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.
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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.
32
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.
43
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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