CORPORATE FINANCIAL REPORTING [PROJECT REPORT 2014]

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Shubham Sarvaiya (349/51) | Shivani Yadav (344/51) | Sonal Gupta (358/51) | Sudipta Sanfui (366/51) | Umang Agrawala (383/51)
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Company: INDIAN OIL [Financial Analysis 2010-2014]

A. Company Background and Brief Industry Outlook
Petroleum Industry: The Indian oil and gas industry is expected to be worth US$ 139,814.7 million by 2015. India is the 5th largest
consumer of energy in the world, with 30% of its energy consumption coming from oil. The demand for oil has shown steady rise over
the last decade and is estimated to grow at a CAGR 3.5% in the next 5 years. This sector is largely dominated by public sector
enterprises. ONGC, IOCL, BPCL, RIL are some of the players operating across upstream and downstream levels of the sector. The Oil
& Gas sector is expected to experience steady growth because of the policy support like 100% FDI in explorations and 49% in refining
by PSUs and increasing investments.
Indian Oil: Indian Oil Corporation Limited is an Indian state-owned oil and gas corporation. It is the world's 88th largest corporation,
according to the Fortune Global 500 list, and the largest public corporation in India when ranked by revenue. Indian Oil and its
subsidiaries account for a 49% share in the petroleum products market, 31% share in refining capacity and 67% downstream sector
pipeline capacities in India. The Indian Oil Group of companies own and operates 10 of India's 22 refineries with a combined refining
capacity of 65.7 million metric tonnes per year. The main products of Indian Oil are petrol, diesel , LPG, auto LPG, aviation turbine
fuel, lubricants and petrochemicals: naphtha, bitumen, kerosene etc.
B. Overall interpretation of each financial statement
Balance Sheet: IOCL is a typical capital intensive public sector with capital investments of 64% of the total asset in 2014. Total asset
grew almost 2 fold in the last 5 years from INR 144,627 Cr to INR 252,414 Cr. Growth in reserve & surplus is also steady as the
company made positive profit throughout 5 years. Company is more dependent on short term borrowings as compared to long term
borrowings & hence current liability stands at INR 135,320 Cr compared to INR 51,101 Cr long term liability. Investments remained
almost constant over the period; an increase in 2014 is due to an investment in IndOil Global B.V. of INR 6,103 Cr. Cash balance of
the company is abysmally low, even dipped to INR 307 Cr in 2012 and currently stands at INR 2,609 Cr. Company is lending more
money in short-term loans and trade receivables, almost 2.75 times as of 5 years back, due to under recovery from state & central
governments.
Profit & Loss: IOCL recorded steady growth in sales over last 5 years from INR 274,406 Cr to INR 463,615 Cr, 13% CAGR. The
firm has registered high profit in 10 due to decrease in crude oil price during 09-10, in turn reducing COGS. Finance cost jumped
from INR 2000Cr to INR 5500Cr during the period 2011-12, as IOCL took unsecured short term loan from banks & other sources of
around INR 20,000 Cr. Company profit increased by INR 4200Cr in 2014 compared to 2013, out of which 1700 Cr was recovered
from additional State Specific Surcharge towards UP Entry Tax paid in earlier years.
Cash Flow: In the last 5 years, cash flow of IOCL except 2014 varies between INR -986 Cr to INR 516 Cr, which is a weak sign for
the company. The firm has maintained cash balance of average cash balance of INR1200Cr over the past 5 years.
(a)Cash Flow from Operations: Cash flow from operations was fluctuating and mostly negative. Poor working capital management
impacted cash flow from operations in 2012 causing CFOA to drop at INR -2,762 Cr. Trade receivables is one of the major factors of
negative operating cash flow, it surged to INR -19,159 Cr during 2012 but dropped to INR -2291.87 Cr in 2014, resulting in positive
cash flow of INR 22,050 Cr in 2014.
(b) Cash Flow from Investments: IOCL has undertaken huge capacity expansion and investment in subsidiaries which reflected in the
net cash outflow from investing activities. In the last 5 years, the average CFI outflow has been INR 11,000 Cr per annum except 2010
when they sold investments worth INR 15,000 Cr.
(c) Cash Flow from Financing Activity: CFF has also been fluctuating, but positive on the average. Long term loans have been
minimal except 2014 when IOCL took unsecured loan from foreign banks worth INR 6,621 Cr. Reliance on unsecured loans has
pushed up the interest cost from 2012, an increase to INR 6000 Cr from previous INR 2000 Cr. As they are not paying the accrued
debt taken, that can also create further pressure on liquidity as observed in negative CFF in 2013 & 2014.
C. Trend analysis, Common size analysis of IOCL
Balance Sheet: Fixed Asset forms around 25% of the total asset and almost steady y-o-y except 2011, when IOCL commissioned INR
19,000 Cr Plant & Machinery which is also evident from decrease in Capital WIP.IOCL has improved their collection efficiency,
Trade receivables decreased compared to 2012, from earlier 7% to 4%. Liabilities grew 200% over past 5 years, similar to asset
growth. Current investment dropped over 5 years. Non-current investments remained almost constant over the period except in 2014
are as they invested INR 6000 Cr in subsidiaries. We also observe a significant increase in advances recoverable from unsecured
sources, which also explain increase in provisions over the time.
Income Statement: Period cost is insignificant compared to product cost, comprising only 4% of Sales. Other income stands at only
1.3% of total income. Raw material cost increased from 2011 due to increase in crude oil prices. Increase in SG&A in 2014 is due to
an increase in other expenses, INR 1600 Cr in account of Exchange fluctuation. Interest & finance cost has increased from Mar11 due
to borrowing from unsecured sources. A fall in Net profit % in 2012 is mainly caused by an exceptional expense of INR 7,707 Cr for
Entry Tax Law settlement by high court for crude import. Income Tax as % of sales is highest in 2012 due to payment of deferred tax
liability of INR 1580 Cr out of which INR 1153 Cr for deficit in 2010 tax payment. Huge capacity addition in 2011 resulted in MAT
credit entitlement of INR -1285Cr, though the effect was neutralized by deferred tax liability. In 2011 profit was also affected due to
huge inventory pile up of INR 12,880 Cr, resulting in increase of manufacturing expenses to the extent of 50% of sales.
CORPORATE FINANCIAL REPORTING [PROJECT REPORT 2014]
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Shubham Sarvaiya (349/51) | Shivani Yadav (344/51) | Sonal Gupta (358/51) | Sudipta Sanfui (366/51) | Umang Agrawala (383/51)
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D. Ratio Analysis of IOCL
Profitability: Net profit margin is mostly greater than industry average; the dip in the margin from 2012 till date was mainly due to
increase in raw material price i.e. crude oil. Return in capital employed dipped in 2012 as IOCL took short term loan of 20,000 Cr
from foreign banks; the effect was cascaded by the 46% fall in net income in 2012 compared to 2011.
Efficiency: Asset turnover for the company is declining as the company is expanding at a higher rate than sales growth, which also
implies the company is not managing its assets properly. Increase in fixed asset turnover over the period is a good sign, but continuous
increase in capital WIP indicates the delay in commissioning activity. Both operating & cash cycle is increasing for the company
which indicates poor management of working capital & decreasing market power.
Liquidity: Liquidity is a real concern for IOCL as current ratio falls below 1 in 2012 & 2014. Company has significantly decreased
their current investments, whereas started taking more short term loan compared to previous year. Cash Flow Yield ratio is fluctuating
from 3.1 to -0.05 indicating instability in operating cash flow like inability to collect trade receivables from customers.
Solvency: Interest coverage ratio is falling because Borrowing grew at the rate of 15% CAGR over last 4 years, whereas growth in
EBIT is only 7%. IOCL maintained pay-out ratio around 30% throughout near industry average, which is a good sign for the company.
DuPont Analysis: The value of asset turnover has decreased over the years as IOCL could not manage its assets very efficiently.
Financial Leverage Multiplier has strengthened as asset growth is more than Equity growth. Hence, the effect of decrease in the profit
margin and asset turnover dominates over the effect of increase in FLM and leads to a 10% fall in the ROE compared to 2010
E. Comparative Analysis
Net Profit Margin vs Sales Growth: HPCL has grown at a higher pace as compared to IOCL due to lower base compared to IOCL
(IOCL Sales is 2.1 times of HPCL). Net profit margin is steadily higher for IOCL as Raw material consumption cost is lower by
around 4% w.r.t sales. Increase in crude oil prices has affected the whole oil industry during 2012-13, as seen in declined profitability
of all three firms.
Asset Turnover vs Net Profit Margin : Asset Turnover ratio is lower for IOCL compared to both HPCL & BPCL though it has
steady higher profit margin compared to both. It is due to the fact that IOCL holds around 3 times of BPCL /HPCL asset, whereas net
sales of IOCL is only 2 times of HPCL/BPCL. Asset turnover is almost steady for IOCL as Net sales grew at almost same pace as
asset. Asset turnover is increasing for BPCL as Investments dropped significantly in and 2012 onwards.
Current Ratio vs Net Profit Margin: Current ratio of IOCL is in better shape compared to HPCL & BPCL and almost steady over
the period as growth in current asset and current liability are both positive and steady over the time. HPCL maintained nearly static
current liability from 2012 till date, whereas current asset grew by 6% during the time which resulted in higher current ratio in 2014 &
2013 as compared to previous years.
Sales Growth vs Market-Book Ratio: Market book ratio is significantly high for BPCL compared to IOCL as Market capitalization/
Sales is higher for BPCL compared to IOCL. Market capitalization of IOCL is 1.7 times of BPCL. For both companies Market to book
ratio is declining over the period as Asset growth is higher compared to growth in Market capitalization.
Dividend pay-out vs. CAPEX: All three companies have maintained dividend pay-out ratio around 30%. IOCL is more into capital
expenditure compared to other two firms; they invested heavily in Fixed Assets from 2013, which are still work in progress. BPCL has
doubled their capital expenditure from 2013 compared to the trend 2010-12.
F. Operating and Financial performance and position of IOCL
IOCL is Indias largest crude oil refiner with 31% market share. It is expanding rapidly; asset growth is around 15% CAGR. Falling
value of rupee, global crude oil price are the main attributing factor for variation in profitability of the firm. Company performance
struggled during 2011-13 but took a turn around in 2014 in many aspects like profit margin, Return on assets, Return on Equity etc. as
they improve their internal performance & global economy strengthened. With its large sales volume IOCL finds itself in peak
position to capitalise on its large asset base when the imminent free pricing comes into picture and also this will allow the firm to
compete in unregulated sectors like alternative fuels, aviation fuel etc in the international markets where the private players are
currently more dominant.
G. Operating and Financial strengths and weakness of IOCL
Strengths: IOCL is market leader in Indian Oil industry and much ahead of its closest competitors in terms of sales, profit & assets.
The company maintained a stable growth in sales over the past years. Even though in global crisis, regulation change and fall in
valuation of rupee they have managed to book positive net profit over the last 5 years. Company has maintained payout ratio of 30%
and is able to attract more investor to invest as well as charge high share premium.
Weakness: Working Capital Management is poor as evident from Current ratio & Quick ratio. Asset Management is in-efficient as
asset growth is higher than both sales & profit growth. Both long term and short term debts have grown compared to equity indicating
Cash flow problems for the firm, under recovery has also led to squeezed cash flows. Balance sheets show a major chunk of
borrowings has been used to buy fixed assets, with net fixed assets growing by 50% in last 5 years. Finance cost incurred by the
company is much higher compared to its competitors as a direct result of its high short term borrowings, though it has reduced the cost
recently, more improvements can be made. Indian Oil Corporation Limited, by virtue of being the largest Public sector Oil Company,
has borne the largest share of subsidy burden due to Govt regulation on Pricing of common fuels like Diesel Oil, Kerosene and LPG.
The subsidy burden which went over INR 300 Billion in 2011 has thereby handicapped the public sector oil companies as whole and
Indian Oil in particular, by virtue of its large share of the energy market.