June 2014 Edition of BEACON, A Monthly Newsletter by SIMCON. Inside this issue: INDUSTRY ANALYSIS : Oil & Gas Industry COMPANY ANALYSIS : HPCL Concept of the Month Quiz Did You Know?

1. B E A C O N
A Newsletter by SIMCON– SIMSREE Consulting Club
Volume:2
Issue : 8 June 2014
Inside this issue:-
Featured Article on : Oil & Gas Industry
Company Analysis : HPCL
Concept of the Month:
Did You Know?
Quiz

2. INDUSTRY ANALYSIS : OIL & GAS
Volume: 2
Issue : 8
Introduction
The Oil and Gas sector is one of the six core industries in India
and has very significant forward linkages with the entire econ-
omy. India was the world’s fourth largest energy consumer as
well as the fourth largest net importer of crude oil and petro-
leum products as of 2013. The Indian oil and gas industry is
expected to be worth US$ 139,814.7 million by 2015. To meet
this demand, the Government of India has come up with a vari-
ety of policies such as FDI (Foreign Direct Investment), Coal
Bed Methane (CBM), National Exploration Licensing Policy
(NELP), etc. This has accelerated the need for searching new
fields, evolving better methods of extraction, refining & distri-
bution, constituting a national price mechanism keeping in mind
the alarming price fluctuation in the recent past and evolving a
spirit of equitable global cooperation. Segments in the Oil &
Gas industry:
 Upstream segment – Exploration and production
 Midstream segment – Storage and transportation
 Downstream segment – Refining, processing and marketing
Porter’s model
Barriers to entry: High
Dominance by state owned entities
The Indian Oil & Gas industry is currently dominated by the
state owned entities in all the segments and it is difficult to
compete with them.
Government regulations
A number of government regulations in different areas such as
legal, environmental, etc. need to be followed in order to enter
the oil and gas market.
Capital & technological requirements
In order to enter into the oil and gas industry, the company
should have the financial muscle as well as the technological
expertise in the areas such as exploration, extraction, refining,
etc.
Bargaining power of consumers: Moderate
Buyer type
There are mainly two types of buyers of oil and gas: industrial
and individual. Industrial buyers tend to have more bargaining
power than the individual buyers as they usually buy in bulk
quantities.
Threat of substitutes: Moderate
Alternative sources of energy
In addition to oil and gas, a number of energy sources like coal,
solar, biomass, nuclear, hydroelectric, etc. exist. But owing to
the massive energy requirements, the demand for oil and gas
will still persist in the market.
BEACON : Page 2
Jun. 2014
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3. INDUSTRY ANALYSIS : OIL & GAS
Volume: 2
Issue : 8
Government policies
The government is coming up with a number of policies to
boost the generation of renewable energy sources like solar,
hydroelectric, etc. and reduce the dependence on oil & gas.
Bargaining power of suppliers: High
Cartels
India is mostly dependent on the Middle East countries for get-
ting crude oil. However these countries have in some way
formed cartels thereby having the power to fix the prices.
Politics
The global political scenario plays a significant role in fixing
the crude oil prices. The recent Iraq crisis had shot up the crude
oil prices to USD 117 per barrel.
Intensity of rivalry: High
Competition
Fierce competition is prevalent amongst the state owned entities
as well as the private players – both domestic & international.
Trends and Growth Drivers
1.Large domestic market and heavy dependence on imports
India was the fourth-largest consumer and fourth-largest net
importer of crude oil and petroleum products in the world in
2013. More than 29% of the energy consumption of India is
dependent on oil & gas; most of which is imported from Middle
East countries like Saudi Arabia and Iraq. Increasing population
and industrialization as well as the focus on economic growth
will fuel the growth of demand in oil & gas. While India’s oil
production is forecasted to be 1 million barrels per day, the defi-
cit of demand will be more than 2.5 million barrels per day.
2.Coal Bed Methane (CBM)
The CBM policy was initiated in 1997 to promote clean and
renewable energy resources. CBM is a natural gas extracted
from coal beds. From 2001 onwards, 33 CBM blocks were
awarded in four auction rounds with three coming under nomi-
nation basis. The CBM policy for simultaneous extraction is
awaited from the new government. CBM production in India is
expected to touch 7.4 million metric standard cubic metre per
day.
3.FDI
Cumulative FDI inflows during April 2000 – September 2013
in India’s petroleum and natural gas sector stood at USD5.41
billion (2.6 per cent of total FDIs). 100 per cent FDI allowed in
E&P (Exploration and Production) projects/companies and 49
per cent allowed in refining under the automatic route from ear-
lier approval route.
Impact analysis
Union Budget presented on 10 July
According to Reuters, the oil & gas industry expected reduction
of subsidy bill through fuel price reforms, reintroduction of im-
port duty on crude oil and continuation of diesel price hikes and
deregulation of diesel price. The budget talked about cuts in fuel
subsidy, but did not go in the details. The budget was silent on
second expectation, but fulfilled the third. The government pro-
posed additional 15000 km gas pipeline network by the public-
private-partnership (PPP) model, thus effectively almost dou-
bling its existing 15,000 km network. The focus on oil & gas
was seen as a positive for gas transportation players
(like GAIL, GSPL etc.) and city gas distribution (CGD) entities.
Delay in revision of gas prices : In July, India revised its gas
pricing formula with producers effective April 1, 2014 when the
deal with RIL expired. The formula, suggested by the Rangara-
jan committee, will be valid for all new contracts and renewals
for the next five years. The prices will be reviewed quarterly,
instead of monthly as suggested by the committee.
Conclusion
Though there is immense growth potential in the sector, which
“fuels” economic growth, the delay in implementation of the
new gas price formula has created an environment of uncer-
tainty, which hinders growth in the sector. The oil & gas indus-
try needs a clearer policy vision from the new Union govern-
ment; though the budget provided a direction.
References :
http://petroleum.nic.in/;IBEF;Aranca Research; Bloomberg; US
Energy Information Administration
BEACON : Page 3
Jun. 2014
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4. COMPANY ANALYSIS : HPCL
Volume: 2
Issue : 8
Introduction
Hindustan Petroleum Corporation Limited (HPCL) is an In-
dian state-owned oil and natural gas company. The Company
was incorporated in the name of Standard Vacuum Refining
Company of India Limited on July 5, 1952. On 31st
March,1962 the name was changed to ESSO Standard Refin-
ing Company of India Limited. Hindustan Petroleum Corpo-
ration Limited came into being after the takeover and
merger of erstwhile Esso Standard and Lube India Limited.
HPCL is one of the companies having Navaratna
status. HPCL has been ranked 284th in the Fortune Global
500 rankings.
HPCL has two Refineries located in Mumbai (West Coast)
and Vishakapatnam (East Coast) with capacities of 6.5
MMTPA &8.3 MMTPA (million metric tones per annum)
respectively, churning out a wide range of petroleum prod-
ucts, viz. LPG, MS, SKO, ATF, HSD, Bitumen etc. and vari-
ous grades of lubricants, specialties and greases as per BIS
standard. HPCL classifies its products and services into dif-
ferent categories
Financials
Hindustan Petroleum Corporation Limited has registered
gross sales of Rs.2,32,188 crores for the year 2013-14 as
against Rs.2,15,666 crores in the previous year representing
an increase of over 7.7%. The sales of petroleum products in
the domestic market were at an all time high of 30.26 million
tonnes during the year 2013-14, registering an increase of
4.1% over the previous year, as against the industry growth
rate of 1.3%.
On the financial front, Profit after Tax (PAT) for the full year
2013-14 was higher at Rs.1,734 crores as compared to Rs.905
crores in the previous year. The increase was mainly due to
increased refining and marketing margins.
For detailed report and all company analysis from previous Beacons together, please visit our blog:
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BEACON : Page 4
Jun.2014
Shareholding pattern
Competition
HPCL faces competition with some other oil and natural gas
companies. Comparison of the company with its peers is given
below. Companies are compared on two factors sales of FY
2012-13 and market capitalization as on 22 July 2014.
Company M a r k e t
Cap.
Sales
Reliance 333,375.99 390,117
IOC 80,450.21 473,210
BPCL 42,137.73 260,061
Essar Oil 16,225.34 98,602
HPCL 13,099.80 223,271
( in Rs. Cr)

5. COMPANY ANALYSIS : HPCL
Volume: 2
Issue : 8
Major ongoing projects
In order to strengthen core processes and modernize, HPCL
has developed ambitious plans for expansion and diversifica-
tion in the areas of increasing energy demand, technological
upgradation and environment management. HPCL has pro-
posed capital expenditure (including equity investments in
Joint Ventures) of Rs. 11487 Crores during the eleventh plan.
Rewari Kanpur Pipe Line (RKPL)
Uran-Chakan / Shikrapur LPG Pipeline Project
Mangalore –Hassan-Mysore LPG Pipeline
Awa-Salawas Pipeline Project
Diesel Hydro Treating (DHT) at Mumbai & Vishakapatna-
mapatnam refineries
Challenges:
Availability of raw material :
International Energy Agency (IEA) estimates that global oil
demand has increased from 88.9 mbpd (Million Barrels per
Day) in 2011 to 89.8 mbpd in 2012. The growth was mainly
from Asia Pacific with demand in Europe declining.On
HPCL’s supply side they had disruptions in oil production in
South Sudan, Yemen, Syria, and the North Sea. To counter
For detailed report and all company analysis from previous Beacons together, please visit our blog:
http://simconblog.wordpress.com
BEACON : Page 5
Jun. 2014
that situation, they effectively managed the situation by in-
creased term upliftment from other suppliers and spot pur-
chases.For securing raw material supplies, exploration of the
possibilities of sourcing from new markets in South East Asia,
Western Africa and Central Asia.
Unstable Oil Producing Countries:
Instability in oil producing countries hamper HPCL in raw ma-
terial management. Oil prices rose in Asia after a Malaysia Air-
lines plane came down in war-ravaged Ukraine and Israel
launched a ground offensive into Gaza, sparking fears about
tensions in the crude-rich West Asia.
Environmental Issues:
The National Human Rights Commission (NHRC) recently
issued a notice to HPCL over reports of pollution happening
due to Guru Gobind Singh Refinery. According to reports,
heavy smoke emitted from the refinery is causing asthma,
cough, eye infections and allergic conditions to the residents of
12 villages in Dabwali Assembly segment of Sirsa in Haryana.
Transportation Issues:
Since the gas is transported through pipelines, it needs to be
more protective. On 17th July, HPCL gas pipeline coming from
JNPT got leakage near Kamothe. It took almost 5-6 days for the
administration to find out the exact spot and fix it. Such leak-
ages are disastrous from environmental as well as financial
aspect.
References:
http://fortune.com/fortune500
http://www.hindustanpetroleum.com/
h t t p : / / w w w . m o n e y c o n t r o l . c o m / c o m p e t i t i o n /
hindustanpetroleumcorporation
w w w . h i n d u s t a n p e t r o l e u m . c o m / . . . /
HPCL_Sustainability_report_2013.pdf
http://www.jsbmarketresearch.com/energy-utilities/r-Hindustan
-Petroleum-Corporation-Limited-HINDPETRO-Financial-and-
Strategic-SWOT-Analysis-Review-26184
SWOT
STRENGTHS WEAKNESSES
OPPORTUNITIES THREATS
 India's major oil and gas
company
 Network of 1400+ retail
outlets
 Produces over 300+ grades
of Lubes, Specialities and
Greases
 Large product portfolio
 Operations bound by
Govt regulations and
fluctuations
 Environmental hazard
from waste
 Human right issues,
rehabilitation issues
 Increasing Natural gas
market globally
 Increasing demand due to
heavy industrialization
 Demand supply gap in
India
 Strong competition from
BPCL, IOCL, ONGC etc
 Fluctuating crude oil prices
in global market
 Variation in subsidy distri-
bution by Govt

6. Concept of the Month
The Value Chain Analysis
Competitive advantage for a company means not just matching or surpassing their competitors potential, but discovering what their cus-
tomers want and then profitably satisfying, and even exceeding, their expectations. With diminishing barriers to interregional and interna-
tional trade, access to goods and services has grown. The customers can, thus, locate and acquire the best of what they want, at an accept-
able price, wherever it is in the world. With the ever growing competition and rising customer expectations, a company’s penalty for com-
placency becomes even greater. A strategic tool to measure the importance of the customer’s perceived value is value chain analysis. By
enabling companies to determine the strategic advantages and disadvantages of their activities and value-creating processes in the market-
place, value chain analysis becomes essential for assessing competitive advantage.
The Value Chain
The term ‘Value Chain’ was used by Michael Porter in his book "Competitive Advantage: Creating and Sustaining superior Perform-
ance" (1985) to depict how customer value accumulates along a chain of activities that lead to an end product or service. Porter describes
the value chain as the internal processes or activities a company performs “to design, produce, market, deliver and support its product.”
He further states that “a firm’s value chain and the way it performs individual activities are a reflection of its history, its strategy, its ap-
proach to implementing its strategy, and the underlying economics of the activities themselves.”
Porter describes two major categories of business activities: primary activities and support activities. The primary activities generally in-
clude the line activities of the organization while the support activities are handled by the organization’s staff functions.
The basic model of Porters Value Chain is as shown in the figure. The term ‘Margin’ implies that organizations realize a profit margin
that depends on their ability to manage the linkages between all activities in the value chain. In other words, the organization is able to
deliver a product / service for which the customer is willing to pay more than the sum of the costs of all activities in the value chain.
John Shank and V. Govindarajan (1993) describe the value chain in broader terms. They state that “the value chain for any firm is the
value-creating activities all the way from basic raw material sources from component suppliers through to the ultimate end-use product
delivered into the final consumer’s hands.” According to Shank and Govindarajan, the industry value chain starts with the value-creating
processes of suppliers, who provide the basic raw materials and components. It continues with the value-creating processes of different
classes of buyers or end-use consumers, and culminates in the disposal and recycling of materials. The industry value chain and the value
chain activities within the firm are compared in the figure below.
The Value Chain Approach for Assessing Competitive Advantage
Most corporations define their mission as one of creating products or services giving the products or services generated more importance
than any single step within their value chain. In contrast, companies that are acutely aware of the strategic importance of individual activi-
ties within their value chain thrive by concentrating on the particular activities that allows them to capture maximum value for their cus-
tomers and themselves. These firms use the value chain approach to better understand which segments, distribution channels, price points,
product differentiation, selling propositions and value chain configurations will yield them the greatest competitive advantage. The way
that the value chain approach helps organizations assess competitive advantage is through the following types of analysis:
Internal cost analysis—to determine the sources of profitability and the relative cost positions of internal value-creating processes;
Internal differentiation analysis—to understand the sources of differentiation (including the cost) within internal value-creating proc-
esses; and
Vertical linkage analysis—to understand the relationships and associated costs among external suppliers and customers in order to maxi-
mize the value delivered to customers and to minimize cost.
Although the value chain has been in the public domain for over 20 years, it’s not often used expressly as part of the strategy development
process because managers aren’t always sure how to go about developing one or are suspicious of the insight the analysis actually pro-
vides.
Source:
www.prism.uct.ac.za/Papers/VchNov01.pdf
https://depts.washington.edu/oei/resources/toolsTemplates/value_chain_analysis.pdf
http://www.imanet.org/PDFs/Public/Research/SMA/Value%20Chain%20Analysis.pdf
http://www.cambridgeperformancepartners.com/storage/performance-insights/ValueChainAnalysis.pdf
BEACON : Page 6
Jun. 2014
Volume: 2
Issue : 8
Support Activities include:
Procurement: purchasing of raw materials, supplies and other con-
sumable items as well as assets;
Technology development: know-how, procedures and technological
inputs needed in every value chain activity;
Human resource management: selection, promotion and placement;
appraisal; rewards; management development; and labor/employee
relations; and
Firm infrastructure: general management, planning, finance, ac-
counting, legal, government affairs and quality management.
Primary Activities include:
Inbound logistics: material handling and warehous-
ing;
Operations: transforming inputs into the final prod-
uct;
Outbound logistics: order processing and distribution;
Marketing and sales: communication, pricing and
channel management; and
Service: installation, repair and parts.

7. QUIZ OF JUNE
Answers of last beacon May 2014 Quiz :
1. Mr. Gautam Adani
2. Garoto, Heinrich Meyerfreund
3. AirAsia's CEO Mittu Chandilya and CFO Vijay Gopalan
4. Deloitte, Bandhan Financial Services Pvt. Ltd.
5. McDonald's
1. At the age of 45, X was elected as the CEO of a premier strategy consulting firm Y. His predecessor
Burkhard Schwenker now heads the supervisory board of the same firm. Identify X & Y
2. From the image given below, which recent incident could
you site.
3. A major global private equity firm recently sued a promi-
nent tax advisory and strategy consulting firm for im-
proper consultations. Identify the companies and the
cause for their tiff.
4. X, a Booz Allen Hamilton alumnus founded company Y,
which recently got valued at USD 1bn after raising
money from other firm Z.
5. Rencently a founder of a top IT conglomerate of India announced partnership with world’s leading e-commerce firm. Name
the two parties in partnership.
ANSWERS : May ISSUE
BEACON : Page 7
Jun. 2014
Volume: 2
Issue : 8
Answer To: simcon.simsree@gmail.com with Subject= simcon_quiz_jun_2014
Winner will be recognized.
All Correct Answers will be published in next month’s Edition.
Contributions invited:
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YOU. We invite articles and trivia on themes related to consulting. Be it industry news, consulting trends, a joke, a cartoon or
feedback, we are eager to hear from you. So go ahead, do your research, pen down your thoughts and mail your entries to sim-
con.simsree@gmail.com.
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SIMCON –SIMSREE CONSULTING CLUB Mail To: simcon.simsree@gmail.com
Winner:-
Pravin Mahajan, MMS, SIMSREE
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