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STD: - SYFM (4TH SEMISTER) ASSINGMENT NO.2 SUB: - EQUITY MARKET-2 TOPIC: - FUNDAMENTAL ANALYSIS OF OIL & REFINERIES INDUSTRIES (5 COMPANIES) 1. BHARAT PETROLEUM CORPORATION LTD. 2. ESSAR OIL & GAS 3. INDIAN OIL 4. ONGC 5. RELIANCE INDUSTRIES LTD. SUBMITTED TO: - MANOJ SIR SUBMISSION DATE: - 18TH FEB, 2012
Fundamental analysis
Fundamental analysis of a business involves analysing its financial statements and health, its management and competitive advantages, and its competitors and markets. When applied to futures and forex, it focuses on the overall state of the economy, interest rates, production, earnings, and management. When analysing a stock, futures contract, or currency using fundamental analysis there are two basic approaches one can use; bottom up analysis and top down analysis.[1] The term is used to distinguish such analysis from other types of investment analysis, such as quantitative analysis and technical analysis. Fundamental analysis is performed on historical and present data, but with the goal of making financial forecasts. There are several possible objectives: to conduct a company stock valuation and predict its probable price evolution, to make a projection on its business performance, to evaluate its management and make internal business decisions, to calculate its credit risk. Two analytical models When the objective of the analysis is to determine what stock to buy and at what price, there are two basic methodologies 1. Fundamental analysis maintains that markets may misprice a security in the short run but that the "correct" price will eventually be reached. Profits can be made by trading the mispriced security and then waiting for the market to recognize its "mistake" and reprice the security. 2. Technical analysis maintains that all information is reflected already in the stock price. Trends 'are your friend' and sentiment changes predate and predict trend changes. Investors' emotional responses to price movements lead to recognizable price chart patterns. Technical analysis does not care what the 'value' of a stock is. Their price predictions are only extrapolations from historical price patterns. Investors can use any or all of these different but somewhat complementary methods for stock picking. For example many fundamental investors use technicals for deciding entry and exit points. Many technical investors use fundamentals to limit their universe of possible stock to 'good' companies. Fundamental analysis includes: 1. Economic analysis 2. Industry analysis 3. Company analysis
On the basis of these three analyses the intrinsic value of the shares are determined. This is considered as the true value of the share. If the intrinsic value is higher than the market price it is recommended to buy the share. If it is equal to market price hold the share and if it is less than the market price sell the shares. Use by different portfolio styles Investors may use fundamental analysis within different portfolio management styles. Buy and hold investors believe that latching onto good businesses allows the investor's asset to grow with the business. Fundamental analysis lets them find 'good' companies, so they lower their risk and probability of wipe-out. Managers may use fundamental analysis to correctly value 'good' and 'bad' companies. Eventually 'bad' companies' stock goes up and down, creating opportunities for profits. Managers may also consider the economic cycle in determining whether conditions are 'right' to buy fundamentally suitable companies. Contrarian investors distinguish "in the short run, the market is a voting machine, not a weighing machine".[2] Fundamental analysis allows you to make your own decision on value, and ignore the market. Value investors restrict their attention to under-valued companies, believing that 'it's hard to fall out of a ditch'. The value comes from fundamental analysis. Managers may use fundamental analysis to determine future growth rates for buying high priced growth stocks. Managers may also include fundamental factors along with technical factors into computer models (quantitative analysis). Top-down and bottom-up Investors can use either a top-down or bottom-up approach. The top-down investor starts his analysis with global economics, including both international and national economic indicators, such as GDP growth rates, inflation, interest rates, rates, productivity, and energy prices. He narrows his search down to regional/industry analysis of total sales, price levels, the effects of competing products, foreign competition, and entry or exit from the industry. Only then he narrows his search to the best business in that area. The bottom-up investor starts with specific businesses, regardless of their industry/region. Procedures The analysis of a business' health starts with financial statement analysis that includes ratios. It looks at dividends paid, operating cash flow, new equity issues and
capital financing. The earnings estimates and growth rate projections published widely by Thomson Reuters and others can be considered either 'fundamental' (they are facts) or 'technical' (they are investor sentiment) based on your perception of their validity. The determined growth rates (of income and cash) and risk levels (to determine the discount rate) are used in various valuation models. The foremost is the discounted cash flow model, which calculates the present value of the future dividends received by the investor, along with the eventual sale price. (Gordon model) earnings of the company, or cash flows of the company. The amount of debt is also a major consideration in determining a company's health. It can be quickly assessed using the debt to equity ratio and the current ratio (current assets/current liabilities). The simple model commonly used is the Price/Earnings ratio. Implicit in this model of a perpetual annuity (Time value of money) is that the 'flip' of the P/E is the discount rate appropriate to the risk of the business. The multiple accepted is adjusted for expected growth (that is not built into the model). Growth estimates are incorporated into the PEG ratio, but the math does not hold up to analysis.Its validity depends on the length of time you think the growth will continue. IGAR models can be used to impute expected changes in growth from current P/E and historical growth rates for the stocks relative to a comparison index. Computer modelling of stock prices has now replaced much of the subjective interpretation of fundamental data (along with technical data) in the industry. Since about year 2000,with the power of computers to crunch vast quantities of data, a new career has been invented. At some funds (called Quant Funds) the manager's decisions have been replaced by proprietary mathematical models
Differential widen further and average around USD 7 per Barrel. The significant increase in the differentials, if sustained during the current year, can benefit refineries Capable of processing heavier crude, by enhancing the Refining margins. The sharp drop in the oil output of countries like Libya had an impact on crude oil availability in March 2011 and this has contributed to higher prices. Major oil exporting countries Like Saudi Arabia have ensured higher supply levels as Compared to the previous year. However, prices are likely to remain high owing to constraints on the supply side. The Pace of economic recovery in the developed countries, Impact of the debt crisis in Europe, coupled with inflationary Pressures in countries like India and China, could however moderate demand for crude oil in 2011-12. The trend of the average crude oil prices in 2010-11 being higher than the average prices in 2009-10 has also been witnessed in prices of key petroleum products. Although there has been some reduction in the current financial year, Product prices continue to rule at high levels. This will push up costs in countries that are largely dependent on imports for meeting their requirements of petroleum products. The Higher international prices are likely to impact the growth in demand. Barring Germany which has seen strong growth in demand for products like Naphtha and Diesel, on account Of a strong economic performance, growth remains flat in other major European countries. Asia continues to show Strong demand growth with India likely to see increased demand for products like Liquefied Petroleum Gas (LPG), Diesel and Petrol.
Oil is the single most important commodity that holds the position of a key factor in each and every economy of the world. India is one of the largest consumers of oil in the world. US tops the list of largest consumer of oil. Indias demand for oil is expected to grow at an annual growth rate of 3.6% whereas domestic production is expected to grow at approximately 2.5%. Oil sector is mainly classified into exploration, refining & marketing segments. 1 bbl = 153 litre. New Exploration Licensing Policy (NELP) was launched by the Government for accelerating the pace of hydrocarbon exploration in the country. Oil blocks are awarded under this policy. HPCL, BPCL, IOC are the oil marketing companies eligible for oil subsidy provided by the government. The upstream oil sector refers to the searching for and the recovery and production of crude oil and natural gas. The upstream oil sector is also known as the exploration and production (E&P) sector. The downstream oil sector refers to the refining of crude oil, and the selling and distribution of natural gas and products derived from crude oil. The oil industry classifies crude oil in three different ways based on geographic location, gravity (or American Petrochemical Institute) & sulphur content. The byproducts of crude oil are lubricating oils, diesel fuel, jet fuel, petrol, chemicals, liquefied petroleum gas, waxes, polishes, bitumen for roads and roofing, fuel for ships and factories & others include plastics (Ethylene and propylene), rubbing alcohol, medicines (e. g. Aspirin), rubber, etc. Aviation fuel is a specialized type of petroleum-based fuel used to power aircraft. Oil marketing companies set the prices of ATF based on vis--vis movement of crud
MANAGEMENT Board of Directors Name R K Singh S K Joshi Haresh M Jagtiani N Venkiteswaran P. K. Sinha S Varadarajan K K Gupta I P S Anand Alkesh Kumar Sharma S P Gathoo S. V. Kulkarni B. K. Khare & Co.
Designation Chairman and Managing director Director (Finance) Director Director Director Director (Finance) Director (Marketing) Director Director Director (Human Resources) Company Secretary AUDITORS
RATIOS ANALYSIS
Intrinsic Value of the Stock The intrinsic value of the stock is calculated by relative P/E method. YEAR P/E FY 2010 15.8 FY 2009 12.8 FY 2008 19.3 FY 2007 9.5 FY 2006 6.4
Avg. P/E = (15.8+12.8+19.3+9.5+6.4) 5 Current EPS = 38.34 Intrinsic value of the stock = 12.76 X 38.34 Current Market Price = (as on 01/3/2012)
= 12.76
= Rs 489.22
Since the Intrinsic value > current value, the stock is undervalued & it should be hold.
2.
Essar Oil Limited was incorporated as a Public Limited Company under the Companies Act, 1956 on 12th September, with the main objective to provide Development, Exploration, and Production and related Services in the oil & gas sector. The main promoters of Essar Oil Limited are Essar Investments Limited, Essar Shipping Limited, South India Shipping Company Limited, Essar Gujarat Limited and a foreign copromoter, Prime Finance Company Limited, and other NRI's associates and friends. EOL was engaged in preliminary activities relating to bidding for Oil & gas fields as well as advising the Energy and Offshore divisions of Essar Gujarat Limited on technical matters relating to their operations. EOL is the first drilling Company in India to secure international drilling contracts against international competitive bidding. Essar Oil is the first and only Indian company to enter the international market for contract drilling services through its energy division. - The Company has India's largest private sector fleet of drilling rigs. The Energy Division has drilled the deepest well in Asia to the depth of 6700 Mtrs. in Himachal Pradesh. The Company is a member of Essar group. The company became a wholly owned subsidiary of Essar Gujarat Limited. EOL proposes to enter into an MOU for operation and maintenance services for the Refinery with an affiliate company, Essar Refineries Limited which in turn will enter into a tie-up with an international refining company providing technical back-up services and key personnel required for successful operation and maintenance of the Refinery. In June, the Board of Essar Gujarat Limited proposed to transfer The entire shareholding of Essar Oil Limited to Essar Investments Limited.EOL proposes to import crude oil by Tankers and VLCCs of capacities 240,000 - 300,000 DWT. EOL shall develop dedicated marine and shore facilities at Vadinar port for receipt of crude oil, storage and transportation to Refinery site. In 1996 the energy division has made entry into Qatar with a three year contract from Qatar General Petroleum Corporation for our deep Rig. It is proposed to produce 87 million barrels of oil and about 1 billion cubic metres of associated gas.
In 1997 Essar Oil has joined the National Securities Depository Limited (NSDL).and also decided to hike its petroleum refinery capacity at Vadinar in Gujarat from nine million tonnes to 10.5 million tonnes.
Kandla Port Trust (KPT) has entered into an agreement with Essar Oil Limited for setting up major facilities for handling POL, under the existing schemes of private participation. In 1998 Essar Oil Ltd and Reliance Petroleum Ltd have sought 13 per cent equity each in a proposed pipeline joint venture. The Ruias-owned Essar Oil (EOL) has forged alliances with three foreign oil companies and Hindustan Oil Exploration Company (HOEC) for joint exploration activities in the country.
In 1999 Essar Oil has unveiled plans to raise the capacity of its refinery to over 21 million tonnes a year. The refinery will produce aviation turbine fuel (ATF), high speed diesel, superior kerosene oil, naphtha and liquefied petroleum gas (LPG). In 2001 ONGC, Essar and Reliance receives authorisation from government to sell petrol and diesel. In 2003 Sets up its first retail outlet at Devrukh in Ratnagiri District of Maharashtra. The company also has bagged a tender for diesel supplies to the Bangalore Metropolitan Transport Corporation (BMTC), which runs a fleet of 2,959 buses in the garden city. Essar Oil Ltd and Castrol India Ltd on December 11, 2004, signed an agreement for sale of Castrol lubricants through Essar Oil fuel outlets throughout the country and in the same year Essar Oil inks deal with Myanmar for exploration. Essar Oil inked a Product Sale, Purchase and Infrastructure Sharing MoU with Indian Oil Corporation. MANAGEMENT
Prashant Ruia P Sampath K N Venkatasubramanian Melwyn Rego Manju Jain Naresh K Nayyar Anshuman Ruia Dilip J Thakkar K V Krishnamurthy V K Sinha Lalit Kumar Gupta Sheikh S. Shaffi M/s. Deloitte Haskins & Sells
Director Director Director Nominee Director Nominee Director Deputy Chairman Director Director Director Nominee Director Managing Director & CEO COMPANY SECRETARY AUDITORS
RATIOS ANALYSIS
Intrinsic Value of the Stock The intrinsic value of the stock is calculated by relative P/E method.
YEAR P/E FY 2010 26.8 FY 2009 576.5 FY 2008 0.0 FY 2007 0.0 FY 2006 0.0
= 120.66
Intrinsic value of the stock = 120.66 X 0.98 = Rs 118.24 Current Market Price = (as on 01/3/2012) Since the Intrinsic value > current value, the stock is undervalued & it should be hold.
Refineries
In Assam
Digboi Refinery, in Upper Assam, is India's oldest refinery and was commissioned in 1901. Originally a part of Assam Oil Company, it became part of IndianOil in 1981. Its original refining capacity had been 0.5 MMTPA since 1901. Modernisation project of this refinery was completed by 1996 and the refinery now has an enhanced capacity of 0.65 MMTPA.
Guwahati Refinery, the first public sector refinery of the country, was built with Romanian collaboration and was inaugurated by Late Pt. Jawaharlal Nehru, the first Prime Minister of India, on 1 January 1962. Its capacity is 1 MMTPA. Bongaigaon Refinery became the eighth refinery of IndianOil after merger of Bongaigaon Refinery & Petrochemicals Limited w.e.f. 25 March 2009. It is located at Dhaligaon in Chirang district of Assam, 200 km west of Guwahati.
In Bihar
Barauni Refinery, in Bihar, was built in collaboration with Russia and Romania. It was commissioned in 1964 with a capacity of 1 MMTPA. Its capacity today is 6 MMTPA.
In Gujarat
Gujarat Refinery, at Koyali (near Vadodara) in Gujarat in Western India, is IndianOils second largest refinery. The refinery was commissioned in 1965. It also houses the first hydrocracking unit of the country. Its present capacity is 13.70 MMTPA.
In West Bengal
Haldia Refinery is the only coastal refinery of the Corporation, situated 136 km downstream of Kolkata in the Purba Medinipur (East Midnapore) district. It was commissioned in 1975 with a capacity of 2.5 MMTPA, which has since been increased to 7.5 MMTPA
In Uttar Pradesh
Mathura Refinery was commissioned in 1982 as the sixth refinery in the fold of IndianOil and with an original capacity of 6.0 MMTPA. Located strategically between the historic cities of Delhi and Agra, the capacity of Mathura refinery was increased to 8.8 MMTPA.
In Haryana
Panipat Refinery is the seventh and largest refinery of IndianOil. The original refinery with 6 MMTPA capacity was built and commissioned in 1998. Panipat Refinery has since expanded its refining capacity to 15 MMTPA.
It is believed that the future IOCL refinery Will be Paradeep Refinery. It is expected to be handover at 2012. Subsidiary refineries Chennai Petroleum (10.5 MMTPA)
IndianOil (Mauritius) Ltd. Lanka IOC PLC Group company for retail and storage operations in Sri Lanka. It is listed in the Colombo Stock Exchange. It was locked into a bitter subsidy payment dispute with Sri Lanka's Government which has since been resolved. IOC Middle East FZE Chennai Petroleum Corporation Limited Green Gas Ltd. a joint venture with Gas Authority of India Ltd. for city-wide gas distribution networks. Indo Cat Pvt. Ltd., with Intercat, USA, for manufacturing 15,000 tonnes per annum of FCC (fluidised catalytic cracking) catalysts & additives in India. IndianOil CREDA Biofuels Ltd., a joint venture with Chattisgarh government for production and marketing of Bio-fuels. Numerous exploration and production ventures with Oil India Ltd., Oil and Natural Gas Corporation
IndianOil is the highest ranked Indian company in the Fortune 'Global 500' listing, 98th position in 2011. It is also the 18th largest petroleum company in the world and the No. 1 petroleum trading company among the National Oil Companies in the AsiaPacific region. MANAGEMENT
Designation
Chairman Director (Finance) Independent Director Director (Marketing) Government Director Independent Director Director (Refineries) Government Director Independent Director Director (Pipelines)
Prof. (Dr.) Indira J. Parikh Shri B. M. Bansal Dr. R. K. Malhotra Development) Shri Anees Noorani Shri V. C. Agrawal Shri Sudhir Bhalla Dr. (Smt.) Indu R. Shahani Shri S. V. Narasimhan Shri A. M. K. Sinha Prof. Gautam Barua Shri Raju Ranganathan
Independent Director Chairman & Director(P&BD) Director(Research Independent Director Director (Human Resources) Director (Human Resources) Independent Director Chairman & Director (Finance) Director(Business Development) Independent Director Company Secretary
&
RATIOS ANALYSIS
Intrinsic Value of the Stock The intrinsic value of the stock is calculated by relative P/E method.
YEAR P/E FY 2010 11.5 FY 2009 7.4 FY 2008 16.5 FY 2007 7.7 FY 2006 6.5
= 9.92
Intrinsic value of the stock = 42.3 x 9.92 = Rs 419.62 Current Market Price = (as on 01/3/2012) Since the Intrinsic value > current value, the stock is undervalued & it should be hold.
P P Upadhya Vivek Kumar A K Rath D Chandrasekharam K S Jamestin U K Basu Vishnu Agrawal K Murali B Ravindranath Usha Thorat
Director (Technical) Director Independent Director Independent Director Director (Human Resources) Managing Director Director (Finance) Director Independent Director Independent Director
RATIOS ANALYSIS
Intrinsic Value of the Stock The intrinsic value of the stock is calculated by relative P/E method.
YEAR P/E FY 2010 9.9 FY 2009 12.4 FY 2008 6.2 FY 2007 11.0 FY 2006 11.8
Avg. P/E = (9.9+12.4+6.2+11.0+11.8) = 10.26 5 Current EPS = 5.86 Intrinsic value of the stock = 10.26 x 5.86 = Rs 63.64 Current Market Price = (as on 01/3/2012) Since the Intrinsic value > current value, the stock is undervalued & it should be hold.
MANAGEMENT
Board of Directors Name Mukesh D Ambani Hital R Meswani Pawan Kumar Kapil Mansingh L Bhakta Dharam Vir Kapur Ashok Misra Raghunath A Mashelkar Designation Chairman and Managing director Executive Director Executive Director Non Executive Director Non Executive Director Non Executive Director Non Executive Director
Nikhil R Meswani P M S Prasad Ramniklal H Ambani Yogendra P Trivedi Mahesh P Modi Dipak C Jain Vinod M. Ambani Chaturvedi & Shah Deloitte Haskins & Sells Rajendra & Co.
Executive Director Executive Director Non Executive Director Non Executive Director Non Executive Director Non Executive Director Company Secretary Auditors
RATIOS ANALYSIS
Intrinsic Value of the Stock The intrinsic value of the stock is calculated by relative P/E method.
YEAR P/E FY 2010 17.2 FY 2009 22.1 FY 2008 16.0 FY 2007 17.2 FY 2006 16.2
= 17.74
Intrinsic value of the stock = 84.18 x 17.74 = Rs 1493.35 Current Market Price = (as on 01/3/2012) Since the Intrinsic value > current value, the stock is undervalued & it should be hold.
CONCLUSION
Increasing oil demand 2010 proved to be the second strongest year for global oil demand growth in the past 30 years, with absolute demand levels expected to surpass pre-recession highs. During 2010 the total liquid supply grew by 2.4% (from 82.96 mb/d in 2009 to 84.96 mb/d in 2010). It is projected that the demand may rise to 86.37 mb/d in 2011 and 87.83 mb/d in 2012. Rising prosperity fuelled by economic growth in the emerging economies and also strong demand in Middle East are driving strong demand for oil and other energy sources. The WEO, 2011, expects that the difference between supply and demand would be made up from rising production of natural gas liquids and unconventional oil, notably Canadian oil sands and biofuels. During 2010, the liquid supply from non-OPEC countries averaged 41.77 mb/d; 49.2% of the total supplies against OPEC average supplies of 29.21 mb/d (34.4%). Natural Gas Liquid (NGL) and condensate supply has been around 13.98 mb/d (16.4% of the total liquid supply). Gains in non-OPEC supplies and NGL are good news for the industry. However, the political unrest in Middle East and North African (MENA) region is likely to have adverse impact on crude oil supplies. Gulf States currently remain stable; however, sentiments may dampen in case MENA unrest intensifies. This Delicate balance may be worrisome for supply side and in turn consequently may upset oil market dynamic. Strengthening of India as a Refined Products Exporter With international oil demand rising during the year, the export market for Indian POL exports expanded further. POL exports from the country grew rapidly and have emerged as the highest foreign exchange earner for the country. The Refining sector in the country has been growing at a fast pace and Indian refineries clocked a capacity utilization of over 100 per cent to meet the rising domestic and export demand. While, quite a few capacity expansions in the refinery sector came on stream during the year, other major expansions are underway. During the year, a landmark achievement was the successful countrywide launch of upgraded BS-IV (13 cities) and BS-III Petrol and Diesel (in rest of the country) in line with the Auto Fuel Policy road map.