of equity decreased by 53.71% in comparison of F.Y. 2007-08.

VALUE OF DEBT:
Similarly the value of IOCL firms debt is the discounted value of debt holders interest income.

Value of debt= discounted value of interest

D=Interest/cost of debt D=INT/Kd

Table shows value of debt for the last four years:

Table: 4.2.2
YEAR 2007-08 2008-09 2009-10 2010-11 INTEREST 1,847.06 4,281.79 1,777.36 3,017.38

Kd
0.048 0.090 0.036 0.052

VALUE OF DEBT 38480.42 47575.44 49371.11 58026.54

Interpretation: As per above shown table we can see that value of debt increased year by year. During the period of 2007-08 to 2010-11 it increased by 50.79%.The value of IOCL is the sum of the value of equity and the value of debt:

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 VALUE OF IOCL:

Value of firm =value of equity +value of debt

V=E+D

Table shows value of firm for the last four years: Table: 4.2.3
YEAR
2007-08 2008-09 2009-10 2010-11

VALUE OF EQUITY
22294.89 4218.28 11151.33 10321.08

VALUE OF DEBT
38480.42 47575.44 49371.11 58026.54

VALUE OF FIRM
60775.31 51793.72 60522.44 68347.62

Interpretation:
As per the above table we can say that value of this firm increased in 2010-11 with the comparisons of previous years except 2008-09. In the 2010-11 it is increase by 12.46% with the comparison of 2007-08. Which is good for company.

Suggestion for Improvement:

Company should select the debt equity ratio in such a way that it increases the value of firm.

49

4.3 COST OF CAPITAL UNDER THE NI APPROACH:

The firms overall expected rate of return or cost of capital is:

KO=NOI/V Table shows cost of capital for the last four years: Table: 4.3.1
YEAR
2007-08 2008-09 2009-10 2010-11

NOI(EBIT)
14,109.29 7,445.65 16,274.09 12,822.41

VALUE OF FIRM
60775.31 51793.72 60522.44 68347.62

COST OF CAPITAL
23.22% 14.38% 26.89% 18.76%

Interpretation:
There is lowest rate of cost of capital in 2008-09 which is 14.38 %. Due to decrease in net operating income .we can see that when net operating income increase than rate of cost of capital also decrease.

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4.4 WEIGHTED APPROACH

AVERAGE

COST

OF

CAPITAL

UNDER

NI

The firms overall cost of capital is the weighted average cost of capital (WACC). WACC = (cost of equity * equity weight) + (cost of debt * debt weight) Ko = (Ke *E/V) + (Kd * d/v) Table shows weight of equity and debt for the last four years:

Table: 4.4.1
VALUE OF EQUITY 22294.89 4218.28 11151.33 10321.08 VALUE OF FIRM 60775.31 51793.72 60522.44 68347.62 EQUITY WEIGHT 0.367 0.081 0.184 0.151 VALUE OF DEBT 38480.42 47575.44 49371.11 58026.54 VALUE OF FIRM 60775.31 51793.72 60522.44 68347.62 DEBT WEIGHT 0.633 0.919 0.816 0.849

Table shows weighted average cost of capital for the last four years: Table: 4.4.2

YEAR
2007-08 2008-09 2009-10 2010-11

Ke * EQUITY
WEIGHT
0.202 0.061 0.240 0.143

Kd * DEBT
WEIGHT
0.030 0.083 0.029 0.044

WACC (WEIGHTED AVG. COST OF CAPITAL)

23.20% 14.40% 26.90% 18.70%

Interpretation:
Here we can see that cost of capital and weighted average cost of capital is the same. Weighted average cost of capital depends on value of equity and value of debt.

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4.5 IF THERE IS NO DEBT THEN ITS IMPACT ON VALUE OF FIRM AND WACC IS:
Table: 4.5.1
2010-11
5.22% RS 57837.61 Debt

2009-10 3.59% RS 49472.57 Debt 16274.09

2008-09 9.04% RS 47346.87 DEBT 7,445.65

Net operating income Total cost of debt (INT) Net income MV of equity (NI/cost of equity) MV of debt (INT/kd) MV of the firm(V=E+D) Debt /total value(D/V) WACC (NOI/V)

ZERO DEBT 12822.41

12822.41

ZERO DEBT 16274.09

ZERO DEBT 7445.65

2007-08 4.76% RS. ZERO 38820.93 Debt Debt 14109.29 14109.29

0 12822.41

3017.38
9805.03

0 16274.09

1777.36
14496.73

0 7445.65

4,281.79
3,163.86

0 14109.29

1847.06
12262.23

13497.3 0

10321 57838

12519 0

11151 49473

9927.53 0

4218.48 47346.87

25653.3 0

22295 38820.9

13497.3

68159

12519

60624

9927.53

51565.35

25653.3

61115.9

0 0.95

0.8486 0.1881

0 1.3

0.8161 0.2684

0 0.75

0.918192 0.144393

0 0.55

0.6352 0.23086

Interpretation:

As per the above table it is clear that in the financial year 2010-11 market value of IOCL is high in debt-equity financial plan with RS 68159 But if there is no debt then value of firm decrease .it is also conclude that if there is debt equity financial plan, then overall cost of capital also decreased.

52

4.6 WEIGHTED AVERAGE COST OF CAPITAL OF FIRM UNDER THE NET OPERATING INCOME APPROACH: Weighted average cost of capital

rA = rD [D/D+E] + rE [E/D+E]

Where: rA: average cost of capital rD: cost of debt rE: cost of equity D: value of debt E: value of equity Table shows weighted average cost of capital for the last four years:
Table: 4.6.1

YEAR
2007-08 2008-09 2009-10 2010-11

Ke * EQUITY
WEIGHT
0.202 0.061 0.240 0.143

Kd * DEBT
WEIGHT
0.030 0.083 0.029 0.044

WACC (WEIGHTED AVG. COST OF CAPITAL)

23.20% 14.40% 26.90% 18.70%

Cost of equity rA = rA ( rA - rD )(D/E) Table shows cost of equity for the last four years:
Table: 4.6.2
YEAR Average cost of capital 0.232 0.144 0.269 0.187

(rA- rD)
0.184 0.054 0.233 0.135

D/E

COST OF EQUITY 0.550 0.753 1.300 0.946 53

2007-08 2008-09 2009-10 2010-11

1.726 11.278 4.427 5.622

Interpretation: As per above table it is clear that cost of equity increase year by year from financial year 2007-08 to 2009-10 but the after in 2010-11 it is decrease by 27.3% with comparison of 200910

4.7 COST OF EQUITY BY THE CAPITAL ASSSETS PRICING MODEL (CAPM)

Cost of equity as per CAPM madel for the year 2012 is:
Risk free rate (Rf) = 12.5% The market risk premium (Rm

-Rf)

Rm = 0.19 Rf = 0.125 (Rm -Rf) = 0.19 - 0.125 =0.065 j = 1.27 Table shows cost of equity for the current year: Table:4.7.1
YEAR 2011-12

Rf
0.125

(Rm-Rf)
0.065

j
1.27

Ke
0.208

Interpretation: As per the above table it is clear that cost of equity is 0.208 which is less than in comparison of net operating income approach.

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4.8 FINANCIAL LEVERAGE

EBIT Earnings before Interest and Tax EBT Earnings before Taxes.

Table shows Financial Leverage of IOCL for the last four financial years:

Table: 4.8.1 crore)

YEAR EBIT EBT

(RS in

FINANCIAL LEVERAGE 1.15 2.35 1.12 1.31

2007-08 2008-09 2009-10 2010-11

14,109.29 7,445.65 16,274.09 12,822.41

12,262.19 3,163.71 14,496.73 9,805.03

55

FINANCIAL LEVERAGE
2.5 2 1.5 1 0.5 0 2007-08 2008-09 2009-10 2010-11 FINANCIAL LEVERAGE

Interpretation: From the above table, it can be seen that there is highest ratio in the year 2008-09, which is 2.35, but after that financial ratio is decreased, as company has to bear huge burden of interest, moreover financial crisis is also responsible for reduction in financial leverage. But financial leverage is increased in 2010-11 by 13.91%. It seems that in future company will achieve better financial leverage because future of this industry seems bright.

Suggestion for improvement: To increase the financial leverage there should be less financial charges. Because if operating profit is greater than fixed financial charges then firm obviously get positive leverage.

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4.9 CAPITAL STRUCTURE OR LEVERAGE RATIO

The solvency or leverage ratios throws light on the long term solvency of a firm reflecting its ability to assure the long term creditors with regard to periodic payment of interest during the period and loan repayment of principal on maturity or in predetermined installments at due dates. There are thus two aspects of the long-term solvency of a firm. a. b. Ability to repay the principal amount when due Regular payment of the interest.

The ratio is based on the relationship between borrowed funds and owners capital it is computed from the balance sheet, the second type is calculated from the profit and loss a/c. The various solvency ratios are:

1. Debt equity ratio 2. Debt to total capital ratio 3. Proprietary (Equity) ratio 4. Fixed assets to net worth ratio 5. Fixed assets to long term funds ratio 6. Debt service (Interest coverage) ratio

4.9.1 Total long term debt of IOCL

4.9.1 Table shows total long-term debts of IOCL for the last four years are as follow. Table: 4.9.1
YEAR 2007-08 2008-09 2009-10 2010-11 TOTAL LONG-TEM DEBT 38,820.93 47,346.87 49,472.57 57,837.61

(RS.IN CR.)

57

TOTAL LONG-TEM DEBT

70,000.00 60,000.00 50,000.00 40,000.00 30,000.00 20,000.00 10,000.00 0.00 2007-08 2008-09 2009-10 2010-11 TOTAL LONG-TEM DEBT

Interpretation: Looking into graph, we can see that debt of the company is getting increased year by year. In F.Y. 2007-08, total long-term debt was Rs. 38,820.93crore and in F.Y. 2008-09 it increased by 21.96% as compared to F.Y. 2007-08. In F.Y. 2009-10 and 2010-11 long-term debt of the company sharply increased by 4.49% and 16.91% as compared to previous year i.e. 2008-09 & 2009-10 respectively. But in 2010-11 it highly increases by 48.99% in the comparison of F.Y 2007-08. From this we can say that firm is taking more debt for investing in different kinds of project which can be riskier for the shareholder of the company as company can have higher burden of paying interest.

58

4.9.2 DEBT EQUITY RATIO

Debt equity ratio shows the relative claims of creditors (Outsiders) and owners (Interest) against the assets of the firm. Thus this ratio indicates the relative proportions of debt and equity in financing the firms assets. It can be calculated by dividing outsider funds (Debt) by shareholder funds (Equity)

The outsider fund includes long-term debts. The shareholder funds include equity share capital, preference share capital, reserves and surplus including accumulated profits. However fictitious assets like accumulated deferred expenses etc should be deducted from the total of these items to shareholder funds. The shareholder funds so calculated are known as net worth of the business.

Table shows Debt: Equity ratios of IOCL for the last four years are as follow: Table:4.9.2
YEAR DEBT EQUITY DEBT:EQUITY RATIO

2007-08 2008-09 2009-10 2010-11

38,820.93 47,346.87 49,472.57 57,837.61

43,619.52 45,509.44 52,462.23 57,575.21

0.89:1 1.04:1 0.94:1 1.00:1

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DEBT:EQUITY RATIO
1.1 1.05 1 0.95 0.9 0.85 0.8 2007-08 2008-09 2009-10 2010-11

DEBT:EQUITY RATIO

Interpretation: Looking into the graph, it becomes clear that companys dependence on debt is getting increases in f.y 2008-09, in that year debt equity ratio is 1.04:1, it means that at every one rupees of equity share there is 1.04 RS debt, but in the latest financial year it became 1.00:1, which considered dangerous on the part of management as company has to bear more burden in paying interest on debt.

Suggestion for improvement: Company should raise its fund by the combination of both equity and debt and try to maintain 2:1 ratio that is debt equity ratio.

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4.9.3 DEBT TO TOTAL CAPITAL RATIO

This is the proportion of debt in a companys capital structure, measured using the book value or carrying value of the debt and assets. It is often useful to focus on the long-term capital of a company when evaluating the capital structure of a company, looking at the interest-bearing debt of the company in comparison with the companys equity or with its capital.

Table shows Debt to total capital ratio of the IOCL for the last four years are as follow. Table: 4.9.3 YEAR 2007-08 2008-09 2009-10 2010-11 TOTAL DEBT 38,820.93 47,346.87 49,472.57 57,837.61 TOTAL ASSETS 84,640.62 94,428.61 103,767.77 117,405.85 DEBT TO TOTAL ASSETS RATIO 0.46 0.50 0.48 0.49

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DEBT TO TOTAL ASSETS RATIO

0.51 0.5 0.49 0.48 0.47 0.46 0.45 0.44 2007-08 2008-09 2009-10 2010-11 DEBT TO TOTAL ASSETS RATIO

Interpretation: From the above graph, it is clear that companys debt to total assets ratio has remained satisfactory during the above given year, but it is increasing F.Y2008-09, company should try to minimize it so that it does not adversely affect to the interest of Investor. In F.Y.2010-11 that ratio is 50%. Suggestion for improvement: In this case debt to total assets ratio is sufficient because there is 50 % ratio. But company have to more invest in the total assets of the company.

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4.9.4 PROPRIETARY (EQUITY) RATIO

This ratio indicates the proportion of total assets financed by owners. It is calculated by dividing proprietor (Shareholder) funds by total assets. The objective computing this ratio is to find out how the proprietors have financed the assets. High ratio indicate long term solvency position of the firm.

Table shows Proprietary Ratio of IOCL for the last four year is as follow: Table: 4.9.4 YEAR SHAREHOLDER'S FUND 43,619.52 45,509.44 52,462.23 57,575.21 TOTAL ASSETS PROPERIETARY RATIO 0.52:1 0.48:1 0.51:1 0.49:1

2007-08 2008-09 2009-10 2010-11

84,640.62 94,428.61 103,767.77 117,405.85

PROPERIETARY RATIO
0.53 0.52 0.51 0.5 0.49 0.48 0.47 0.46 2007-08 2008-09 2009-10 2010-11 PROPERIETARY RATIO

63

Interpretation: From the above graph it is clear that proprietary ratio of the company is change year by year. There is no large change in this ratio. In the year 2008 it is much better but after that it was increased. Because share holders fund is increased in compared of total assets of the company. But in 2010-11 it reduced by 3.92% .It shows that increasing rate of shareholders fund is lower than that of total assets of company. Suggestion for improvement: Lower rate of this ratio is not good for long term solvency position of company. So company should try to increase rate

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4.9.5 FIXED ASSETS TO NET WORTH RATIO

This ratio establishes the relationship between fixed assets and shareholder funds. calculated by dividing fixed assets by shareholder funds.

It is

The shareholder funds include equity share capital, preference share capital, reserves and surplus including accumulated profits. However fictitious assets like accumulated deferred expenses etc should be deducted from the total of these items to shareholder funds. The shareholder funds so calculated are known as net worth of the business.

Table shows Fixed Assets to Net worth ratio of IOCL for the last four years are as follow. Table:4.9.5

YEAR

NET FIXED ASSETS

NET WORTH

FIXED ASSETS TO NET WORTH RATIO

2007-08 2008-09 2009-10 2010-11

36,867.95 38,453.19 45,458.05 62,642.74

43,619.52 45,509.44 52,462.23 57,575.21

84.52% 84.49% 86.65% 108.80%

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FIXED ASSETS TO NET WORTH RATIO

120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00% 2007-08 2008-09 2009-10 2010-11 FIXED ASSETS TO NET WORTH RATIO

Interpretation:
From the above graph, it is clear that companys investment in fixed assets was 84.52% of the Net worth of the company in the year 2007-08, while in the latest Financial year it has become 108.80% , it shows that company is investing more amount of money in the fixed assets.

Suggestion for improvement:

In this case, it shows that the company is investing more amount of fund in the fixed assets. The company should invest more amount of money to increase rate.

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4.9.6 FIXED ASSETS TO LONG TERM FUNDS RATIO

Fixed assets to long term funds ratio establishes the relationship between fixed assets and long-term funds and is calculated by dividing fixed assets by long term funds.

Table shows Fixed Assets to Long-term Funds ratio of the IOCL for the last Four years are as follow. Table: 4.9.6
YEAR FIXES ASSETS LONG-TERM FUNDS FIXED ASSETS TO LONG TERM FUNDS RATIO 94.97% 81.22% 91.89% 108.31%

2007-08 2008-09 2009-10 2010-11

36,867.95 38,453.19 45,458.05 62,642.74

38,820.93 47,346.87 49,472.57 57,837.61

FIXED ASSETS TO LONG TERM FUNDS RATIO

120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00% 2007-08 2008-09 2009-10 2010-11 FIXED ASSETS TO LONG TERM FUNDS RATIO

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Interpretation:
From the above graph, it is clear that companys fixed assets was 94.97% of the long-term fund in the F.Y. 2007-08,which reduced by 14.48% in the F.Y. 2008-09,because lack of market opportunity, which is risky for the investors of the company. But in the year 2010-11 it was increase by 17.87% in comparison of F.Y 2009-10, which is good for investors to invest.

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4.9.7 Debt service (Interest coverage) ratio:

This ratio establishes a relationship between operating profit on interest on long term debt Objective: The objective of computing this ratio is to measure the debt- servicing capacity of a farm so far as fixed interest on long- term debt is concerned.

Table shows debt service ratio for the last four years are as follows: Table:4.9.7
YEAR EBIT INTEREST ON LONGTERM DEBT 1,847.06 4,281.79 1,777.36 3,017.38 DEBT SERVICE RATIO 7.64 times 1.74 times 9.16 times 4.25 times

2007-08 2008-09 2009-10 2010-11

14,109.29 7,445.65 16,274.09 12,822.41

DEBT SERVICE RATIO

10 8 6 4 2 0 2007-08 2008-09 2009-10 2010-11 DEBT SERVICE RATIO

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Interpretation: As per the above diagram it is clear that this ratio is good in the financial year 2009-10, but in the year 2008-09 ratio is very low which is not good for the company because it shows that firm is poor to serving interest. It shows bed impression to investor. In the F.Y 2010-11 this ratio decreased by 53.60%. This can adversely affect to the company in near future.

Suggestion for improvement: Company should try to increase rate because decreasing rate is adversely affect the solvency of company. It also shows bed image in mind of investment.

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Companys net profit ratio reduced in last financial year which can adversely affect to company. My suggestion is that to enhance technical efficiency and the company should charge lower rate of interest. The company has to put major control on all expenses. Reductions in expenses result in more profit. As a result the net profit ratio shows increment.

To increase the financial leverage there should be less financial charges. Because if operating profit is greater than fixed financial charges then firm obviously get positive leverage.

Here debt equity ratio is poor because it does not have ratio 2:1. Company should try to maintain that ratio Companys debt to total assets ratio is also 50% so that company have to invest more amt in the fixed assets. Company has to try to reduce overall cost of capital so that it increase in profit . And Company has to also increase the financial ratio

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I would like to conclude that in study about general management activities. I have experience of General Department. In a giant company like IOCL which is fastest growing in oil sector, work is carried out in a very systematic, sophisticated & technical manner. Todays world is full of competition, which has become more prominent and distinct in this period of globalization and thus each aspect of the company needs attention to survive, retain and grow in the market. In the part working process flow was smooth and silent. There was no conflict between staff and other members.

In line with companys goals to maintain world class standards across all function, IOCL has implemented a SAP Enterprise Resource Planning solution firm-wide. This initiative has established an integrated information system for IOCL and association companies, to enable the firm to think, plan have a 360-degree view of the business, and to enable the firm to think plan and act in a collaborative fashion. The same process recorded in SAP system. This system was used in rare companies, because it requires skilful employees for operating. But by SAP system working was easy, fast and accurate.

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BIBLIOGRAPHY

BOOKS:1). I.M.PANDEY. (FINANCIAL MANAGEMENT)

2). PRASANNA CHANDRA (FINANCIAL MANAGEMENT)

ANNUAL REPORTS:-

Indian Oil Corporation Ltd

WEBSITES:-

www.iocl.com www.wikipedia.com www.money.rediff.com

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PROFIT AND LOSS ACCOUNTS

Consolidated Profit & Loss account of Indian Oil Corporation

------------------- in Rs. Cr. -------------------

Mar '11 12 mths Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised Total Expenses

Mar '10 12 mths

Mar '09 12 mths

Mar '08 12 mths

343,348.6 4 30,860.94 312,487.7 0 4,264.34 5,613.61 322,365.6 5 279,768.7 5 2,129.59 6,729.70 1,763.15 13,210.76 1,953.93 -945.24 304,610.6 4 Mar '11 12 mths 13,490.67

279,686.60 26,050.02 253,636.58 4,000.41 5,386.87 263,023.86

315,996.06 27,245.45 288,750.61 -2,728.83 -2,792.38 283,229.40

259,080.41 28,575.21 230,505.20 3,449.66 2,799.42 236,754.28

223,133.71 592.08 6,046.75 1,789.05 11,670.20 1,084.10 -1,121.28 243,194.61 Mar '10 12 mths

252,918.97 509.81 5,917.25 1,239.59 10,867.82 1,684.90 -544.01 272,594.33 Mar '09 12 mths

203,062.26 421.25 3,212.28 1,355.23 10,443.05 1,512.89 -403.68 219,603.28 Mar '08 12 mths

15,828.84 19,829.25 1,777.36 18,051.89 3,555.16 0.00 14,496.73

13,363.90 10,635.07 4,281.79 6,353.28 3,189.42 0.15 3,163.71

13,701.34 17,151.00 1,847.06 15,303.94 3,041.71 0.04 12,262.19

Operating Profit PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax

17,755.01 3,017.38 14,737.63 4,932.60 0.00 9,805.03

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Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Minority Interest Share Of P/L Of Associates Net P/L After Minority Interest & Share Of Associates Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised)

247.58 10,052.61 1,903.77 8,085.62 254.90 0.00 7,583.14 24,841.89 0.00 2,349.26 399.86

748.70 15,245.43 4,049.92 10,998.68 285.49 0.00 9,964.49 20,060.90 0.00 3,181.31 546.46

544.90 3,708.61 1,253.27 2,395.84 -203.56 0.00 2,054.50 19,675.36 0.00 932.14 159.66

259.29 12,521.48 3,938.12 8,550.56 637.82 0.00 7,653.45 16,541.02 0.00 685.94 141.61

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BALANCE SHEET

CONSOLIDATED BALANCE SHEET ------------------- in Rs. Cr. --------OF INDIAN OIL CORPORATION Mar '11 Mar '10 Mar '09 Mar '08 12 mths 12 mths 12 mths 12 mths Sources Of Funds 2,427.95 2,427.95 1,192.37 1,192.37 2,427.95 2,427.95 1,192.37 1,192.37 Total Share Capital 0.00 0.00 21.60 0.06 Equity Share Capital 0.00 0.00 0.00 0.00 Share Application Money 0.00 0.00 0.00 0.00 Preference Share Capital 0.00 0.00 0.00 0.00 Init. Contribution Settler 0.00 0.00 0.00 0.00 Preference Share Application Money Employee Stock Opiton 55,147.26 50,034.28 44,295.47 42,427.09 0.00 0.00 0.00 0.00 Reserves Revaluation Reserves 57,575.21 52,462.23 45,509.44 43,619.52 Networth 21,292.83 19,343.28 18,510.83 7,600.47 36,544.78 30,129.29 28,836.04 31,220.46 Secured Loans Unsecured Loans 57,837.61 49,472.57 47,346.87 38,820.93 Total Debt 1,993.03 1,832.97 1,572.30 2,200.17 0.00 0.00 0.00 0.00 Minority Interest 0.00 0.00 0.00 0.00 Policy Holders Funds Group Share in Joint 115,412.82 101,934.80 92,856.31 82,440.45 Venture Total Liabilities Mar '11 Mar '10 Mar '09 Mar '08 12 mths 12 mths 12 mths 12 mths Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors 100,396.65 78,539.86 37,753.91 33,081.81 62,642.74 45,458.05 14,311.41 18,646.92 54,917.07 7,654.64 778.47 22,809.55 21,429.78 41,076.51 5,606.15 1,055.80
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68,383.50 63,814.60 29,930.31 26,946.65 38,453.19 36,867.95 19,214.78 10,102.52 31,334.52 20,773.11 28,518.20 37,221.07 4,781.73 5,256.48 886.90 968.08

Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Minority Interest Group Share in Joint Venture Miscellaneous Expenses Total Assets Contingent Liabilities Book Value (Rs)

63,350.18 26,432.82 758.92 90,541.92 0.00 61,823.45 6,929.12 68,752.57 21,789.35 0.00 0.00 15.43

47,738.46 27,985.27 542.63 76,266.36 0.00 41,134.89 21,079.57 62,214.46 14,051.90 0.00 0.00 18.49

34,186.83 13,770.76 118.28 48,075.87 0.00 40,025.10 2,662.97 42,688.07 5,387.80 0.00 0.00 38.32

43,445.63 15,343.12 92.14 58,880.89 0.00 40,609.06 1,499.87 42,108.93 16,771.96 0.00 0.00 125.08

117,405.85 103,767.77 94,428.61 84,640.62 30,752.26 25,247.21 27,937.53 28,214.12 237.13 216.08 381.49 365.82

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