1. What is the rating, if any, of your company's bonds?

Moodys investment service has assigned a rating of Baa3 to IOC USD 500 million 4.75% Bond
Issued by IOC in Jan 2010. These are Eurobond issued by IOC with settlement date Jan 22 2010
and Maturity date Jan 22 2015. A Baa3 rating represents a relatively low-risk bond or investment.
However, Baa3 is at the bottom of investment-grade bond ratings, being only one grade above
Junk bond ratings.
(Source:http://v2.moodys.com/cust/content/content.ashx?
source=StaticContent/Free+Pages/Products+
and+Services/Downloadable+Files/Indian+Oil+Corporation+Ltd.pdf)
2. What is the cost of debt of your company? How did you arrive at this figure?
Cost of debt for the company is 8.86%
Bond Value in multiples of Rs
1000000
10000
5000
4300
10700
16000
20000

Coupon Rate %
7.15
7.4
11.15
11
10.7
7

Weighted average of all coupons = 8.86 %

3. How much debt does your company have?
The total debt owned by the company is 44566.25 crores INR
From companys 2009-10 balance sheet
Total secured loan = 18292.45 crores INR
Total unsecured loan = 26273.80 crores INR
4. What is the market-value of equity of your company?
The market value of equity is 50552.93 crores INR
The break up as per companys 2009-10 balance sheet is
Share Capital = 2427.95 crores INR
Reserves and surplus = 48124.96 crores
5

What is the Debt/Equity percentage (ratio) of your company?

Indian Oil Corporation has the Debt/Equity Ratio of 0.8815 (Equity = Rs 50,552.93 Cr and Debt = Rs
44,566.25 Cr)
6

What is the Debt/Equity percentage of your company's competitors?

The Debt/Equity ratios of that of Competitors are tabulated below:

Debt/Equity Ratio

ONGC
BPCL
HPCL
0.18
1.7
1.84

How does your company's Return on Assets compare with those of its competitors?

The Return on Assets (ROTA) of Indian Oil Corporation Ltd and that of competitor is tabulated
below:
Indian Oil
Return on Total Assets

5.36

ONG
C
12.62

BPCL

HPCL

1.02

1.63

How does your company's Interest Coverage compare with those of its competitors?

The Interest Coverage Ratio (ICR) of Indian Oil Corporation Ltd and that of competitor is tabulated
below:

Interest Coverage
Ratio
9

Indian
Oil
11.71

ONG
C
3.64

BPCL

HPCL

5.11

4.86

Would your company's bonds be rated better or worse than an average competitor? Why?

Ans: IOCL Bonds are rated as par with the competitor BPCL i.e AAA. Oil is a regulated public
sector and the bonds are majorly issued by companies like IOCL, HPCL and BPCL. Also they have
less risk associated with them as they are supported by government. The profit with each bond is
almost the same.
10 What is the company's P/E Ratio? Is it higher or lower than that of its competitors? Why?
Ans: P/E Ratio = Market Price per share/ EPS
= 334.25/42.10 = 7.93
P/E ratio of HPCL =358/38.53=9.29
It is lesser than its competitors because of lower expected returns by the market from the share.
11 What has been the dividend-yield of your company's shares?
Ans: Dividend yield = total dividend/market value of equity
= 3156 / 81155.9
= 3.89 %
12 What has been the capital-gains-yield on your company's shares?
Ans: Capital gain Yield= (P1 P0)/P0 = (334.25-288.85)/288.85 = 15.71%
13 What has been the average growth in annual dividends during the last five years or so?
Mar-06 Mar-07 Mar-08 Mar-09 Mar-10
EPS(Rs.)
42.08
64.21
58.39
24.74
42.1
2006-07
Growth(%)

52.59%

2007-08

2008-09 2009-10
-9.06% 57.63% 70.17%

Average Growth in annual dividends = (52.59-9.06-57.63+70.17)/4 = 14.02%

14.

What has been the average growth in annual EPS during the last five years or so?
Mar-06 Mar-07 Mar-08 Mar-09 Mar-10
DPS(Rs.)
12.5
19
5.5
7.5
13
2006-07
Growth(%)

2007-08 2008-09 2009-10

52.00% 71.05% 36.36% 73.33%

Average Growth in annual EPS = (52.00-71.05+36.36+73.33)/4

=22.66%
15. What has been the company's average Payout Ratio during the last five years or so?
Average payout ratio= (Divident per share/Earning per share)
Mar-06 Mar-07 Mar-08 Mar-09 Mar-10
EPS(Rs.)
42.08
64.21
58.39
24.74
42.1
DPS(Rs.)
12.5
19
5.5
7.5
13
Payout Ratio
0.297
0.296
0.094
0.303
0.309
Average Payout Ratio= (0.297+0.296+0.094+0.303+0.309)/5 = 0.260
16. What has been the company's reported book Return on Equity (ROE)?
ROE= (PAT/Equity)*100
For the FY 2010-11,
PAT= Rs. 10,220.55 Cr
Equity= Share Capital+ Reserves and Surplus
=Rs. 2,427.95 Cr+ Rs. 48,124.98 Cr
=Rs. 50,552.93 Cr.
Hence, ROE =(10,220.55/50,552.93)*100
= 20.21%
17. What is the company's cost-of-equity (COE) as per the DDM (dividend discount model)?
Average growth in annual dividends = 14.20% (From the question No 13)
COE = D1/P0 + g
= D0*(1+g)/P0 + g
= 13*(1+14.20%)/334.25 + 14.20%
COE = 18.64%
18. Is the DDM-COE obtained above higher or lower than earnings-yield (inverse of the P/E
ratio)? Why?
Earnings yield = 1/(P/E ratio) = 1/ 7.93 = 12.61 %
DDM-COE is higher than the Earnings yield.
19. Is the DDM-COE obtained above same as the reported (book) ROE? Should it be?
Reported (book) ROE is 20.21%, which is higher than DDM-COE. DDM-COE is need not
be same as the reported (book) ROE.
20. What is the s of your company?

Ans :- 0.80 (Source : CMIE Prowess)

21. Is the company's s higher or lower than that of its competitors? Why so?
Ans :s

Company Name
Bharath Petroleum Corporation Ltd.
Hindustan Petroleum Corporation Ltd.
Reliance Petroleum Ltd.
Essar Oil
Indian oil Corporation Ltd.

0.73
0.78
1.11
1.75
0.8

The s for IOCL is more than state run companies HPCL and BPCL. This higher value indicates the
risk involved with the return. The s for IOCL is lesser than Reliance Petroleum Ltd and Essar Oil.

22. Based on your company's s, what is your company's CAPM-COE?

CAPM-COE can be calculated by the equation
s

Re = Rf + s (Rm Rf)

= 0.80 (Source: CMIE Prowess)

2006
6.61%

2008
2009
2010
Rf
7.36%
5.10%
4.62%
Rm
46.32% 46.71% 52.54% 79.67% 17.37%
Rm-Rf
39.71% 38.51% 59.90% 74.57% 12.75%
(Source: Rm: 5 year data http://www.bseindia.com/histdata/hindices2.asp )
Rf : 182 days treasury bill is taken into account from RBI website)
Rm -Rf = 21.13%
Rf
= 6.38%

2007
8.20%

(Average value of Rm Rf for five years)

(Average value of Rf for five years)

Hence CAPM-COE
Re = Rf + s (Rm Rf)
= 0.0638 + 0.80(0.2113)
= 0.23284
Hence COE = 23.28 %

23) How does your estimate of the CAPM-COE compare with your estimate of the DDM-COE?
COE calculated from the DDM-Model is 18.64% (Answer to Question No.17)
COE Calculated from the CAPM-COE Model is 23.38%
The CAPM-COE is higher compared to DDM-COE. The difference is 4.64 Percentage points.

.
24) What is the WACC of your company? Which cash flows do you discount at this rate?
Cost of debt (Rd) for the company is 8.86 %
(From answer to Question No.2)
Amount of Debt (D)= 44566.25 crores INR
(From answer to the question No.3)
Cost of the Equity (Re) = 21.13%
(From answer to Question No.22)
Amount of Equity (E) = 50552.93 crores INR (From answer to the question No.4)
WACC of the company = (D/ (D+E))*Rd + (E/(D+E))*Re
= (44566.25/(44566.25+50552.93))*8.86% + (50552.93/
(44566.25+50552.93))* 21.13%
= 15.38%
Here Levered cash flows are discounted at this rate of WACC
25) What is the Adjusted COC of your company? When do you use this?
Adjusted WACC = (D/ (D+E))*Rd (1- tax rate) + (E/(D+E))*Re
Tax rate is taken as 34%
Adjusted WACC=
(44566.25/(44566.25+50552.93))*8.86 %( 1-34%) + (50552.93/(44566.25+50552.93))* 21.13%
=13.97% (Adjusted COC of IOCL)
This WACC should be used to discount the Unlevered Cash Flows. Whenever the Unlevered cash
flows have to be discounted, The Adjusted WACC has to be used.

Submitted by
U110124
U110134
U110135
U110137
U110149
U110152