IOCL summer internship report


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IOCL summer internship report

  1. 1. EVALUATION OF THE CASH MANAGEMENT & BANKING SYSTEM WITH A FINANCIAL ANALYSIS OF INDIAN OIL CORPORATION LTD. Submitted By: Sagar Mehra Under the guidance of Mr. Vishal Maheshwari Manager - Finance Indian Oil Corporation Limited & Prof. Suryanarayan S Faculty Finance Institute For Technology & Management, Kharghar___________________________________________________ _ ITM Business School
  2. 2. ITM Campus, 25 & 26, Institutional Area, Sector 4, Kharghar (E), Navi Mumbai - 410210 2
  3. 3. ACKNOWLEDGEMENTThis project, though an individual project, wouldn’t have been possible without the constanthelp and guidance of a few individuals whose support has been vital to the completion of theproject.At the outset, I would like to thank Mr. Sanjay Khare (Manager – Vigilance department) forproviding me the opportunity to do a project at Indian Oil Corporation limited.This research project would not have been possible without the support of many people. I wishto express my gratitude to my supervisor, Mr. Vishal Maheshwari, who was abundantly helpfuland offered invaluable assistance, support and guidance. Deepest gratitude are also due to themembers of the finance department, Ms. Neha Choudhary, Mr. Himanshu Shah & Mr.Sandeep without whose knowledge and assistance this study would not have been successful.Special thanks also to all my graduate friends, especially group members; Sonia & Kriselle forsharing the literature and invaluable assistance. Not forgetting to thank my peers who havealways been there.I would also like to convey my thanks to my college faculty, Prof. Suryanarayan S.And finally I wish to express my love and gratitude to my beloved family; for theirunderstanding & endless love through the duration of my internship. 3
  5. 5. 13 BIBLIOGRAPHY & WEBLIOGRAPHY 70 Executive SummaryThis project seeks to evaluate the Cash Management & Banking System at Indian OilCorporation along with a financial statement analysis in understanding the profitability,liquidity & efficiency of the firm.The company uses system called Cash Management Product (CMP) to get information relatedto its cash information. This system performs the required function of speeding up the cashreceipts and payments as well as provides for greater accountability which enables themanagement at the top to take efficient decisions in regards of the liquidity available.State Bank of India (SBI) is one of the main bankers of Indian Oil and provides various facilities.IOC is one of the main customers of SBI. HDFC is also among the bankers to Indian Oil and itscustomers. Though most of IOC’s customers cater to the services of SBI, there are a few whoprefer to carry out their transactions from HDFC bank. Hence Indian Oil Corporation hasappointed HDFC as their second banker which also helps them during contingencies.Indian Oil has around 500 locations around India which serve as an outlet for the finishedproducts. Payments are made to these locations on a day to day basis. This project provides anunderstanding to the facilities provided by SBI to Indian Oil at various locations.During the year 2007, Indian Oil started the concept of Electronic Collections (e – Collections)facility with a view of speeding up the payment procedures for the purchasing party whereinthe delivery of the product can be taken within 15 – 30 minutes whereas in the case of physicalpayment, the delivery would take place only after clearing of the particular instrument. 5
  6. 6. And lastly, a financial statement analysis of the firm so as to identify its financial strengths andweaknesses based on a ratio analysis model. OBJECTIVES OF THE STUDY • To get an exposure of the actual working environment within a multi-national. • To thoroughly understand the cash flow management and various aspects related to banking at Indian Oil. • To study and analyze all the details of Cash Management Product (CMP) facility provided by SBI. • To understand the benefits of electronic solutions in banking functions. • Evaluate the contents of IOCL Financial Statements. • Measure IOCL’s Profitability, Efficiency & Liquidity position. 6
  7. 7. METHODOLOGYThe study conducted is investigative in nature that is to say it probes into the cash & bankingdepartment at Indian Oil figuring out its major functions with the help of secondary sources ofdata available from the department itself.The major parameters of the methodology include: • Data Collection (Cash Flow Statements, Income Statements, Balance Sheets etc) • Analyzing and interpreting the information available in the financial statements and drawing meaningful conclusions from them. • Brainstorming with the personnel in cash department in applying various tools and techniques to bring out the various results. 7
  8. 8. COMPANY OVERVIEWINDIAN OIL CORPORATION LTDIOC (Indian Oil Corporation) was formed in 1964 as the result of merger of Indian Oil CompanyLtd. (Estd. 1959) and Indian Refineries Ltd. (Estd. 1958).Indian Oil Corporation Ltd. is currently Indias largest company by sales with a turnover of Rs. 2441 329 600, and profit of Rs. 25 994 000 for fiscal 2009.Indian Oil Corporation Ltd. is the highest ranked Indian company in the prestigious Fortune‘Global 500’. It is ranked at 109th position in 2010. It is also the 20th largest petroleumcompany in the world.Indian Oil and its subsidiaries today accounts for 49% petroleum products market share in India.Indian Oil group has sold 59.29mn tonnes of Petroleum including 1.74mn tonnes of natural gasin the domestic market and exported 3.33mn tonnes in the yr 2008-09.IOCL GROUPIOCL Group consists of Indian Oil Corporation Ltd. and the following subsidiaries: • Lanka IOC Ltd • Indian Oil (Mauritius) Ltd. • IOCL Middle East FZE • Indian Oil Technologies Ltd. 8
  9. 9. • Chennai Petroleum Corporation Ltd. (CPCL) • Bongaigaon Refinery & Petrochemicals Ltd (BRPL)VISION OF IOCLA major diversified, transnational, integrated energy company, with national leadership and astrong environment conscience, playing a national role in oil security & public distribution.MISSION OF IOCLIOCL has the following 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 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.VALUES OF IOCL 9
  10. 10. Values exist in all organizations and are an integral part of any it. Indian Oil nurtures a set ofcore values: • CARE • INNOVATION • PASSION • TRUSTOBJECTIVES OF INDIAN OILIOCL has defined its objectives for succeeding in its mission. These objectives are: • 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 countrys 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. 10
  11. 11. • To avail of all viable opportunities, both national and global, arising out of the Government of India’s policy of liberalization 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.Major Divisions of IOCL: IOCLIndian Oil Corporation Limited (Indian Oil) owns and operates a network of crude oil andpetroleum product pipeline in India. It has two divisions: Refineries Division and Marketing 11
  12. 12. Division. The Refineries Division is focused on managing the public sector refineries and theMarketing Division is focused on distribution not only the entire production of public sectorrefineries but also the deficit products imported. It is organized in two segments: sale ofpetroleum products, and other businesses, which comprises sale of imported crude oil, sale ofgas, petrochemicals, explosives and cryogenics, wind mill power generation and oil and gasexploration activities jointly undertaken in the form of unincorporated joint ventures. TheDigboi Refinery of Assam Oil Division processed 0.623 million metric tons (MMT) of crude oilduring the year. The Division sold about 1.067 MMT of products. IBP Division comprises theexplosives and cryogenics business. BUSINESS MODEL OF IOCL:IOCL has its presence in all spheres of downstream operations. 12
  13. 13. PRODUCTS OFFERED BY IOCIndian Oil is not only the largest commercial enterprise in the country it is the flagshipcorporate of the Indian Nation. Besides having a dominant market share, Indian Oil is widelyrecognized as India’s dominant energy brand and customers perceive Indian Oil as a reliablesymbol for high quality products and services. Major Products of IOCL are:Auto LPG Lubricants & GreasesAviation Turbine Fuel Marine FuelsBitumen MS GasolineHigh Speed Diesel PetrochemicalsIndustrial Fuels Crude OilLiquefied Petroleum Gas Superior Kerosene Oil ORGANIZATIONAL STRUCTUREThe whole of Indian Oil Corporation (IOC) works under Corporate Office located at New Delhi. Itfollows hierarchical structure where the decision flows from top to bottom and the data flowsfrom bottom to top. Under the corporate office there are 5 divisions namely- Pipelines,Refineries, R&D, Marketing & Assam oil division. The Marketing division located at Mumbai co-ordinates with the regional offices i.e. North, South, East & West Region office, the otherDivisional Offices & SBI for decisions regarding investments. The Regional offices co-ordinateswith respective state office that in turn co ordinates with respective location offices. Corporate Office New Delhi R&D Pipelines Marketing Division Division Refineries Assam Oil Division Noi Division Division da Mumbai New Delhi 13
  14. 14. NR ER WR SR New Delhi Kolkata Mumbai Chennai Respective State Offices Respective Location Offices THE PROJECTCASH MANAGEMENT & BANKING SYSTEM 14
  15. 15. Cash management: What is it?Cash Management involves management of the liquidity of the firm in order to maximize cashavailability and interest income on idle funds. At one end, the function starts when thecustomer writes a check to pay the accounts receivable and ends when the funds are realizedthe funds on an account payable and accrual. On the other hand, the payment of bills involvesaccounts payable and accrual management.Efficient cash management processes are pre-requisites to execute payments, collectreceivables and manage liquidity. Managing the channels of collections, payments andaccounting information efficiently becomes imperative with growth in business transactionvolumes. This includes enabling greater connectivity to internal corporate systems, expandingthe scope of cash management services to include “full-cycle” processes (i.e., from purchaseorder to reconciliation) via ecommerce, or cash management services targeted at the needs ofspecific customer segments. Cost optimization and value-add services are customer demandsthat necessitate the creation of a mechanism to service the various customer groups.Banks are increasingly becoming innovative and anticipating the needs of corporates towardsstandardization, ERP integration, reconciliation, real-time reporting, providing an end-to-endview of cash management value chain besides offering the ability to reach and be reached bytheir own customers. The mounting pressure from competitors forces the Banks to look for an 15
  16. 16. Information Technology vendor who can offer better solutions and services in CashManagement and Internet Banking.The goals of cash management include: • To minimize idle balances • To minimize borrowings and interest costs • To maximize yields on surplus liquidity • To reduce internal administrative cost • To control foreign exchange and interest rate exposure risks HISTORY OF CASH MANAGEMENT AT INDIAN OILAn organizations cash operating cycle is the complete process of utilizing its resources andconverting them into income through trading activities. Prior to the establishment of the CashManagement Product module, the Indian Oil transactions took place through the conventionalmethods of Regional Cash Credit module. In the RCC module the SBI branches of various statesdispersed over various locations would send the information of remittance of funds to theRegional office of SBI and they in turn would then forward that information to the SBI headoffice.However, in this module the lead-time on an average was 4-10 days depending on theaccessibility of the location. The delay included 2-7 days for the transfer between the locationand State Office SBI Branch to the Regional Office SBI Branch, and another 2-3 days from theRegional Office to the Head Office SBI Branch. Therefore, though a collection may be made on 16
  17. 17. the 10th of any month the credit of such a collection may reflect only on the 14th - 20th of thatmonth.It is clearly evident that from such a long lead time in the transfer of funds, the cashrequirements of Indian Oil and the interest figure in the income statement are affected directlyby the length of the cycle.Hence to tackle this problem, Indian Oil’s primary banker, SBI, introduced the CASHMANAGEMENT PRODUCT (CMP) module which helped the personnel to determine the fundposition (Receipts & Applications) of all the locations in all the 4 regions on the very same day,thus making it easier to project cash flow requirements or investments more accurately.CASH FLOW SYSTEM AT INDIAN OIL: TODAYIndian Oil, being a huge organization, has numerous transactions taking place through out thecountry. On an average at least 5000 transactions take place within one working day with anamount equivalent to Rs.500 crore. All of these transactions take place through banks and sinceSBI is the primary banker to IOC, it has established various facilities to oversee that thetransitions take place smoothly. Since Indian Oil is the biggest customer of SBI, they enjoy certain value added services providedby the bank. Corporate Accounts Group (CAG) – central office of SBI at Andheri, Mumbai is thecontrolling office of SBI, having Sanctioning Authority for the various credit facilities and theother banking needs of the corporation. CAG of SBI operates with network of branches called"CAG Branches" in all the Metro Cities. The co-ordination between SBI and IOC is done from theHO-Marketing Mumbai.The Credit Facilities provided by SBI to Indian Oil can be summarized as follows:FUND BASED FACILITY 17
  18. 18. It is the amount of overdraft obtained from the Bank. At present the total overdraft limit of thecorporation is controlled through the Main Cash Credit Facility. Other accounts opened atvarious branches and other places are just the extension of this limit. It gets renewed from timeto time.NON FUND BASED FACILITYThese facilities are for pure banking convenience provided by the bank, so that the Corporationcan carry out the Business transactions. Various Non Fund-Based facilities available include: • Performance/ Financial Bank Guarantee Facility • Letter of Credit Facility - Inland • Letter of Credit Facility - ImportHOW TRANSACTIONS TAKE EFFECT:Undertaking the transactions at more than 500 places and giving effect in a single account ofMumbai branch is a very complicated process which involves a lot of supervision and mostimportantly to administer the various kind of accounts IOC has with SBI to run its operations.Each and every account has its own advantages towards company. 18
  19. 19. CASH BUDGET: PREPARATION AND MANAGEMENT • Compilation of monthly dollar/rupee cash flow statements from inputs received from all the divisions. • Cash flow is monitored on a daily basis • Debt availment / repayment decided based on cash flow projections - daily/monthly/yearly • Variance analysis of actual v/s budgeted cash flow on an ongoing basis. CASH FLOW FORECASTING OVERVIEWA key element of treasury management involves projections of inflows and outflows of cash thecorporation. It also requires its constant updation on day to day basis for ensuring effectivefund management.Projection is done in two stages: 19
  20. 20. • Monthly --- by 7th of every month • Rolling --- by 22nd of every month for 15 days of next monthFor effective forecasting, managers at Indian oil require credible information from multiplesources. The sources of information for daily updation of accruals and refinement of projectionscan be given as follows: • Cash Management Product- Through downloading data from CMS Service Providers. • Web-banking / emails from banks. • Regional Collection Centers - through emails / telephone from:  All 4 regions of marketing division  Refinery division  Pipeline division  Assam oil divisionInformation is received from networks spread all over India.SBI • 570 collection centers with SBI in 250 locations most of the centers have CMP (Cash Management Product) facility. • 460 total withdrawal account with SBI about 150 special withdrawal account with the facility of transferring the balance at the end of the day to the centralized cash credit account with SBI, Mumbai.HDFC (Initiative for Alternate Banking Arrangement) • 30 collection centers in North India. All the centers have CMP (Cash Management Product) facility • 1 withdrawal Account in DelhiThe following is a cash flow reconciliation statement for the month of March 2010, depictingthe total of collections among all the four regions (North, East, West, and South) across India, 20
  21. 21. also including the Assam Oil Division and the head office here in Mumbai. The statement isdivided into three main aspects namely, the budgeted collections, the actual receivables andthe variance among the two. DATE TOTAL Budget Actual Variance 377.78 798.38 718.19 816.05 763.00 637.79 935.16 815.26 820.02 712.66 914.94 665.96 961.35 543.40 894.62 786.80 993.01 711.51 995.72 937.72 388.22 909.74 885.80 676.49 998.10 1064.92 1067.29 21
  22. 22. 1-Mar 302.04 75.74 2-Mar 951.23 (152.85) 3-Mar 733.91 (15.72) 4-Mar 722.39 93.66 5-Mar 727.41 35.59 6-Mar 584.33 53.46 7-Mar 8-Mar 875.78 59.39 9-Mar 746.36 68.9010-Mar 791.92 28.1011-Mar 718.04 (5.38)12-Mar 897.36 17.5813-Mar 661.52 4.4414-Mar15-Mar 988.28 (26.93)16-Mar 517.48 25.9217-Mar 880.06 14.56 22
  23. 23. TOTAL 20888.34 21789.90 901.55The major problem or bottleneck faced by the cash management department is the hugevariance between the budgeted receivables and the actual accruals. The prime reasons whyvariances occur are: • Debtors failing to make a payment on time. • Delay in clearance of payment from banks. • Over estimation of receivables. • Problems of clearance through the electronic modes of payment. • Extra Ordinary state of affairs. 23
  24. 24. VARIANCE ANALYSIS FOR MARCH 2010 Rs/Crores SOURCES (INFLOWS) REASONS BUDGE ACTUA VARIANC T L ECollections 21746 23635 1889 Annexure AOMC Product Exchange Receipts 94 88 (6)OMC Imports Receipts 0 -Receipt on Product -Import 207 210 3 Shifting of CPCL collection from - Receipt on Crude import 1727 2085 358 AprilTotal 1934 2296 362 0Exports and Others 957 939 (18)Subsidy 192 238 46Interest on Bonds 238 238 0Sale Of Bonds 1064 1064 0BD Receipts 281 281 0Maturity of FD of USD bonds under REG S 850 1100 250 Premature receipt of FDReceipt of Compensation from GOI 7100 7100 0Discount from Upstream Companies. 605 605 0 0Total Inflows 35060 37583 2523 APPLICATIONS (OUTFLOWS) BUDGE ACTUA VARIANC T L E Increase in Import Quantity byCrude Related FE Payments 12431 13200 (769) around USD 150 MN Increase in advance Sales tax including additional demandRegion Payments 5745 6247 (502) for sales Tax and custom duty GSO Annexure BR & P Payments 4583 4792 (209) Reason 24
  25. 25. Shifting of April 51 ml importPayment for Indegenous Crude 1992 2225 (233) payment Increased in purchases from OMC Payments 6389 6557 (168) OMC Misc. HO Payments 307 555 (248) Annexure A Interest of FE Loans 8 9 (1) Payment of Advance Tax 275 275 0Investment in FD of USD Bonds under REG S 250 250 0 Total Outflows 31980 34111 (2131)Internal Accrual 3080 3472 392Budgeted Borrowing 44030Less : Increase in Internal Accrual 392Add : Increase in Exchange Loss (181) Increase in Positive BalanceAdd : Other Variations 61 From BudgetActual Borrowings 43518 44588 REASONS FOR VARIATION IN COLLECTIONS OF Rs. 1889 CRORES. • 5.85% growth in MS and HSD sales in comparison to last year March 2009 and 9.44% in comparison to Feb 2010 – Rs.1200 crores. • Aviation O/s realization in March 2010 – Indian Airlines – Rs. 422 crores. • Grant from ONGC under RGGLV scheme – Rs. 48 crores. • Advance collections from M/s Zauri & Nepal Oil – Rs. 99 crores. REASONS FOR VARIATION IN MISCELLANEOUS HEAD OFFICE PAYMENTS OF Rs. 248 CRORES. • Interest on WXDL loans & Adhoc Interest for March – Rs. 34 crores. 25
  26. 26. • Equity contribution to Indian Oil Petronas on 31st march – Rs. 34 crores. • Payment to airport authority of India by - Rs. 69 crores. • Payment to Lubrizol (against 1 crore in Feb) - Rs. 16 crores. • Demurrage, Freight, charter hire payment by import section – Rs. 35 crores. • Misc increased payments in leiu of March closing by LPG & capital assets section – Rs. 40 crores.CASH MANAGEMENT PRODUCT (CMP):All the conventional methods and controls outlined by Indian Oil in today’s world have becomeobsolete. With the growing availability of relatively inexpensive computer systems, it hasencouraged the firm to introduce a greater level of control and forward planning. Thejustifications for introducing a computer system are: • High volume data processing that would otherwise be prohibitively expensive, difficult to manage, and too slow. • Complex task that would otherwise be either impossible or unjustifiably expensive. Keeping the above considerations in mind, SBI, Indian oil’s primary banker, introduced amodule known as CASH MANAGEMENT PRODUCT or CMP. CMP is a facility provided by SBI,whereby the collections and withdrawals from the branches all over India are transferred viaelectronic mode to the Cash Credit Account in Mumbai.The CMP facility can be divided into two Main Modules: • The Credit Module of CMP: This Module deals with the Collection Proceeds. • The Debit Module of CMP: This Module deals with the Withdrawals.Under CMP, no new account is opened. On receipt of the request for a new account for aparticular location, the HO Finance gets a separate client code allotted to the location throughCMP Cell Mumbai. Such Client code is unique for each location.The CMP Charges are divided into 3 broad categories:0.01 / 100 for all the Metros i.e. A Class City 26
  27. 27. 0.05 / 100 for all the B Class Cities (that includes mainly Capital Cities)0.12 / 100 for all the C Class Cities (this includes all the other locations not included in theabove 2 categories)The CMP Module provides convenience to the Company in the sense that all the decentralizedinformation flows to the company in a centralized manner through very fast modes andaccordingly the company can have precise information of where the funds are and how toutilize them more efficiently.ACCOUNTS AND FACILITIES PROVIDED BY CMP MODULEIn designing the CMP module, SBI established various accounts that would operate under it andalso set up various amenities for the ease of transactions.These facilities include: • Collection Account • Special Current (Withdrawal) Account • Current Imprest Account • Letter of Authority Facility • Railway Credit Note Facility • Regional Cash Credit Account • Cash Credit Account 27
  28. 28. COLLECTION ACCOUNT:This account is opened at all the branches / locations/ depots etc. or at any place from whereIOC collects its money from customers or other parties.Important Terms:DCR (Daily Collection Report): IOC has a completely different system of depositing theircheques into bank. Instead of filling in bank slip book they make their own DCR and deposit itinto bank where respective SBI person will check all entries and then credit the amount in theaccounts of IOC at his/her respective branch.DDP Limit (DD Purchase): A facility provided by SBI from all the branches (where IOC has theirCollection Account) in which they purchase all outstation cheques and gives immediate credit,to IOC against these. It has to be fixed for every location depending upon the outstationcheques collection requirement of the Company. Once the DDP limit is granted to a location,the overall cash credit limit is reduced to that extent by the SBI. Therefore it is necessary for thelocation to ensure that the DDP limit is not fixed too high so as to remain unutilized, at thesame time it should be sufficient to meet the outstation cheques requirements for 15 days.Day Zero / One / Two Centers: Depending upon the clearing house arrangement for localbanking instrument these centers are identified, in which credit and transfer of funds is given toIOC on same day in Day Zero center, on next day in Day One center and on second day of 28
  29. 29. deposit in Day Two center provided by instruments are deposited with CMP into the branchbefore cut-off time. • If an instrument is not cleared within 15 days of depositing follow-up action is taken against party or customer. • If it has been 60 days to deposit an instrument and then it got dishonored, SBI cannot debit the amount without prior intimation; even in case of Loss in transit same is applicable. • There should not be a balance of more than Rs. 1,000 in a branch at the time of day closing; it should be transferred to regional office. • The overdue interest for delayed realization of outstation instruments recovered from the Corporation should not be more than 47 days. Such overdue interest should be at SBIs Prime Lending Rate at that period. Overdue interest is applicable only in respect of outstation instruments drawn by the Corporation drawn on a Bank other than SBI and the Branch on which it is drawn is situated at a place where the SBI does not have a Branch. 29
  30. 30. SPECIAL CURRENT (WITHDRAWAL) ACCOUNTThis account is opened at all Regions and State Offices for the purpose of withdrawal. Thelocations having monthly payments of more than Rs. 1 crore have the facility of this account,for this purpose locations are to assess their fund requirements and put up the proposal foropening it as this will result in avoidance of blockage of funds.Features: - • No pre-funding of this account is done. • All payments made are centrally funded from the corporations Main Cash Credit Account at Mumbai. • Daily balances are transferred through Regional Cash Credit Account to Main Cash Credit Account at Mumbai. • Monthly expenditures should be at least Rs. 1 crore, not less.Important: - • There is a fixed monthly limit for this account and it should not exceed, if so, duly approval from Regional Head should be taken. • No deposit of any instrument is permitted in this account. • Only computerized cheque books printed by IOC should be used with "Account-payee only" printed on. • On 5th of every month a bank reconciliation statement is taken and a report on same is submitted to region on a fixed interval basis. 30
  31. 31. CURRENT (IMPREST) ACCOUNT:This account is generally opened at all locations of IOC. Main purpose of the account is to meetday-today expenses of respective locations. Its transactions are not transferred to the mainaccount of Mumbai via CMP.Features: - • This account has to be pre-funded by State/Region Office. • It’s safe because locations cannot make payments more than the credit available in the account. • It is an independent account and therefore its transactions are not transferred to State/ Region Offices. • On 5th of every month a bank reconciliation statement is taken and a report on same is submitted to region on a fixed interval basis. • No deposit of instrument is permitted in this account except instruments received from State/ Region Office towards Salary and other payments. • Only computerized cheque books printed by IOC should be used with "Account-payee only" printed on. 31
  32. 32. LETTER OF AUTHORITY FACILITY:At every location of IOC some special type of payments are made, e.g. Customs and ExciseAuthorities or Payment to Port Trust Authorities or Payment to other refineries for cost ofproduct etc. With the help of this facility payments can be made to these authorities fromrespective locations.Features: - • Various payments to only one authority can be made via this facility. • For payments to different authorities from one branch only there should be approval for this from IOC as well as SBI and then a new facility for new authority payment is made. • Finance In-charge of the Region has the power to increase or decrease the limit of facility.Important: - • For the payment of Excise duty, only three LAs in a month can be issued not more than that. • For the payment of others e.g. Customs / Port Trust etc. no such restriction is imposed. 32
  33. 33. • On 12th of every month a bank reconciliation statement is taken and a report on it is submitted to Region.• LA facility can be opened in only such branches, which is authorized to collect Central Excise/ Customs revenue.• If in that center the authorized revenue-collecting bank is other than SBI, then the SBI branch from where the transfer of funds to the other bank is possible in the quickest time is chosen. 33
  34. 34. RAILWAY CREDIT NOTE FACILITY (RCN):This is a special facility provided by SBI in which IOCs all locations can make payments forRailway freight. All locations, under this facility are authorized to make payment of Railwayfreight, shunting charges etc.Three ways of making payment under this facility:- • By having a special current (withdrawal) account of the location. • By issuing cheques of special current (withdrawal) account maintained at the RCC branch. • By issuing Railway Credit Note (RCN).Important: - • Any other payment accept from RCN is not permitted under this facility by the bank. • Locations need to have pre-printed cheque books with the name of Railway. • Authority to which payment is made. • SBI cannot charge any charges for accepting IOCs cheques presented by the Railways banker. • If it is paid by account of RCC, separate cheque book should be given to each location, and at the time of issuing new cheque book all cross checks for old one should be done. 34
  35. 35. REGIONAL CASH CREDIT ACCOUNT (RCC):Each Regional Office of the Marketing and other Divisions of the corporation individuallyoperates a Regional Cash Credit (RCC) Account.Features:- • In this account, pooling of Debits and Credits from various accounts other than the Current (Imprest) Account operated by the locations is effected. • Debit entries to the RCC Account is from the following three accounts:  Special Current (Withdrawal) Account  Letter of Authority payments made  Railway Credit Notes issued. • Credit entry to the RCC Account is from the Collection Account. • Separate code numbers are allotted to identify each type of transactions in the RCC. They are:  For Collection (01)  For Withdrawal (02)  For LA debits (04)  For RCN debits (05) 35
  36. 36. Net balances pooled in the RCC accounts have to be transferred daily to the main Cash CreditAccount at Mumbai. A separate code number (19) identifies this transfer amount. No Balance isretained in this account.Daily transfer of funds to the cash credit account should be communicated to the HO marketingdivision on a daily basis.CASH CREDIT ACCOUNT: Cash credit Account is the principle Account operated by the HO Marketing Division.Features:- • Transfer of funds from all other accounts like the Collection Account, Special Current (Withdrawal) Account etc. except the Current Imprest Account are to the Cash Credit Account. • Apart from Transfer entries all payments handled by HO like purchase of foreign currencies, repayment of loan availed, and etc. is directly debited to the Cash Credit account. • Loans availed for Working Capital purpose and other major receipts handled by HO are mostly credited to Cash Credit Account directly. • Interest payable to the bank are based on daily "Value Dated" balances in the CC Account and is calculated every quarter by applying the prevalent Prime-Lending rate and interest amount is debited to Cash Credit Account. The bank balance of Cash Credit Account is monitored on daily basis to ensure that the over draft balances do not exceed the sanctioned limit and also no surplus balances are kept idle. This is done with the help of daily Cash Flow Forecast Statement that is explained below: • For the purpose monthly cash flow projection statement is prepared by 17th of the previous month for the next month by the HO. • In accordance with the resource gap thus ascertained (cash inflows-cash outflows), additional finance/ borrowing is planned in order to ensure that balances remain within the overall sanctioned limit and no fund problem is faced on any given day in the month. Incase of any surplus situation on any day, the 36
  37. 37. repayment of short-term borrowing is arranged to obviate the avoidable interest cost.Important:- • Only the Board of Directors can open a Cash Credit Account upon passing a resolution to that effect. • The Fund-Based and Non Fund-Based limits sanctioned by SBI for the Cash Credit Account are required to be renewed every year by submitting yearly Credit Monitoring Arrangement (CMA) data in the form prescribed by the bank. (The data to be given are the current and previous year’s actuals and the next two years projections). • Since the fund-based limit is against hypothecation of Stock-in-Trade, Debtors etc. a quarterly report of debtors outstanding, stock of raw material, finished goods held etc are to be submitted to the bank by HO Marketing Division. 37
  38. 38. SUMMARY BANKING FUNCTIONS OF INDIAN OIL CORPORATION LIMITED Collection Withdrawals Current Imprest Letter of Railway Account Authority Credit(85-90% CMP) Note (Pre – Funded) Regional Cash Credit Account (RCC) (ALL FOUR REGIONS) Cash Credit Account (Head Office SBI CAG Branch Mumbai) 38
  39. 39. UNDER CASH MANAGEMENT PRODUCT (CMP) • Collections – Cash credited directly in Cash Credit Account. • Withdrawals - Cash debited directly in Cash Credit Account. • Letter of Authority - Cash debited directly in Cash Credit Account. • Railway Credit Note - Cash credited directly in Cash Credit Account. SUGGESTIONSIndian Oil needs to make sure that they have a clear view of the true cash position at any pointof time. Since they deal with multiple banks, it may get difficult to know the true cashstandings. For this purpose they need to have better internal controls so that the flow ofinformation among all the departments is smooth.They need to have better visibility of the cash standings so that they can effectively disbursetheir surpluses and deal with negative cash balances. An obvious place to start is to sweep anysurpluses into deposit accounts or investing in short-term money markets. Where loans exist oraccounts are overdrawn, cash can be more productively used to offset these, thus minimizinginterest payments.The other areas in which cash has to be efficiently managed include: • Explore centralizing cash and treasury management. • Review market counterparties, such as banks, on a regular basis. • Proactively plan to reduce debt levels. • Ensure treasury and cash management systems are up to date. • Consider outsourcing services to free up time to be spent on core treasury activity. 39
  40. 40. Since IOC has large cross border trade so there should be parallel convergence in internationaltrade towards open account, electronic payment and the automation of information flows. Itshould adopt the latest solutions to digitize paper wherever it persists. This will reduce the timeof the transaction and will enhance the safety and authenticity. ELECTRONIC COLLECTIONS 40
  41. 41. Internet banking or banking via the Internet can be considered a remarkable development inthe banking sector. The ability to carry out banking transactions through the Internet hasempowered customers to execute their financial transactions within the comfort of theirhomes. Besides this, the benefits of Internet banking are not limited to a particular group ofpeople, as it benefits both bankers and customers alike.Thanks to the information technology and the upgrades in our banking sector and thanks toReserve bank of India (RBI) for introducing the paperless work called electronic funds transfer(EFT) mechanism.Conventional banking has always been slow and time consuming, so much so that sometimesyou need to wait several hours to process a simple transaction like clearing a check. But,Internet banking has tremendously reduced the time required to process banking transactions,thereby making banking faster and convenient. For both the banker (SBI) and the corporate(IOCL), this system is cost-effective, as it has considerably reduced the administrative costs andpaperwork related to the transactions. Besides, banks can also cater to the needs of thousandsof customers at the same time. All these factors have significantly increased the profit marginsby lowering their operating costs.With the Internet banking facility, multinationals like IOCL, can bank on the opportunities like: • Immediate arrangement of Funds • Reduced float period • Centralized control • Almost nil Cost 41
  42. 42. With Internet banking becoming a necessity in today’s business world, Indian Oil along with thehelp of its bankers has been able to introduce the concept of E-COLLECTIONS within its workingenvironment so as to reap all the benefits coming out of it. E – COLLECTION ModelsE Collection uses the internet banking facility by adapting to the latest technology in use. Someof the important concepts coming under it are: • Electronic Funds Transfer (EFT) • Real Time Gross Settlement (RTGS) • National Electronic Funds Transfer (NEFT) 42
  43. 43. Electronic Funds Transfer (EFT)Electronic Funds Transfer (EFT) is a method in which the money is transferred from one bankaccount to other bank account in without the paper cheque and paper money. The transactionis done at bank ATM or using Credit Card or Debit card. In RBI-EFT system you authorize thebank to transfer money from your bank account to other bank account that is called asbeneficiary account. However, this facility is restricted only to the 15 RBI defined cities such asMumbai, New Delhi, Chennai, etc. Funds transfers using this service can be made from anybranch of a bank at these centres to any other branch of any bank at these cities, both inter-cityand intra-city. RBI remains intermediary between the senders bank called as remitting bankand the receiving bank and affects the transfer of funds. Using this method, funds are creditedinto the receiver’s account either on the same day or within a maximum period of 4 days,depending upon the time at which the EFT instructions are given and the city in which thebeneficiary account is located. Usually the transactions done in first half of the day will get firstpriority of transfer than the transaction done in second half.National Electronic Funds Transfer (NEFT)This is a better version of RBI-EFT system. In RBI-EFT there is a limit in location, whereas in NEFTthere is no geographical location problem and only requires both the bank to be NEFT enabledsystem. Under NEFT, the transfer takes place either on the same day or on the next day, 43
  44. 44. depending on the time of instructions given. NEFT is on net settlement basis that is to say that itprocesses transaction in batches. NEFT involves four settlement cycles a day 9.30 am, 10.30 am,12 pm and 4 pm. Thus if a customer has given instruction to its bank to transfer money throughNEFT to another bank in the morning hours, money would be transferred the same day, but ifthe instruction is given later during the day, money would be transferred next day.NEFT transactions are mostly avoided at Indian Oil. They have their preference more towardsInternet banking and Real Time Gross Settlement.Real Time Gross Settlement (RTGS)RTGS is an instantaneous funds-transfer system, wherein the money is transferred on a ‘realtime’ basis and hence, happens in a real time mode. With this system you can transfer moneyto other bank account with maximum 2 hours. In this system there is a limit that you have totransfer money only above Rs 1 lakh and for money below Rs 1 Lakh transactions, banks areinstructed to offer the NEFT facility to their customers. This is because; RTGS is mainly used forhigh value clearing. As of now, customers can use the RTGS facility only up to 3.30 pm andinter-bank transactions are possible up to 5 pm.Here we outline the major advantages that RTGS has over Core Banking facilities: DD / Pay Order / Other Instruments RTGSCustomers arrange for instruments in advance Immediate Arrangement Funds credited on the same dayFunds credited in IOC A/c after 2-3 days if transaction done within thesubsequent to clearing by bank RTGS time spanBanks enjoy the float till funds are not cleared Float of 2 –3 days phased out 44
  45. 45. Cost to IOCLInstrument CollectionDCR Generation & Checking No such costDepositing at BranchFollow Up No Chances of Dishonour as it’s aChances of Dishonour Confirmed mode of Realization of CollectionsDecentralized Control Centralized ControlThe RTGS solution at Indian Oil has been implemented by its primary banker i.e. SBI. The mainparameters behind choosing SBI as their RTGS vendor are: • A Primary & Lead Banker • Has long term Business Relation with IOCL • Flexible in the past to accommodate IOCL requirements • Zero day float of funds • Besides customer code detail, also provides product details by generating them in the MIS and then for posting it in SAP • CMP annual charges currently incurred shall be reduced once replaced by RTGS having nil cost • In March 08 during severe liquidity crisis in market RTGS collections were received in IOC A/c after 5 – 6 hours from the time of remittance. Also there are delayed settlements due to high volume of transactions at RBI end on next working day of any holiday – all such instances will lead to loss of float in case BNP or HDFC are explored • RTGS with one banker is recommended as customer should not have choice to select banks in which case there may be no control over collections 45
  46. 46. PROCEDURE OF RTGS COLLECTION AT INDIAN OIL.Being able to transact with IOCL through RTGS system, its customers need to registerthemselves with SBI by mapping in their details. The is just a one time process which will enableIOCL’s customers to get their username and ID created and involve in electronic transactionswith Indian Oil.To summarize the role of the user we can say that: • A Username is created for making payments in his own ID on day to day basis. • Access rights as “AUTHORIZER” are assigned to the User. • The role is submitted to the bank branch for approval and follow up is done. • “IOCL-RTGS” is mapped as “supplier”. • Liaison with IOCL state office for approval. 46
  47. 47. Once the account is operational, the user is authorized to make payments to IOCL in thefollowing fashion:Customer provides following details during remittance at his bank branch. • Customer’s account number, beneficiary bank, beneficiary customer name, IFSC code of receiving branch, amount and IOCL account number. • IOCL A/c No. – An 18 digit Code & Unique for each Customer • First 11 digits – IOCL SBI RTGS A/c No. • 12th Digit – Alpha & Variable [A - Y ] denotes CCA code (PRODUCT In Transit) • Last 6 digits – SAP code of CustomerThe remitting bank branch of customer processes the transaction and transmits to RBI which inturn processes the transaction on real time basis and sends it to the Beneficiary Bank i.e. SBI.SBI on Receipt of Incoming RTGS affords credit to IOCL RTGs A/c reading the first 11 digits andsimultaneously generates MIS using 12th digit as product code description and 13-18th digit asSAP Code of remitting customer.MIS is sent through E-mail by SBI CMP section which is uploaded in SAP for crediting customersaccount under respective CCA.The client who has made the payment can take his delivery as soon as possible as and when thedetails appear in SAP. 47
  48. 48. 48
  49. 49. Customers Options Charges Timings Bank Internet Banking No Charges 24 x 7 hours 0.1 % of Transaction Core Banking Amount During Bank Hours only State [Max : Rs. 1250] Bank of India Max. Rs. 25 per Transaction for RTGS transfer in IOCL transfers Rs.1-5 lakh 9am – 4.30 pm [Mon-Fri] 18 digit A/c no with BNP Paribas Max. Rs. 50 per Transaction for 9am – 12.30 am [Sat] transfers above Rs.5 lakhCustomers Options Charges Timings Bank State 9am – 4.30 pm [Mon-Fri] Online RTGS Max. Rs. 25 per Transaction for Bank of 9am – 12.30 am [Sat] transfers Rs.1-5 lakh IndiaAssociates RTGS in 18 digit A/c Max. Rs. 50 per Transaction for 9am – 4.30 pm [Mon-Fri] no. transfers above Rs.5 lakh Banks 9am – 12.30 am [Sat] Max. Rs. 25 per Transaction for RTGS [IOCL SBI A/c] in 18 transfers Rs.1-5 lakh 9am – 4.30 pm [Mon-Fri]Any Bank digit A/c no. Max. Rs. 50 per Transaction for 9am – 12.30 am [Sat] transfers above Rs.5 lakh SUGGESTIONS 49
  50. 50. • Integrate system so details of customers directly appear in SAP, so middleman can be avoided.• Still a number of people using e-banking is not significant, so create awareness among customers by telling them advantages of system.• Giving them assurance about security of payment can increase number of users.• Indian Oil and its bankers should drive for the convergence towards electronic payments and collections to better integrate money and information flows. This will help the treasurers to exactly determine the cash position of the company on the real time basis. 50
  51. 51. FINANCIAL ANALYSIS OF INDIAN OIL CORPORATION LTD.Financial Statement analysis. 51
  52. 52. Financial statement analysis is defined as the process of identifying financial strengths andweaknesses of the firm by properly establishing relationship between the items of the balancesheet and the profit and loss account.There are various methods or techniques that are used in analyzing financial statements, suchas comparative statements, schedule of changes in working capital, common size percentages,funds analysis, trend analysis, and ratios analysis.Financial statements are prepared to meet external reporting obligations and also for decisionmaking purposes. They play a dominant role in setting the framework of managerial decisions.But the information provided in the financial statements is not an end in itself as no meaningfulconclusions can be drawn from these statements alone. However, the information provided inthe financial statements is of immense use in making decisions through analysis andinterpretation of financial statements.The technique of financial statement analysis used by me in this project is ratio analysis.Ratio Analysis 52
  53. 53. The ratios analysis is the most powerful tool of financial statement analysis. Ratios simply meanone number expressed in terms of another. A ratio is a statistical yardstick by means of whichrelationship between two or various figures can be compared or measured. Ratios can be foundout by dividing one number by another number. Ratios show how one number is related toanother.Profitability Ratios:Profitability ratios measure the results of business operations or overall performance andeffectiveness of the firm. Some of the most popular profitability ratios are as under: • Gross profit ratio • Net profit ratio • Operating ratio • Expense ratio • Return on shareholders investment or net worth • Return on equity capital • Return on capital employed (ROCE) Ratio • Dividend yield ratio • Dividend payout ratio • Earnings Per Share Ratio • Price earning ratioLiquidity Ratios:Liquidity ratios measure the short term solvency of financial position of a firm. These ratios arecalculated to comment upon the short term paying capacity of a concern or the firms ability tomeet its current obligations. Following are the most important liquidity ratios. • Current ratio • Liquid / Acid test / Quick ratioActivity Ratios:Activity ratios are calculated to measure the efficiency with which the resources of a firm havebeen employed. These ratios are also called turnover ratios because they indicate the speedwith which assets are being turned over into sales. Following are the most important activityratios: • Inventory / Stock turnover ratio • Debtors / Receivables turnover ratio • Average collection period • Creditors / Payable turnover ratio • Working capital turnover ratio 53
  54. 54. • Fixed assets turnover ratio • Over and under tradingLong Term Solvency or Leverage Ratios:Long term solvency or leverage ratios convey a firms ability to meet the interest costs andpayment schedules of its long term obligations. Following are some of the most important longterm solvency or leverage ratios. • Debt-to-equity ratio • Proprietary or Equity ratio • Ratio of fixed assets to shareholders funds • Ratio of current assets to shareholders funds • Interest coverage ratio • Capital gearing ratio • Over and under capitalizationLimitations of Financial Statement Analysis:Although financial statement analysis is highly useful tool, it has two limitations. These twolimitations involve the comparability of financial data between companies and the need to lookbeyond ratios.Advantages of Financial Statement Analysis:There are various advantages of financial statements analysis. The major benefit is that theinvestors get enough idea to decide about the investments of their funds in the specificcompany. Secondly, regulatory authorities like International Accounting Standards Board canensure whether the company is following accounting standards or not. Thirdly, financialstatements analysis can help the government agencies to analyze the taxation due to thecompany. Moreover, company can analyze its own performance over the period of timethrough financial statements analysis. INCOME STATEMENT FOR THE YEAR ENDED 31ST MARCH 2009 54
  55. 55. INCOMESales Turnover 329,806.88Excise Duty 22,682.89Net Sales 307,123.99Other Income -2,905.92Stock Adjustments -1,674.56Total Income 302,543.51 EXPENDITURE 55
  56. 56. Raw Materials 273,708.98Power & Fuel Cost 447.19Employee Cost 5,686.96Other Manufacturing Expenses 1,053.32Selling and Admin Expenses 10,709.66Miscellaneous Expenses 804.51Preoperative Exp Capitalised -544.01Total Expenses 291,866.61 56
  57. 57. Operating Profit 13,582.82PBDIT 10,676.90Interest 4,020.98PBDT 6,655.92Depreciation 2,881.71Other Written Off 317.64Profit Before Tax 3,456.57Extra-ordinary items 915.26PBT (Post Extra-ord Items) 4,371.83Tax 1,364.71Reported Net Profit 2,949.55Total Value Addition 18,157.63Preference Dividend 0Equity Dividend 910.48Corporate Dividend Tax 154.74 57
  58. 58. PER SHARE DATAShares in issue (lakhs) 11,923.74Earning Per Share (Rs) 24.74Equity Dividend (%) 75Book Value (Rs) 368.86 58
  59. 59. SOURCES OF FUNDS Total Share Capital 1,192.37 Equity Share Capital 1,192.37 Share Application Money 21.6 Preference Share Capital 0 Reserves 42,789.29 Revaluation Reserves 0 Networth 44,003.26 BALANCE SHEET FOR Secured Loans 17,565.13 THE YEARENDED 31ST Unsecured Loans 27,406.93MARCH 2009 Total Debt 44,972.06 Total Liabilities 88,975.32 59
  60. 60. PROFITABILITY RATIOS FOR THE YEAR ENDING 31ST MARCH 2009 (Figures in Crores)Gross Profit Ratio:Indicates the relationship between net sales revenue and the cost of goods sold. Gross Profit Net Sales 10676/329806 = 3.23%The gross profit margin has fallen marginally from last year due to the rise in the cost ofexpenditure incurred.Net Profit Ratio:A measure of net income Rupees generated by each Rupee of sales. 60
  61. 61. Net Income * Net Sales* Refinements to the net income figure can make it more accurate than this ratio computation.They could include removal of equity earnings from investments, "other income" and "otherexpense" items as well as minority share of earnings and nonrecurring items. 2949.55/307123.99 = 0.95The Net profit margin has fallen considerably due to the fall in gross profit margin andfulfillment of other obligations by IOCL.The rising profitability of Indian oil is affected due to high level of global crude oil prices((Indian Crude Basket: $ 77.72 / bbl in Apr 2010; $ 136.66 /bbl on 27th June 2010)Under-recoveries on account of LPG (D), SKO (PDS), MS & HSD (Net under recoveries: 2008-09– Rs 2190 cr; 2009-10 – Rs 9774 cr.)The future profitability prospects of Indian oil are assured by: • Issue of Special Oil bonds in lieu of part under recoveries (bonds sanctioned: 2008-09 - Rs 13943 cr, 2009-10 – Rs 18,997 cr) • Rationalization of duties. • Indian Oil’s huge expansion, diversification & globalization plans.Operating Income Margin:A measure of the operating income generated by each rupee of sales. Operating Income Net Sales 13582.82/307123.99 = 4.42% 61
  62. 62. Operating Profit Margin stands at a decent standpoint. Yet it is lower than the previous yearsfigures. Contraction in margin is largely on account of Crude cost which as proportion to netsales (net of stocks) rose sharply to 49.9% compared to 31.5% in the corresponding previousperiod. The other cost though has come down significantly that is not good enough tocompletely offset the rise in crude cost.Operating Expense Ratio:Measures the relationship between the admin, selling & distribution expenses to the ratio of Netsales. Administration + Selling & Distribution Net Sales = 4.87%This stands at a high percentage as compared to previous years because of higher acquisition cost and manufacturing within all the four regions.Return On Equity:Measures the income earned on the shareholders investment in the business. Net Earnings Shareholders Equity 2949.55/1192.37 = 2.47A business that has a high return on equity is more likely to be one that is capable ofgenerating cash internally. For the most part, the higher a companys return on equitycompared to its industry, the better. The Industrial ROE is placed at 5%. Indian Oil isperforming at below the industrial trends, which means that in order to generate higherwealth, they need to generate higher ROE. 62
  63. 63. Return On Capital Employed:Measures the income earned on the invested capital. Net Earnings Long-term Liabilities + Equity 2949.55/201.47 = 14.64%The ROCE is higher than the rate of borrowings by the company so this does not pose anyserious threat to the shareholders earnings.Dividend Payout Ratio:It calculates the percentage of earnings paid to shareholders in dividends. Dividend per Share Earnings per share 7.50/14.64 = 0.51 or 51 %Here if we subtract the DP ratio with hundred we get to know the retention ratio of IOCL. Theretention ratio indicates what percentage share of net profits are retained in the business.Hence the retention ratio of IOCL is 49 %, which states that 51 % of the profits are used to paydividends and the rest 49 % are ploughed back.Earnings Per Share:This measures the management’s success in achieving profits for the owners. Profit After Tax – Preference Dividend No. of Equity Shares 2949.55 – 0/ 201.47 63
  64. 64. = 14.64Dividend Yield Ratio:This measures the relationship between cash dividends paid to common shareholders and themarket price per share of common stock. Dividend Per Share Market Price per share 7.50/347.15 = 0.021Price Earning Ratio:This measures how much the investors are willing to pay per rupee of reported profits. Market price of Share Earning per Share 347.15/14.64 = 23.71This figure measures the investors’ expectations and the market appraisal of the performanceof IOCL. This ratio is used by many security analysts in the Indian market to assess a firmperformance as expected by the investors. 64
  65. 65. LIQUIDITY RATIOS FOR THE YEAR ENDING 31ST MARCH 2009 (Figures in Crores)Current Ratio:The current ratio measures the ability of the company to meet its short term obligations i.e. topay off short term debts. Current Assets Current Liabilities 31884.02/38890.02 = 0.81The ideal current ratio for any firm is 2:1. Indian Oil carries a big risk of not having enoughcash reserves for meeting its short term obligations.Acid Test ratio:A measurement of the liquidity position of the business. The quick ratio compares the cash pluscash equivalents and accounts receivable to the current liabilities. The primary difference 65
  66. 66. between the current ratio and the quick ratio is the quick ratio does not include inventory andprepaid expenses in the calculation. Consequently, a businesss quick ratio will be lower than itscurrent ratio. It is a stringent test of liquidity. Cash + Marketable Securities + Accounts Receivable Current Liabilities 6734.42/38890.02 = 0.17The ideal Quick ratio for any firm is 1:1. Indian Oil fails to achieve that target by a hugemargin.Before moving forward with the concept of Activity and leverage ratios, it is vital to understandthe concept of debt management at Indian oil. Debt Management at Indian Oil Corporation:OBJECTIVES: • Meet funds requirement on time • Flexibility in capital structure to leverage market opportunities • Provide exit routes • Optimize costIndian Oil Corporation uses innovatively designed loan structure which would help themmanage their working capital requirement in the most efficient manner. The loans are linkedMIBOR, pre-payment options, interest resets, CBLO, Cross-currency swapping. 66
  67. 67. Features of debt management at Indian Oil: • Post deregulation of the oil sector foreign currency risk is to be borne by IOC. • Interest differential between Cash credit facility and other working capital loans have increased considerably. • Endeavor to minimize utilization of CC limit while also avoid surplus balances. • Maximize utilization of FE loans in view of appreciating rupee and low interest rates. • Accurate cash flow projections for optimum utilization of funds.Borrowing limits approved by Indian Oil’s Board of Directors: • Rupee:Rs. 38000 crore • Foreign Currency: US$ 4.5 billion • RBI limit for foreign currency borrowings – Short Term USD 2.90 billion Resource mobilization options available for Indian Oil: DOMESTIC OVERSEASShort term Short term 67
  68. 68. • Cash credit/overdraft • Buyer’s credit • MIBOR, T-Bill linked • Supplier’s credit • loans • Revolving lines of credit • Access to CBLO market • FCNR (B) • Commercial paper Long term • Fixed loan from banks • Term Loans - Bilateral • Inter corporate deposits • Syndicated Term Loan • Export packing credit • Bonds • Repo (on Oil Bonds) • Export credit backed financing Long term • Long term Notes in Overseas Market • Term Loans (USPP) • Bonds 1918.5 18.50 18 PRESENT SCENARIO IN DOMESTIC FINANCING:17.5 17.61 1716.5 • Domestic interest rates at high levels essentially due to policy to rein in inflation. 1615.5 15 • Rise in Short-term interest rates, with Reverse Repo Rate at 3.75% & Repo rate at14.5 14 5.25%.13.5 1312.5 • Benchmark long-term interest rates following the Northward trend. 1211.5 1110.5 10 9.5 MIBOR/ CALL RATE MOVEMENT: 9.16 9 8.77 8.5 7.03 8.96 8 6.81 8.63 7.5 7.30 7 5.80 7.02 6.63 5.78 5.85 5.69 6.13 6.5 6 6.90 5.5 4.38 5.69 6.55 5.80 5.80 5 4.5 4 4.49 3.5 4.25 3 68 J-04 S-04 D-04 M-05 J-05 S-05 D-05 M-06 J-06 S-06 D-06 M-07 J-07 S-07 D-07 M-08 J-08 Call Rate NSE MIBOR
  69. 69. There is a rising short term interest rates due to high liquidity tightness in the money market. PRESENT SCENARIO OF INTERNATIONAL FINANCING: • LIBOR stabilized at low levels, having followed southward trend till March 09. • Having decreased the rates gradually, Fed maintaining status-quo of late.47 • High inflation & large capital market 46.05 – causing the rupee to depreciate against outflows46 45.93 US$. 45.0445 46.06 43.5244 44.62 43.48 43.0343 43.47 43.52 MOVEMENT IN US$/INR RATES:42 40.9041 40.7140 40.1239 39.4238 J-04 S-04D-04M-05J-05 S-05D-05 69 M-06J-06 S-06D-06M-07J-07 S-07D-07M-08J-08 US$/INR
  70. 70. Here the rupee is depreciating on high FII outflow.The main objective of Indian Oil’s debt management module is the minimization of the debtcost. For this purpose the follow certain strategies which help them achieving this target: • Long Term rupee borrowings to be a judicious mix of fixed, floating & semi-fixed. • Tapping domestic and international market for maintaining optimum proportion of FE & rupee loans as well as fixed/floating interest rates taking advantage of interest and exchange rate movements. • Raising loans of various maturities to avoid bunching up of loan repayments during any particular period. • Availing FE and rupee facilities of significant amounts with put and call option on daily basis as per requirement. 70
  71. 71. • Development of Broad & Diversified sources of Funding - Recently tapped US market for raising fixed rate unsecured long-term foreign currency loan.ACTIVITY RATIOS FOR THE YEAR ENDING 31ST MARCH 2009 (Figures in Crores)Inventory Turnover Ratio:This rate measures how fast the merchandise is moving. Indian oil requires huge workingcapital requirement (mainly in the form of inventory) for running the business as well as formaintaining country’s oil security. Net sales Average inventory 71
  72. 72. 307123.99/ 21968.81 = 13.98This figure indicates a high rate of inventory turnover. Indian Oil’s Sales are booming.Debtors Turnover Ratio:Debtor’s turnover ratio or accounts receivable turnover ratio indicates the velocity of debtcollection of a firm. In simple words it indicates the number of times average debtors(receivable) are turned over during a year. Credit Sales Average Debtors = 48.15 daysThis figure shows how rapidly IOCL collects its receivables. Since IOCL deals with thousands ofbig customers both within and outside the country, the days of receivables collections aredifferent. Such a high ratio is indicative of shorter time lag between credit sales & cashcollection.Working Capital Turnover ratio:The Working Capital Turnover ratio measures the companys Net Sales from the WorkingCapital generated. Net Sales Working Capital 307123.99/3740.03 = 82.11Fixed asset Turnover Ratio: 72
  73. 73. Measures the capacity utilization and the quality of fixed assets. Net Sales Net Fixed Assets 307123.99/ 34778.45 = 8.83Capital Gearing Ratio:A general term describing a financial ratio that compares some form of owners equity (orcapital) to borrowed funds. Gearing is a measure of financial leverage, demonstrating thedegree to which a firms activities are funded by owners funds versus creditors funds. Fixed Charge Bearing Capital Equity Shareholders funds 17565.13/ 44003.26 = 0.39:1 or 39%The above figure states that IOCL has a safety margin of 39 % available to the creditors of thefirm. That is to say, IOCL will be able to meet the creditors’ obligations even if the value of itsassets decline by 39 %. This kind of a structure is suitable for a firm like IOCL, as it has neithera high capital gearing ratio which sometimes leads to inflexibility in the operations of thefirm as the creditors might exercise pressure in the working of the management nor is it toolow which would indicate poor cash management.LONG TERM SOLVENCY OR LEVERAGE RATIOS FOR THE YEAR ENDING 31ST MARCH 2009Debt to Equity Ratio:It is a measure of a companys financial leverage calculated by dividing its totalliabilities by stockholders equity. It indicates what proportion of equity and debt the companyis using to finance its assets. Total Liabilities Shareholders Equity 88975.32/1192.37 73
  74. 74. = 74.62Fixed Assets to Shareholders funds:Fixed assets to proprietors fund ratio establishes the relationship between fixed assets andshareholders funds. Fixed Assets Shareholders funds 34778.45/ 44003.06 =0.79Interest Coverage ratio:A ratio used to determine how easily a company can pay interest on outstanding debt. Theinterest coverage ratio is calculated by dividing a companys earnings before interest and taxes(EBIT) of one period by the companys interest expenses of the same period. EBIT Interest 10676.90/4020.98 = 2.66 74
  75. 75. Looking at this figure form the point of view of lenders of IOCL, the larger the coverage, thegreater is the ability of the firm to handle fixed charge liabilities and more assured is thepayment of interest to them. However, too high a ratio may imply unused debt capacity. Incontrast, a low ratio is a danger signal that the firm is using excessive debt and does not havethe ability to offer assured payment of interest to the lenders. On making a comparison withthe industrial average figure of 2.65, IOCL’s interest coverage ratio seems to foot the billexactly. SUMMARISED RATIO ANALYSIS OF INDIAN OIL CORPORATION KEY FINANCIAL RATIOS PROFITABILITY RATIOS Gross Profit Ratio 3.23 % Net Profit Ratio 0.95 Operating Income Margin 4.42 % Operating Expense Ratio 4.87 % 75
  76. 76. Return On Equity 2.47 % Return On Capital Employed 14.64 % Dividend Payout Ratio 51 % Earning Per Share 14.64 Dividend Yield Ratio 0.021 Price Earning Ratio 23.71 LIQUIDITY RATIOS Current Ratio 0.81 Acid Test/ Quick Ratio 0.17 ACTIVITY RATIOS Inventory Turnover Ratio 13.98 Debtors Turnover Ratio 48.15 Working Capital Turnover Ratio 82.11 Fixed Asset Turnover Ratio 8.83 Capital Gearing Ratio 39 % LEVERAGE RATIOS Debt to Equity Ratio 74.62 Fixed Asset to Shareholders Funds 0.79 Interest Coverage Ratio 2.66 RISK MANAGEMENT AT INDIAN OIL CORPORATION • Post deregulation of oil sector- Indian Oil has been exposed to currency and interest rate risk. • Indian Oil has adopted a risk management policy duly approved by the board of directors. • Primary objective of the policy is to limit exposures to tolerable levels under selective hedging.INTEREST RATE RISK MANAGEMENT AT INDIAN OIL: 76
  77. 77. • To optimize interest rate risks and costs following parameters are applied to each FC loan separately  Floating rates: minimum 25% of outstanding loans  Fixed rates: minimum 25% of outstanding loans  Balance amount: fixed/floating depending on views • Long term rupee borrowings to be a judicious mix of fixed, floating & semi-fixed • Policy to be constantly reviewed by Indian Oil’s consultants.OTHER RISK MANAGEMENT FUNCTIONS: • Weekly monitoring of exposures and finished goods inventory levels • Monthly report on risk management put up to Director (Finance) • Quarterly report to Board of Directors on operations of risk management policySTRATEGIES RECENTLY ADOPTED FOR EXCHANGE RATE MANAGEMENT • Selective hedging of long term foreign currency loans in addition to short term • To increase hedging of total foreign currency loans exposure in case of sharp appreciation of rupee with the approval of Director(F) • To hedge through forwards & options • Hedging considering overall cost of loan including forward/option premium within cost of rupee loan BIBLIOGRAPHY 77
  78. 78. • Managerial Finance - Weston and Copeland Pg.• Multinational Financial Management – Alan C Sharipo• Cash Management – R.N. Joshi• Financial Management - Khan and Jain• Financial Management - I.M. Pandey WEBLIOGRAPHY•••••• 78