Capital Structure Analysis of Indian Oil

Corporation Limited (IOCL)

Submitted In the Partial Fulfillment of the Requirement for the Award of Degree Of

MBA (IB)

(2015-2017)Amity International Business School

Submitted to: - Submitted by:-Ms. Kirandeep Bedi Shubhankar Rudra

Munir AhmadAkash Singh

Shadab JavedHarsh Khandelwal

Mohit Sugandh

TA B LE O F C O NTENTS

CHAPTER 1: INTRODUCTION TO THE PROJECT

1.1: Objective of the study

1.2: Introduction to the topic

CHAPTER 2: PROFILE OF THE COMPANY AND THE MARKET SCENARIO

2.1: Origin of oil industry in India.

2.2: About IOCL and Guwahati refinery.

2.3: Vision, Mission and values.

CHAPTER 3: RESEARCH METHODOLOGY

3.1: Research design.

3.2: Data source and collection.

3.3: Capital structure analysis.

CHAPTER 4: DATA INTERPRETATION AND ANALYSIS

CHAPTER 5: CONCLUSION

5.1: FINDINGS

5.2: SUGGESTIONS

5.3: LIMITATIONS

5.4: CONCLUSION

CHAPTER 6: BIBLIOGRAPHY

5

O B J E C TIVES O F THE S T U D Y

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

To give suggestions for improvement of the Capital Structure composition of Indian Oil corporation Ltd

Evaluate the contents of IOCL Debts and Equity

CHAPTER 1: INTRODUCTION TO THE PROJECT

Capital Structure: Theory and Analysis

Capital Structure

Financing decisions involve raising funds for the firm. It is concerned with formulation and designing of capital structure or leverage. The most crucial decision of any company is involved in the formulation of its appropriate capital structure. The best design or structure of the capital of a company helps the management to achieve its ultimate objectives of minimising overall cost of capital, maximising profitability and also maximising the value of the firm.The capital structure decision of a firm is concerned with the determination of debt equity composition. Capital structure ordinarily implies the proportion of debt and equity in the total capital of a company. The term capital may be defined as the long – term funds of the firm. Capital is the aggregation of the items appearing on the left hand side of the balance sheet minus current liabilities. In other words capital may be expressed as follows:Capital = Total Assets – Current Liabilities.Further, capital of a company may broadly be categorised into equity and debt. The total capital structure of a firm is represented in the following figure:

Established companies generally have track record of their profit earning capacity, which helps them to create their creditworthiness. The lenders feel safe to invest their funds in such companies. Thus, there is ample scope for this type of companies to collect debt. But a company cannot freely i.e. without having any limit. The company must have to chalk out a plan to collect a debt in such a way that the acceptance of debt becomes beneficial for the company in terms of increase in EPS, profitability and value of the firm.If the cost of capital is greater than the return, it will have an adverse effect on company’s profitability, value of the firm and its EPS. Similarly, if company is unable to repay the debt within the scheduled period it will affect the goodwill of the company in the credit market and consequently may create problems in future for collecting further debt. Other factors remaining constant, the company should select its appropriate capital structure with due consideration.

Total Capital

Equity Capital

Equity Share CapitalPreference Share Capital

Share PremiumRetained Earnings

Debt Capital

Term Loans Debentures

Deferred Payments LiabilitiesOther Long term Debt

Capital structure involves a choice between risk and expected return. The optimal capital structure strikes the balance between these risks and returns and thus examines the price of the stock.

Significant variations with regard to capital structure can easily be noticed among industries and firms within the same industry. So it is difficult to generate the model capital structure for all business undertakings. The following is an attempt to consolidate the literature on various methods to suggested by researchers in arriving at optimal capital structure. Notations used:

V = value of firm

FCF = free cash flow

WACC = weighted average cost of capital

rs and rd are costs of stock and debt

re and wd are percentages of the firm that are financed with

stock and debt.

Operating and Financial LeveragesThe term leverage refers to the ability of a firm in employing long – term funds having a fixed cost, to enhance returns to the owners. In other words leverage is the employment of fixed assets or funds for which a firm has to meet fixed costs or fixed rate of interest obligation irrespective of the level of activities attained or the level of operating profit earned.Higher the leverage, higher the profits and vice – versa. But a higher leverage obviously implies higher outside borrowings and hence riskier if the business activity of the firm suddenly takes a dip. But a low leverage does not necessarily indicate prudent financial management, as the firm might be incurring an opportunity cost for not having borrowed funds at a fixed cost to earn higher profits.

Operating Leverage Operating leverage is concerned with the operation of any firm. The cost structure of any firm gives rise to operating leverage because of the existence of fixed nature of costs. This leverage relates to the sales and profit variations.

Operating Leverage =

Contribution

EBIT

Contribution = Sales – Variable CostsEBIT = Earnings Before Interest and Taxes.

Disadvantages of Operating Leverages The reliability of operating ratios rests to a large extent on the

correctness of the fixed costs identified with a product. Faulty apportionment would distort the usefulness of the ratio.

The published accounts does not give details of the fixed cost incurred and the contribution from each product and for an outsider it is difficult to calculate the firm’s operating leverage.

Firm’s cost structure and nature of the firm’s business affects operating leverage. A degree change in sales volume results in more than proportionate change (+/-) in operating (or loss) can be observed by use of operating leverage.

Financial Leverage

This ratio indicates the effects on earnings by rise of fixed cost funds. It refers to use the use of debt in the capital structure. Financial leverage

arises when a firm deploys debt funds with fixed charge. The ratio is calculated with the following:

Earnings before interest and tax / Earnings after interest – The higher the ratio, the lower the cushion for paying interest on borrowings. A low ratio indicates a low interest outflow and consequently lower borrowings. A high ratio is risky and constitutes a strain on profits. This ratio is considered along with the operating ratio, gives a fairly and accurate idea about the firm’s earnings, its fixed costs and the interest expenses on long term borrowings.

Earnings per Share – Higher financial leverage leads to higher EBIT resulting in higher EPS, if other things remain constant. Financial leverage affects the variability and expected level of EPS. The more debt the firm employs the higher its financial leverage. Financial leverage generally raises expected EPS, but it also increases the riskiness of securities as the debt / asset ratio rises.

Financial Leverage =

EBITEBT

EBIT – Earnings Before Interest and TaxEBT – Earnings Before Taxes.

Consider Two Hypothetical Firms

Firm U Firm L

No debt 10,000 of 12% debt

20,000 in assets 20,000 in assets

40% tax rate 40% tax rate

Both firms have same operating leverage, business risk, and EBIT of

3,000. They differ only with respect to use of debt.

Impact of Leverage on Returns

Firm U Firm L (Fig. in Rs’000)EBIT 3,000 3,000Interest 0 1,200EBT 3,000 1,800Taxes (40%) 1, 200 720NI 1,800 1,080

ROE 9.0% 10.8%

More EBIT goes to investors in Firm L.

Total dollars paid to investors:

U: NI = Rs.1,800.

L: NI + Int = Rs.1,080 + Rs.1,200 = Rs.2,280.

Taxes paid:

U: Rs.1,200; L: Rs.720.

Now consider the fact that EBIT is not known with certainty. Determining the impact of uncertainty on stockholder profitability and risk for Firm U and Firm L

Firm U: Unleveraged

Economy (Fig. in

Rs’000)

Bad Avg. Good

Prob. 0.25 0.50 0.25

EBIT 2,000 3,000 4,000Interest 0 0 0EBT 2,000 3,000 4,000Taxes (40%) 800 1,200 1,600NI 1,200 1,800 2,400

Firm L: Leveraged

Economy (Fig. in Rs’000)

Bad Avg. Good

Prob.* 0.25 0.50 0.25EBIT* 2,000 3,000 4,000Interest 1,200 1,200 1,200EBT 800 1,800 2,800Taxes (40%) 320 720 1,120NI 480 1,080 1,680*Same as for Firm U.

Firm U Bad Avg. GoodBEP 10.0% 15.0% 20.0%ROIC 6.0% 9.0% 12.0%ROE 6.0% 9.0% 12.0%TIE n.a. n.a. n.a.

Firm L Bad Avg. GoodBEP 10.0% 15.0% 20.0%

ROIC 6.0% 9.0% 12.0%ROE 4.8% 10.8% 16.8%TIE 1.7x 2.5x 3.3x

U L

Profitability Measures:E(BEP) 15.0% 15.0%E(ROIC) 9.0% 9.0%

E(ROE) 9.0% 10.8%

Risk Measures:sROIC 2.12% 2.12%sROE 2.12% 4.24%

CHAPTER 2: PROFILE OF THE COMPANY AND THE

MARKET SCENARIO

C O M PA N Y OV E RV I EW

INDIAN OIL CORPO R ATION L TD

IOCL (Indian Oil Corporation) was formed in 1964 as the result of merger of

Indian Oil Company Ltd. (Estd. 1959) and Indian Refineries Ltd. (Estd. 1958).

Indian Oil Corporation Ltd. is currently India's largest company by sales with

a turnover of Rs. 2 441 329 600, 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 petroleum company 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 gas in the domestic market and exported 3.33mn tonnes in

the yr 2008-09.

IOCL GROUP

IOCL 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.

Chennai Petroleum Corporation Ltd. (CPCL)

Bongaigaon Refinery & Petrochemicals Ltd (BRPL)11

L o cat i on of IO C L in India

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The current Refining capacity stands at 55.01 million ton per annum.

Yet another refinery is being set up on the East Coast at Paradip (Orissa). The

outlay includes provision for Expansion of Barauni Refinery, Quality improvement

for HSD at Haldia, Gujarat, Mathura, Grass Root Refinery in Eastern Sector,

Residue Up gradation at Gujarat, and Implementation of Lube Quality

improvement at Haldia etc.

The company is mainly controlled by the Government of India which owns

approx.. 79% shares in the company. It is one of the Maharatna status companies

of India apart from Coal India Limited, NTPC Limited, Oil and Natural Gas

Corporation, Steel Authority of Indian Limited, Bharat Heavy Electricals Limited

and Gas Authority of India Limited.

Indian Oil Corporation Limited operates a network of 11,214 km long crude oil,

petroleum product and gas pipelines with a capacity of 77.258 million metric

tonnes per annum of oil and 10 million metric standard cubic meter per day of

gas. Cross-country pipelines are globally recognized as the safest, cost-effective,

energy-efficient and environment friendly mode for transportation of crude oil

and petroleum products. Indian Oil has one of the largest petroleum marketing

and distribution networks in Asia with over 35,000 marketing points.

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VISION OF IOCL

A major diversified, transnational, integrated energy company, with national

leadership and a strong environment conscience, playing a national role in oil

security & public distribution.

MISSION OF IOCL

IOCL 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.

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VALUES OF IOCL

Values exist in all organizations and are an integral part of any it. Indian Oil

nurtures a set of core values:

1. CARE

2. INNOVATION

3. PASSION

4. TRUST

OBJECTIVES OF INDIAN OIL

IOCL 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 country's 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

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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.

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.

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Major Divisions of IOCL:

IOCL

Indian Oil Corporation Limited (Indian Oil) owns and operates a network of crude

oil and petroleum product pipeline in India. It has two divisions: Refineries

Division and Marketing Division. The Refineries Division is focused on managing

the public sector refineries and the Marketing Division is focused on distribution

not only the entire production of public sector refineries but also the deficit

products imported. It is organized in two segments: sale of petroleum products,

and other businesses, which comprises sale of imported crude oil, sale of gas,

petrochemicals, explosives and cryogenics, wind mill power generation and oil

and gas exploration activities jointly undertaken in the form of unincorporated

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joint ventures. The Digboi Refinery of Assam Oil Division processed 0.623 million

metric tons (MMT) of crude oil during the year. The Division sold about 1.067

MMT of products. IBP Division comprises the explosives and cryogenics business.

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CHAPTER 3: RESEARCH METHODOLOGY

19

RES E AR C H DE S IGN

A research design is the specification of method and procedure for accruing the

information needs. It is overall operational pattern of frame work of project that

stipulates what information is to be collected for source by the procedures.

Descriptive Research design is appropriate for this study.

Descriptive study is used to study the situation. This study helps to describe the

situation. A detail description about present and past situation can be found out

by the descriptive study.

DATA S O U RCE A N D CO L L ECTION

This research is based on secondary data. This means the data are already

available, i.e. the data which have been already collected and analyzed by

someone else.

Secondary data are used for the study of ratio analysis of this company and also

its competitors. To collect the data, company annual report, internet websites has

been used.

Analyzing and interpreting the information available in the financial statements

and drawing meaningful conclusions from them.

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CAPITAL STRUCTURE

A mix of a company's long-term debt, specific short-term debt, common

equity and preferred equity . The capital structure is how a firm finances its

overall operations and growth by using different sources of 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

COMPONE N T S OF C A PITAL S T RUCT U R E :

CAPITAL STRUCTURE

Shareholder’ s fund s

Borr owed fu nds

-equity capital

-preference capital (Nil)

-debenture (Nil)

-Term loan

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CHAPTER 4: DATA ANALYSIS

22

23

S HARE CAP I TAL

6000

50004000

3000

2000

Authorised Capital(CR)Issued Capital (CR)

1000

02014 2013 2012 2011 2010

A UTHO RISED CAP ITAL : 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 CA P I T AL : 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 the shareholders. Issued share capital and share premium

represent the amount invested by the shareholders in the company. It is also

known as the subscribed capital or subscribed share capital.

A n alysi s : 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

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Paid u p c a pital

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 Equity share 1192374306 10 1192.37

2009 2010 Equity share 1192374306 10 1192.37

2008 2009 Equity share 778674809 10 778.67

Paid up cap ital :

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 company’s 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.

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TOT AL DEBT

The IOC L has o nly two de bts :

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.

Se c u r ed lo an :

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.

Un secu red lo an :

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.

26

SE C UR E D L O AN

25000

20000

15000

10000 (CR)

5000

02014 2013 2012 2011 2010

(CR) 17866 13046 20380 18292 17565

A n alysi s :

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 Company’s credit when

they are repaid. If company have never taken a secured loan, company’s

credit may be low despite your good record of repayment.

27

2014 2013 2012 2011 2010

(CR) 62733.1 57278 32354.2 26273.8 27406.7

A n alysi s :

U N SE C UR E D L O AN

70000

60000

50000

40000

30000

20000

10000

0

(CR)

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

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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.

EARNI N G BEFORE IN T ER E ST AND T AX

Earnings before interest and tax A measure of a Indian oil corporation limited

(IOCL) earning power from ongoing operations, equal to earnings before

deduction of interest payments and income tax. EBIT excludes income and

expenditure from unusual, non-recurring or discontinued activities. In the

case of a IOCL with minimal depreciation and amortization activities, EBIT is

watched closely by creditors, since it represents the amount of cash that

such a company will be able to use to pay off creditors. also called operating

profit.

As you can re-arrange the formula to be calculated as follows:

EBIT

=Revenue - COGS-

Operating Expenses

Also known as Profit before Interest & Taxes (PBIT), EBIT equals Net

Income with interest and taxes added back to it.

EBIT was the precursor to the EBITDA calculation, which includes

depreciation and amortization expenses.

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Financial managers spend a considerable amount of time analyzing and

understanding their EBIT. EBIT is short for earnings before interest and taxes

and is synonymous with net operating income. EBIT is calculated by taking

revenue and subtracting cost of goods sold and all operating expenses. The

calculation is useful because it provides a look at how profitable a business is

before loan decisions and tax considerations are included to arrive at net

income. If you plan on improving EBIT while holding sales constant, your only

option will be to reduce costs.

30

2014 2013 2012 2011 2010

( CR) 13359.43 12050.65 16773.88 11157.05 15057.96

Earnings bef o re interest an d t ax

20000

15000

10000 ( CR)

5000

0

An alysis :

In 2014, the operating profit of Indian oil corporation limited (IOCL) is Rs

13359.43 (Cr). But at present generally they are earning average operating

profits. so IOCL has try to reduce the long term borrowed fund and issue the

more share capital to the shareholders in different areas.

Analyze Indian Oil Corporation limited (IOCL) internal structure and look for

areas where operations can be centralized or more productive. For instance,

labor is sometimes redundant or inefficiently organized. Writing out your

processes in a flow diagram can help you identify and eliminate or

reorganize them. Consider introducing new, long-term cost saving

technologies for inventory, production and sales. These systems can greatly

increase efficiency, creating costs savings.

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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.

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2014 2013 2012 2011 2010

(Rs) 28.91 20.61 16.29 30.67 42.1

EPS of IO C L Sha r eholders from 2 010 t o 2 01 4 :

50

40

30

20 (Rs)

10

0

An alysis :

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

shareholders.

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LEV E R A 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:

LEVERAGE

Financial leverage Operating leverage

F i n a nc ial l e verage:

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 shareholder’s return. The darker side is that if the said

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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.

Opera t i n g l e ve r ag e :

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 shareholder’s 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.

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2014 2013 2012 2011 2010

(Ratio) 1.61 1.91 1.49 1.31 1.11

De g ree Fina n cial lev e rage of IO C L:

2

1.5

1

0.5

(Ratio)

0

An alysis :

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.

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2014 2013 2012 2011 2010

(Ratio) 1.12 1.14 1.09 1.13 1.01

Degree of O p e rat i ng l e v era g e of I n dian O i l Corpo r at i on

li mi t ed (I O C L ):

1.15

1.1

1.05

1 (Ratio)

0.95

0.9

An alysis:

In 2014 Indian oil corporation limited has degree of operating ratio is 1.12

.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 a dramatic improvement in profitability with higher volume, because

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

with volume.

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2014 2013 2012 2011 2010

(Ratio) 1.82 2.43 1.64 1.49 1.21

To t al le v er a ge of I n dian Oil C orporati o n l im ited:

3

2.5

2

1.5

1

0.5

0

(Ratio)

An alysis:

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

company’s financial strength, it also dilutes the current shareholders’

percentage of ownership.

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CHAPTER5: CONCLUSION

39

F INDINGS

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.

EBIT is very less in 2014; it is constantly decreasing from 2010 to 2014.

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.

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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.

SUG G ES T IO N S

The company should utilize the debt funds more efficiently to maximize

shareholders’ return.

Increasingly firms are moving from secured debt to unsecured debt in order

to free their assets.

For IOCL, to issue maximum number of share to the public and they have to

reduce the share price is minimum. And IOCL try to fulfill the limit of

authorized share capital.

IOCL have to reduce total debts of the company against of issuing more

share to the public.

IOCL, Need to minimize the degree of financial leverage .otherwise which

will be affect in future period of time.

The company should try to increase the profit before interest and tax so

that the Investments in the firm are attractive as the investors would like to

invest only where the return is higher.

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The company can invest in marketable securities to improve its cash

position.

IOCL can try to reduce the secured loan because secured loan can be affect

the assets of the company in future.

LIMITA T IO N S OF T H E S T UDY The scope of the study is limited to Guwahati Refinery.

Time taken to complete the study is very limited.

The analysis of the analysis of the companies and suggestion totally

depends upon the information shared.

Non-monetary aspects are not considered making the results unreliable.

CON C LU S I O N From the above discussion it can be concluded that Indian Oil Corporation limited

running with low debt fund. Therefore, they may increase it to get benefits of low

cost capital. It has found that IOCL largely employing shareholders funds in their

as sets it has crossed even 100% in the first two years. Moreover EOL is on high

degree financial risk. Therefore, they may reduce the debt capital and employ

more equity fund. The study undertaken has brought in to the light of the

following conclusions. According to this project I came to know that from the

analysis of capital structure analysis it is clear that Indian Oil Corporation Ltd have

been doing a satisfactory job. But the firm has certain areas to ponder upon like

capital employment. So the firm should focus on getting of profits in the coming

years by taking care internal as well as external factors. And with regard to

resources, the firm is take utilization of the borrowed fund in a right place.

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BIBLIOGRAPHY

WEBSITE RE F ERENC E S:

www.moneycontrol.com

www.iocl.com

B OOKS REF E RENC E S:

K.R Das, Priti chandna B.B Dam, & Anju Kakoty 1st Edition

(2013):Financial Statement Analysis.

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THANK YOU

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Financia l state me nts of Ind ia n Oil Co rpo ra tion Ltd.

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