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Capital Structure Analysis of Indian Oil

Corporation Limited (IOCL)

SUBMITTED BY
AMIT SARDANA
ANUPAM SHARMA
ARVIND GUPTA

OBJECTIVES OF THE STUDY

To examine the Capital Structure policy and pattern of


IOCL.
To understand the capital structure of Indian Oil
Corporation
To identify the share capital and debt of the company.
To Find out the earnings per share
To Find out the leverage
Evaluate the contents of IOCL Debts and Equity.

CAPITAL
STRUCTURE
A mix of a company's long-term debt, specific short-term
debt, common equity and preferred equity .
structure is how a firm finances its overall
growth

by

using

different

sources

of

The capital

operations

and

funds.

Debt comes in the form of bond issues or long-term notes


payable, while equity is classified as common stock, preferred
stock or retained earnings. Short-term debt such as working
capital requirements is also considered to be part of the
capital structure. But the IOCL does not issue the preference
shares and debenture to the public of the company

COMPONENTS
STRUCTURE:

OF

CAPITAL

CAPITAL STRUCTURE

Shareholder
s fund s
-equity capital

Borrowed
funds

-preference capital
(Nil)

-debenture
(Nil)
-Term loan

SHARE CAPITAL
6000
5000
400
0

Authorised
Capital
(CR)
Issued Capital
(CR)

300
0
200
0
1000
0

2014

2013

2012

AUTHORISED CAPITAL:

2011

2010

The maximum equity capital

a company can
raise, which is mentioned in the Memorandum of Association
and Articles of Association of the Company. However, share
premium is excluded from the definition of authorized capital.

SSUED CAPITAL: Issued capital

is

the

amount

of

nominal value of share held by the shareholders. It is the face


value of the shares that have been issued

to

shareholders.

premium

Issued

share

capital

and

share

the

represent the amount invested by the shareholders in the

company. It is also known as the subscribed capital or


subscribed share capital.

Analysis:

But here, IOCL issued very less share capital IN

Previous years if I compared to Authorized capital. IOCL is only


issued the limited share to the shareholders

Paid up
capital

From To

Instrument

Shares(nos)

Face value

Capital

2013
2014

Equity
share

2427952482

10

2427.95

2012
2013

Equity
share

2427952482

10

2427.95

2011
2012

Equity
share

2427952482

10

2427.95

2010
2011
2009
2010

Equity
share
Equity
share

1192374306

10

1192.37

1192374306

10

1192.37

2008
2009

Equity
share

778674809

10

778.67

Paid up capital:
The amount of a company's capital that has been funded by
shareholders, Paid-up capital can be less than a company's
total capital because a company may not issue all of the
shares that it has been authorized to sell. Paid-up capital can
also reflect how a company depends on equity financing.
Here, from 2011 to 2013, the companys Paid up capital
remain same. Its means the IOCL collected average funded by
shareholders and they have to issue more share capital to
shareholders in future periods.

TOTAL DEBT
The IOCL has only two debts

Secured loan
Unsecured loan
Total debt means here included debenture, Bonds, Long term
loans, short term loan etc. But Indian Oil Corporation limited
(IOCL) did not issued debenture, bonds etc.

Secured
loan:
Secured loans are those loans that are protected by an asset
or collateral of some sort. The item purchased, such as a
home or a car, can be used as collateral, and a lien is placed
on such item. The finance company or bank will hold the
deed or title until the loan has been paid in full, including
interest

and

all

applicable

fees.

Other

items

such

as

stocks, bonds, or personal property can be put up to secure


a loan as well.
Secured loans are usually the best (and only) way to obtain
large amounts of money. A lender is not likely to loan a large
amount with assurance that the money will be repaid. Putting
your home or other property on the line is a fairly safe
guarantee that you will do everything in your power to repay
the loan.

Secured loans usually offer lower rates, higher borrowing


limits and longer repayment terms than unsecured loans. As
the term implies, a secured loan means you are providing
"security" that your loan will be repaid according to the
agreed terms and conditions. It's important to remember, if
you are unable to repay a secured loan, the lender has
recourse to the collateral you have pledged and may be able
to sell it to pay off the loan.

Unsecured loan:
On the other hand, unsecured loans are the opposite of secured loans and
include things like credit card purchases, education loans, or personal
(signature) loans. Lenders take more of a risk by making such a loan, with no
property or assets to recover in case of default, which is why
the interest rates are considerably higher. If you have been turned down for
unsecured credit, you may still be able to obtain secured loans, as long as you
have something of value or if the purchase you wish to make can be used as
collateral.
When you apply for a loan that is unsecured, the lender believes that you can
repay the loan on the basis of your financial resources. You will be judged
based on the five (5) C's of credit -- character, capacity, capital, collateral, and
conditions these are all criteria used to assess a borrower's creditworthiness.
Character, capacity, capital, and collateral refer to the borrower's willingness
and ability to repay the debt. Conditions include the borrower's situation as
well as general economic factors.

SECURED
LOAN
25000
20000
15000
100
00

(CR)

5000
0

2014

(CR) 17866
17565

2013
13046

2012

2011

20380

2010

18292

Analysis:
In 2014 the secured loan proportion is high than 2013. The
India oil corporation limited (IOCL) has try to reduce the
secured loan because secured loan effect the assets of the
company and it will be effect on future periods

so the IOCL

Increasingly firms are moving from secured debt to unsecured


debt in order to free their assets.
Secured loans have the largest positive impact on Companys credit when
they are repaid. If company have never taken a secured loan, companys
credit may be low despite your good record of repayment.

UNSECU
RED
LOAN
700
00
600
00
(CR
)

500
00
400
00
300
00
200
00
100
00
0

2014 2013 2012 2011 2010

(CR 62733 5727 32354 26273 27406


.1
8
.2
.8
.7
)

Analys
is :

Here unsecured loan is constantly high from 2010 to 2013.


Indian oil corporation limited ( IOCL).Unsecured loan is more
better than secured loan Because secured loan will be affect
the assets of the company in future period of time so the

IOCL has increasing the unsecured loan for reducing the risk
of the company . Most of the company has preferred the
unsecured debt which will not affect any assets of the
company.
In some cases, IOCL may be able to reduce IOCL unsecured
debts by negotiating with creditors for a lower balance.
Either IOCL can talk to
creditors on IOCL own, or IOCL can solicit the help of a
credit counseling

organization. In some cases, credit counselors can negotiate


with creditors better than debtors can. However, if IOCL
choose to work with a credit counselor make sure the
organization is reputable.

EARING PER SHARE (EPS)


Earnings per share represent a portion of a company's
profit that is allocated to one share of stock. Therefore, if you
were to multiply the EPS by the total number of shares a
company has, you'd calculate the company's net income.
EPS is a calculation that many people who watch the stock
market pay attention to.

When calculating, it is more accurate to use a weighted


average number of shares outstanding over the reporting
term, because the number of shares outstanding can change
over time. However, data sources sometimes simplify the
calculation by using the number of shares outstanding at the
end of-the-period.
Diluted EPS expands on basic EPS by including the shares of
convertibles or warrants outstanding in the outstanding
shares number.

EPS of IOCL
Shareholders
from 2010 to
2014:
50
40
30
20
(Rs)
10
0

201 201 201 201


4
3
2
1
(Rs 28.9 20.6 16.2 30.6
1
1
9
7
)

201
0
42.1

Analysis:
In 2014, IOCL shareholders earned per share of Rs 28.91.
But in 2010, EPS was Rs 42.1. At that time shareholders of
IOCL

was

earned

more

than

last

year.

So

constantly

decreasing the earning capacity of shareholders of the IOCL,


But still there EPS is good if I compared to other companies.
IOCL is to increase earnings or decrease the number of
shares. In order to increase earnings, a business has to

increase revenues, reduce expenses or both. In order to


decrease the number of shares, do a share buyback from
shareholde
rs.

LEVERA
GE
The degree to which an investor or business is utilizing
borrowed money. Companies that are highly leveraged may
be at risk of bankruptcy if they are unable to make payments
on their debt; they may also be unable to find new lenders in
the future. Leverage is not always bad, however; it can
increase the shareholders ' return on investment and often
there are tax advantages
associated with borrowing. Components of
leverage are:

LEVERA
GE
Financial leverage

Operating

leverage

Financial leverage:
Financial leverage is a leverage created with the help of debt
component in the capital structure of a company. Higher the
debt, higher would be the financial leverage because with

higher debt comes the higher amount of interest that needs to


be paid. Leverage can be both good and bad for a business
depending on the situation. If a firm is able to generate a
higher return on investment (ROI) than the interest rate it is
paying, leverage will
have its positive effect shareholders return. The darker side is
that if the said

situation is opposite, higher leverage can take a business to a


worst situation like bankruptcy. the Degree of Financial
Leverage (DFL) can be calculated with the following formula:
DFL = % Change in EPS / % Change in EBIT
Where EPS is the Earnings per Share and EBIT is the Earnings before interest
and Taxes.
Operating
leverage:
Operating leverage, just like the financial leverage, is a result
of operating fixed expenses. Higher the fixed expense, higher
is the operating leverage. Like the financial leverage had an
impact on the shareholders return or say earnings per share,
operating leverage directly impacts the operating profits
(Profits

before

Interest

and

Taxes

(PBIT)).

Under

good

economic conditions, due to operating leverage, an increase


of 1% in sales will have more than 1% change in operating
profits.
The formula used for determining the Degree of Operating Leverage or DOL
is as follows:
DOL = % Change in EBIT / % Change in Sales
So, Indian oil corporation limited (IOCL)

need to be very

careful in adding any of the leverages to your business viz.


financial leverage or operating
leverage as it can also work as a double
edged sword.

Degree
Financial
leverage of
IOCL:
2
1.5
1

(Ratio)

0.5
0

2014 2013 2012 2011 2010


(Rati
o)

1.61

1.91

1.49

1.31

1.11

Analysis:
In 2014 degree of financial leverage of Indian Oil Corporation
limited (IOCL)
ratio is 1.61 and it has constantly higher than
previous years.
By borrowing funds, the IOCL incurs a debt that must be
paid. But, this debt is paid in small installments over a
relatively long period of time. This frees funds for more
immediate use.

Indian Oil Corporation limited that

successfully uses leverage demonstrates by its success that it


can handle the risks associated with carrying debt. This can

become an important factor when additional financing is


needed. Not only will loans more likely be available, but they
will be available at more attractive interest rates. Like
individuals, companies with solid
financials.

Degree of Operating
leverage of Indian Oil
Corporation
limited (IOCL):
1.15
1.1
1.05
1
(Ratio)
0.95
0.9

2014 2013 2012 2011 2010


(Rati
o)

1.12

1.14

1.09

1.13

1.01

Analysis:
In 2014 Indian oil corporation
operating ratio is 1.12

limited

has

degree

of

.which is constantly almost same from 2011 to 2014.


According to this chart IOCL having a good position in future
period of time. The more operating leverage a company has,
the more it has to sell before it can make a profit. IOCL with a
high operating leverage must generate a high number of sales
to cover high fixed costs, and as this sales increase, so does
the profitability of the company. Conversely, a company with
a

lower

operating

leverage

will

not

see

dramatic

improvement in profitability with higher volume, because

variable costs, or costs that are based on the number of units


sold, increase
with
volume.

Total leverage
of Indian Oil
Corporation
limited:
3
2.5
2
(Ratio)

1.5
1
0.5
0
(Rati
o)

2014 2013 2012 2011 2010


1.82

2.43

1.64

1.49

1.21

Analysis:
Combined or total leverage measures total risk of the Indian
oil

corporation

limited

(IOCL).

In

this

year

Indian

Oil

Corporation has minimum risk than last year which ratio was
2.43. In this diagram is measured by percentage change in
earning per share (EPS) due to percentage change in sales.
IOCL ask their existing shareholders to issuing common stock
rights. Stock rights allow existing shareholders to purchase
additional shares at below- market prices, in order to raise
equity. While this practice does improve a companys

financial

strength,

shareholders
percentage
ownership.

of

it

also

dilutes

the

current

FINDI
NGS
IOCL has issued less shares capital to the shareholders,
constantly from
2010 to 2014. IOCL does not fulfill the of authorized share
capital which is mention in memorandum of association.
IOCL, Preference share and Debenture not existent in the
industry.

The return on investment ratio of IOCL is the lowest among


its competitors which imply that the degree of efficiency of
IOCL in utilizing the funds entrusted by shareholders and
long term creditors is lower than its competitors.

IOCL has maximum no of total debts in the period of 2014,


if I compared with previous years.
In 2014, unsecured loan is constantly higher than previous
years.
In 2014, IOCL has maintained the secured loan amounts.
Which is mostly remain same with previous years.
In 2014, earning per share (EPS) value is Rs 28.91, which is
higher than 2013 but overall five years, IOCL shareholders
has earned minimum EPS in 2014.
IOCL has Degree of operating leverage almost same with
last five years.
IOCL having a good position in future period of time.

In 2014, degree of financial leverage is very high than


previous years, IOCL incurs a debt that must be paid. But,
this debt is paid in small installments over a relatively long
period of time.
The overall efficiency of IOCL is higher than those of its
competitors in previous years of comparison.