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1
FINANCIAL STATEMENT ANALYSIS
OF
INDIAN OIL CORPORATION LTD
SUBMITTED TO
PROF.SAROJ ROUTRAY
SUBMITTED BY
Manish Kumar (135)
Sipra Routaray (143)
Nirupama Ghosh Dastidar(153)
ACKNOWLEDGEMENT 2
Contents 3
Acknowledgement
Overview of IOCL
Objectives
Financial analysis
- Liquidity ratios
- Solvency ratios
- Profitability ratios
- Market based ratios
- Activity ratios
Bibliography
EXECUTIVE SUMMARY 4
Indian Oil operates the largest and the widest network of fuel stations in the
country, numbering about 17606 (15557 regular ROs & 2049 Kissan Sewa
Kendra). It has also started Auto LPG Dispensing Stations (ALDS). It reaches
Indane cooking gas to over 47.5 million households through a network of 4,990
Indian distributors.
Vision
A major diversified, trans-national, integrated energy company, with national
leadership and a strong environment conscience, playing a national role in oil
security & public distribution.
Mission
• To achieve international standards of excellence in all aspects of energy and
diversified business with focus on customer delight through value of products and
services, and cost reduction.
• To help enrich the quality of life of the community and preserve ecological
balance and heritage through a strong environment conscience.
Concern
Empathy
Understanding
Cooperation
Empowerment
Creativity
Ability to learn
Flexibility
Change
Commitment
Dedication
Pride
Inspiration
Ownership
Zeal & Zest
Delivered Promises
Reliability
Dependability
Objectives of IOCL
Financial Objectives
Shareholding
FIIs
Others
Public 1% 16%
3%
Promoters
80%
11
Share Holding %age
Promoters 80.35
Public 2.73
FIIs 1.37
Others 15.55
Expanding Horizons
Indian Oil is currently metamorphosing from a pure sectoral company with
dominance in downstream in India to a vertically integrated, transnational energy
behemoth. The Corporation is already on the way to becoming a major player in
petrochemicals by integrating its core refining business with petrochemical
activities, besides making large investments in E&P and import/marketing ventures
for oil&gas in India and abroad.
%age Dec-08
Total 13451
Market Share
OTHERS
18% IOCL
31%
ESSAR
8%
RIL
21% BPCL
12%
HPCL
10%
FINANCIAL ANALYSIS 14
Liquidity Ratios
These are the indicators of the ability of the company to convert its assets
into cash or to obtain cash to meet short term obligations.
Working Capital
15
Trend Analysis :
Current Ratio
It is calculated as
Current Ratio = Current Assets / Current Liabilities
Standard Norm: 2:1
Relevance:
• Current Liability coverage: Higher the current ratio, greater is the assurance we
have that current liabilities will be paid.
• Buffer against losses: Current Ratio shows the margin of safety available to
cover shrinkage in non cash current asset values when ultimately disposing off or
liquidating them.
Limitations:
It is static measure of resources available at a point in time to meet the current
obligations. The current reservoir of cash does not have a logical or causal relation
to its future cash flows. These cash flows depend on factor excluded from the ratio
i.e sales, expenditure, cash, profits.
Liquid Ratio
It is calculated as follows
Liquid Ratio = Liquid assets / Liquid liabilities
Standard Norm: 1:1
A more stringent test of the liquidity uses the Liquidity ratio, also known as the
Quick or the Acid Test Ratio which includes the assets most quickly convertible to
cash. This is a better test of liquidity as it handles issues of window dressing.
As can be observed, the liquidity ratios have been increasing over the years. This
can be mainly attributed to the increase in the current assets over the last 3 years.
The current assets have seen a jump by 43% in the last 3 years. Even though the
current liabilities have gone up by 32%, this increase has been adjusted by the huge
increase in the current assets to give increasing liquidity over the years.
Liquidity Ratios 19
1.6000
1.4000
1.2000
1.0000
CURRENT RATIO
0.8000
LIQUID RATIO
0.6000
ABSOLUTE LIQUID
RATIO
0.4000
0.2000
0.0000
2005-2006 2006-2007 2007-2008
Solvency Ratios 20
Debt Equity Ratio:
It is a measure of a company's financial leverage calculated by dividing its
total liabilities by stockholders' equity. It indicates what proportion of equity and
debt the company is using to finance its assets.
DER = LTL / Shareholder's Equity
A high debt/equity ratio generally means that a company has been
aggressive in financing its growth with debt. This can result in volatile earnings as
a result of the additional interest expense.
If a lot of debt is used to finance increased operations (high debt to equity),
the company could potentially generate more earnings than it would have without
this outside financing. If this were to increase earnings by a greater amount than
the debt cost (interest), then the shareholders benefit as more earnings are being
spread among the same amount of shareholders. However, the cost of this debt
financing may outweigh the return that the company generates on the debt through
investment and business activities and become too much for the company to
handle. This can lead to bankruptcy which would leave shareholders with nothing.
The debt/equity ratio also depends on the industry in which the company operates.
Debt Ratio: 21
It is a ratio that indicates what proportion of debt a company has relative to its
assets. The measure gives an idea to the leverage of the company along with the
potential risks the company faces in terms of its debt-load.
A debt ratio of greater than 1 indicates that a company has more debt than assets,
meanwhile, a debt ratio of less than 1 indicates that a company has more assets
than debt. Used in conjunction with other measures of financial health, the debt
ratio can help investors determine a company's level of risk.
Equity Ratio:
22
Total assets divided by shareholder equity. Asset/equity ratio is often used as a
measure of leverage
It is calculated as
Trend Analysis :
Solvency ratios
1.000
0.900
0.800
0.700
0.600
DEBT EQUITY RATIO
0.500
DEBT-CAPITAL EMPLOYED
0.400 RATIO
0.300 DEBT TOTAL ASSET RATIO
0.200
0.100
0.000
2005-2006 2006-2007 2007-2008
Profitability Ratios 25
The profitability ratios give an indication of the ability of the company to generate
profits.
Net Profit Margin Ratio (After Tax Margin Ratio) = Net profit after tax / sales.
26
2005-2006 2006-2007 2007-2008
27
The gross profit ratio is primarily a test of the efficiency of purchases and sales
management. No ideal standard is fixed for this ratio, but the gross profit ratio
must be adequate.
Trend Analysis :
As can we observed, the Net Profit Margin Ratio and the Operating Profit Margin
Ratio have both increased over the years. While the former has shown a 22%
600
500
400
Axis Title
200
100
0
2005-2006 2006-2007 2007-2008
Return on Investment 29
The ROI is perhaps the most important ratio of all. It is the percentage of return on
funds invested in the business by its owners. In short, this ratio tells the owner
whether or not all the effort put into the business has been worthwhile. If the ROI
is less than the rate of return on an alternative, risk-free investment such as a bank
savings account, the owner may be wiser to sell the company, put the money in
such a savings instrument, and avoid the daily struggles of small business
management. The ROI can be calculated in three ways:
Return on Investment = Return on Net worth
= Return on Capital Employed
= Return on Total Assets
Return on invested capital is an important indicator of a company’s long term
financial strength. It uses key summary features from both the income statement
and the balance sheet to assess profitability. It can effectively convey the return on
invested capital from varying perspectives of different financing contributors.
-20
-40
Axis Title
-60
EARNING PER SHARE
-80
-100
-120
Year
ANALYSIS
EPS has been constantly & drasticly declining. The basic cause of this is constant
rise in price of crude petroleum in the world market . Sales & cost of production
both are increasing simultaneously , which has led to constant declining in EPS.
Note –EPS has been for this taken directly from the CMIE database.
19
Analysis
Though the PE ratio is negative but it is increasing due to the reason that Market
price per share is increasing & it is negative because the EPS is negative. PE ratio
in the year 2007-08 has increased by 36.28% due to the rise in market price per
share.
an
34
PRICE EARNING RATIO
0.00
-5.00 2005-06 2006-07 2007-08
-10.00
-15.00
-20.00
PRICE EARNING RATIO
-25.00
-30.00
-35.00
-40.00
-45.00
2002005 2003-24
Market Capitalization
Market capitalization indicates the public’s opinion of the company’s net worth. It
is a determining factor in stock evaluation. It is calculated as follows:
Market Capitalization = Market Value * No of Shares
Activity Ratios 36
Debtor turnover ratio
Debtors turnover ratio indicates the relation between net credit sales and average
accounts receivables of the year. This ratio is also known as Debtors’ Velocity.
Objective and Significance: This ratio indicates the efficiency of the concern to
collect the amount due from debtors. It determines the efficiency with which the
trade debtors are managed. Higher the ratio, better it is as it proves that the debts
are being collected very quickly.
Debtor Days
A ratio used to work out how many days on average it takes a company to get paid
for what it sells. It is calculated by dividing the figure for trade debtors shown in its
accounts by its sales, and then multiplying by 365.
37
2005-2006 2006-2007 2007-2008
Objective and Significance: This ratio indicates how quickly and efficiently the
debts are collected. The shorter the period the better it is and longer the period
more the chances of bad debts. Although no standard period is prescribed
anywhere, it depends on the nature of the industry.
Analysis
With the increase in overall sales the credit sales of the company is also rising
which results in increase in average debtors.The increase in average debtors lead
to increase in debtor turnover ratio.
Objective and Significance: This ratio expresses the number to times the fixed
assets are being turned over in a stated period. It measures the efficiency with
which fixed assets are employed. A high ratio means a high rate of efficiency of
utilisation of fixed asset and low ratio means improper use of the assets.
Capital turnover ratio establishes a relationship between net sales and capital
employed. The ratio indicates the times by which the capital employed is used to
generate sales. It is calculated as follows: -
42
0.250
0.200
0.150
RETURNS ON NET WORTH
Return on CAPITAL EMPLOYED
0.050
0.000
2005-2006 2006-2007 2007-2008
20
18
16
14
12
Debtors turnover
10 Creditors Turnover
8
0
2005-2006 2006-2007 2007-2008
EVA ANALYSIS
Particulars 2006-2007 2007-2008
BETA 0.376 0.468
Profit is the output of the GAAP driven accounting assumptions. One of the
important accounting assumptions is that the interest is treated as an expense,
whereas the dividend is treated as distribution of profit. Sometimes, such
KIIT SCHOOL OF MANAGEMENT
Financial Analysis of Indian IOCL
assumption result in situations where the company show the accounting profit but
45
may be destroying the wealth of the shareholders. To address such anomaly, the
concept of the residual profit (from the economics literature) has been made
popularized as Economic Value Added by Stern and Stewart EVA measures
whether the operating profit is enough compared to the total costs of capital
employed. Stewart defined EVA as Net operating profit after taxes (NOPAT)
subtracted with a capital charge.
Cost of capital = Cost of Equity x Proportion of equity from capital + Cost of debt
x Proportion of debt from capital x (1-tax rate)
Cost of capital or Weighted average cost of capital (WACC) is the average cost of
both equity capital and interest bearing debt. Cost of equity capital is the
KIIT SCHOOL OF MANAGEMENT
Financial Analysis of Indian IOCL
opportunity return from an investment with same risk as the company has. Cost of
46
equity is usually defined with Capital asset pricing model (CAPM). The estimation
of cost of debt is naturally more straightforward, since its cost is explicit. Cost of
debt includes also the tax shield due to tax allowance on interest expenses. The
idea behind EVA is that shareholders must earn a return that compensates the risk
taken. In other words equity capital has to earn at least same return as similarly
risky investments at equity markets. If that is not the case, then there is no real
profit made and actually the company operates at a loss from the viewpoint of
shareholders. On the other hand if EVA is zero, this should be treated as a
sufficient achievement because the shareholders have earned a return that
compensates the risk. This approach – using average risk-adjusted market return as
a minimum requirement - is justified since that average return is easily obtained
from diversified long-term investments on stock markets. Average long-term stock
market return reflects the average return that the company generate from their
operations.
3632.764
3500
3000
2500 2513.412
2000
1500
1000
500
0
2006-2007 2007-2008
Appendix
48
Executive Summary of the Company:-
Indian Oil Corpn. Ltd. Mar 2006 Mar 2007 Mar 2008
Rs. Crore (Non-Annualised) 12 mths 12 mths 12 mths
-
Total income 201908.8 244282.8 274659.63
Sales 199430.9 238498.4 270582.36
Income from financial services 1577.58 5193.82 3239.19
49
Bibliography
CMIE database
www.iocl.com
www.wikipedia.com
www.nseindia.com