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Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~1~

SUMMER TRAINING PROJECT


AT
INDIAN OIL CORPORATION LIMITED,
YUSUF SARAI, NEW DELHI-110016
ON
INDEPTH ANALYSIS OF OMC TRANSACTIONS AND ITS IMPACT ON
INDIAN OIL CORPORATION LTD

Submitted to:
Prof. J D Agarwal
Indian Institute of Finance
Submitted by:
Vaibhav Rastogi
(4108175175)

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~2~

CONTENTS INDEX

S. No. Content Page No.
1 Preface
2
2 Certificate
3
3 Acknowledgement
4
4 Executive Summary
5
5 Table Index
6
6 Chart Index
7
7 Chapter 1
Introduction
Company
Industry
8-26
8 Chapter 2
Literature Review
26-33
9 Chapter 3
Research Methodology
Objectives of project
Nature of Research
Ratios
34-96
10 Chapter 4
Analysis & Suggestion
97-106
11 Chapter 5
Findings & Suggestion
107-119
12 Limitations
120
13 Conclusions
121-130
14 Bibliography
131-132
15 Annexure
133-172






Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~3~

Preface

As a part of MBF program, a student has pursued a project duly approved by the
director of the institute. I had the privilege of undertaking project on In-depth
Analysis of OMC Transactions and its Impact on Indian Oil Corporation Ltd.
My project is divided into five chapters and they are given as under.
1. Chapter one of this study contains, concept of Introduction of Company &
Industry and importance of the subject in present scenario.
2. Chapter two deals with the Review of the Literature.
3. Chapter three deals with Research Methodology, Objective of the study and
Nature of Research & Ratio.
4. Chapter four deals with Analysis and Suggestion
5. Chapter deals with the summary of Major Findings & Conclusion.




(VAIBHAV RASTOGI)
Name Vaibhav Rastogi
Enrolment No - 4108175175




Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~4~

Certificate

This is to certify that In-depth Analysis of OMC Transactions and its Impact on
Indian Oil Corporation Ltd. was carried out by Vaibhav Rastogi as a part of the
requirements of management of business finance (MBF) four semester program. This
study is being submitted for approval to the Indian institute of finance.
I declare that the form and contents of the above mentioned project are original and
have not been submitted in a part or full, for any other degree or diploma of this or
any other organisation/ institute/ university.







(VAIBHAV RASTOGI)
Name Vaibhav Rastogi
Enrolment No 4108175175



Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~5~
ACKNOWLEDGEMENTS
I would like to take this opportunity to express my sincere thanks to all those
who extended their whole-hearted and unreserved help to me throughout this
project and enabled me to give the project its present shape.
I thank Prof. J D Agarwal, my project guide at Indian Institute of Finance who
extended his valuable suggestions and encouragement that was required to
complete this project.
I also like to thank Mr. Piyush Jain, who was my project guides at Indian Oil
Corp. Limited, who provided me with the relevant information and know-
how that was indispensable for the completion of the project.





Vaibhav Rastogi
(4108175175)


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~6~
EXECUTIVE SUMMARY
The Indian economy is passing through a dynamic phase of major
restructuring and hence significant changes are taking place within the
petroleum sector. A strategically significant consequence of reforms in the
petroleum sector is the dismantling of ADMINISTERED PRICING
MECHANISM (APM) in 2002 (under which the petroleum companies were
assured of a reasonable return through controlled pricing).
Ever since the APM has dismantled, the PSU companies are given authority to
negotiate the prices at which they will be providing goods and services to
each other. They operate under name of OIL MARKETING COMPANIES
(OMC). Currently, under OMC three major oil PSUs i.e. INDIAN OIL CORP.
LIMITED, BHARAT PETROLEUM CORP. LIMITED and HINDUSTAN
PETROLEUM CORP. LIMITED work. It is basically a consortium between the
above said companies to provide goods and services to the other company in
case the assisted company is not having refinery or other facilities at a
particular place. This is being done to avoid the transit cost which may be
involved when that company gets the product from its far of refinery and
thus to help the economy as a whole. That is because the PSUs operate with
the purpose of social welfare also.
In this project, an in depth study of the accounting procedures under which
the OMC transactions are done, is being made. It also consists of the impact of
OMC transactions on IOCL in the last quarter of 2008-2009.
Also, an in depth analysis of the profitability of various products is being
conducted. It is being studied that which product is more profitable when it
has been sold through OMC than through the retail route.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~7~
Chart Index
S. No. Content Page No.
1 Refining Capacity/Share of Indian Oil 14
2 Indian Oil Pipeline Network Share 15
3 Marketing Infrastructure 17
4 Past Scenario of Under recovery 91
5 Present Scenario of Under recovery 91



Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~8~
Table Index
S. No. Content Page No.
1 Major Oil Marketing Companies (OMCs) in the sector 23
2 Ratios 38-39
3 Quantities of ATF that is being transacted through the
OMC route
69
4 Calculation of Profit / Loss through OMC in ATF 70
5 Quantities of SKO that is being transacted through the
OMC route
71
6 Rates of SKO through OMC route 72
7 Calculation of Profit / Loss through OMC in SKO 73
8 Quantities of EUROIII MS that is being transacted
through the OMC route
74
9 Rates of EUROIII MS through OMC route 75
10 Calculation of Profit / Loss through OMC in EURO-III
MS
76
11 Quantities of BSIII HSD that is being transacted through
the OMC route
77
12 Rates of BSIII HSD through OMC route 78
13 Calculation of Profit / Loss through OMC in BSIII HSD 79
14 Retail v/s OMC - Profit or Loss Analysis 80
15 Under recoveries of Oil Marketing Companies 85
16 Mechanism for sharing under recoveries 87
17 Price Gap 89
18 Profit & Loss account 93
19 Balance Sheet 94
20 Cash Flow Statement 95


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~9~







CHAPTER 1
INTRODUCTION


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~10~
INTRODUCTION
ESTABLISHMENT OF IOCL
In order to ensure greater efficiency and smooth working, the Government of India
decided to merge the refining and distribution activities.
The Indian Refineries and Indian Oil Company were combined to form the giant
Indian Oil Corporation Limited (IOCL) on 1st September 1964 with its registered
office at Bombay. In 1967, the pipeline division of the corporation was merged with
the refineries division. Research and Development center of Indian Oil came into
existence in 1972. In October 1981, Assam Oil Company was nationalized and has
been amalgamated with IOCL as Assam Oil Division (AOD).

(Source: www.iocl.com)
Indian Oils Capacity to handle refining and marketing operations on an ever-
expanding scale, gave the government the confidence to take over the three major
private oil companies during the seventies. This was followed in 1981 by the

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~11~
acquisition of Assam Oil Company and a 50% private shareholding of the Oil India
Limited. With this step, the entire oil industry came under the public sector fold.
With these developments, India was on her way to achieve self-reliance in one of the
core sectors of the national economy.
Indian Oil Corporation Limited Today:-
Indian Oil Corporation Ltd. (IOCL) is currently India's largest company by
sales with sales turnover of Rs. 2, 47,479 crore (US $ 61.70 billion) and profits
of Rs. 6,963 crore (US $ 1.74 billion) for the year 2007-08. It will also celebrate
its Golden jubilee this year on 1
st
September 2009.
Indian Oil is also the highest ranked Indian company in the prestigious
Fortune 'Global 500' listing, having moved up 19 places to the 116th position
in 2008. It is also the 18th largest petroleum company in the world. Indian
Oils vision is driven by a group of dynamic leaders who have made it a name
to reckon with.
In this section, you can peruse through the profile and spread of Indian Oil
across the country & abroad. You can also know about Indian Oil's current
financial performance, special initiatives and causes along with the
prestigious recognitions & awards that have come its way for exceptional
performances.
Recently Indian oil inaugurated first LPG Pipeline in North India. There has been
many milestones which have been achieved by the Indian Oil the most recent
been:-
The 'historic amalgamation' of Bongaigaon Refinery & Petrochemicals Ltd.
(BRPL) with the parent company - Indian Oil became effective from March 25,
2009. BRPL was inducted as an Indian Oil Group Company on 29
th
March,
2001.

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~12~
Product Profile
Indian oil accounts for approximately 48% petroleum products market share. Its
products include liquefied petroleum gas, aviation turbine fuel, bitumen, high speed
diesel, lubricating oils and greases, petrochemicals, and superior kerosene and crude
oil.

The company also offers special products, which comprise benzene, carbon black
feed stock, food grade hexane, jute batching oil, micro crystalline wax, mineral
turpentine oil, paraffin wax, propylene, raw petroleum coke, sulphur, and toluene.


(Source: www.iocl.com)




Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~13~


Divisions at IOCL


(Source: www.iocl.in)

1. Refining
2. Pipelines
3. Marketing
4. Research & Development



Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~14~
1. Refining
Indian Oil controls 10 of India's 18 refineries - at Digboi, Guwahati, Barauni, Koyali,
Haldia, Mathura, Panipat, Chennai, Naphtha and Bongaigaon - with a current
combined rated capacity of 49.30 million metric tonnes per annum (MMTPA) or 990
thousand barrels per day (bpd). Indian Oil accounts for 42% of India's total refining
capacity.

(Source: Self Generated)

Indian Oil accounts for 42% of India's
total refining capacity.
42%
58%
Indian Oil
Other Companies

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~15~
2. Pipelines
During the year, Indian Oils network of underground highways breached the 10,000
kilometer mark and registered the highest ever operational throughput of 59.5
million tonnes. Compared to the previous year, the crude oil pipelines registered a
6.7% growth at 38.2 million tonnes. The year was marked by the commissioning of a
record number of pipeline projects, the foremost being the Paradip-Haldia crude oil
pipeline and Indian Oil's first Panipat - Jalandhar LPG pipeline. Other projects
commissioned during the year include the Koyali - Ratlam product pipeline, ATF
Pipeline from CPCL (Manali) to Chennai AFS and ATF pipeline to the New
Bangalore International Airport. Indian Oil owns & operates 76% of India's
downstream pipeline network.

(Source: Self Generated)
Indian Oil owns & operates 76% of
India's downstream pipeline network.
76%
24%
Indian Oil
Other Companies

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~16~


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~17~
3. Marketing
Indian Oils countrywide network of over 34,000 retail sales points is backed for
supplies by its extensive, well spread out marketing infrastructure comprising 166
bulk storage terminals, installations and depots, 101 aviation fuel stations and 89
LPG bottling plants. Its subsidiary, IBP Co. Ltd, is a stand-alone marketing company
with a nationwide retail network of over 34000 sales points. Indian Oil caters to over
55.5% of India's petroleum consumption.

(Source: www.IOCL.com)


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~18~
4. Research & Development
Indian Oils world-class R&D Centre, with state-of-the-art facilities, has done
pioneering work in tribology (lubricants formulation), refinery processes, pipeline
transportation and fuel-efficient appliances. It has developed over 2,200
formulations of the leading SERVO brand lubricants and greases for virtually all
conceivable applications - automotive, railroad, industrial and marine. The Centre
has to its credit over 124 national and international patents. The wide range of
SERVO brand lubricants, greases, coolants and brake fluids meet stringent
international standards and bear the stamp of approval of all major original
equipment manufacturers. The SERVO has to its credit over 60 national and
international patents, including 5 from US.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~19~

1) BACKGROUND

i. INDIAN PETROLEUM SECTOR

Oil is one of the most important factors contributing to the economic development of
a country. The production and consumption of oil in a country has become a
barometer of its economic growth and prosperity.
India has been following the mixed economy with socialistic pattern ever since its
independence. As per the industrial policy resolution of 1948 (IPR 48) certain core
sector industries were exclusively reserved for the public sector, one such sector is
the Petroleum Sector. The downstream refinery (for more details refer appendix) and
marketing segment of the petroleum sector are dominated by the three large PSUs,
namely Indian Oil, Bharat Petroleum and Hindustan Petroleum, Indian Oil being the
largest and the oldest of them.
This sector is witnessing enormous amounts of activity due to the crude prices
soaring high, the mounting losses of the oil marketing companies and the entry of
private players in this sector and hence demands of liberalization of the sector to
make it a level playing field. Thus the scenario is ever changing as far as this sector is
concerned.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~20~
ii. ADMINISTERED PRICE MECHANISM (APM)

Petroleum sector remained regulated through the mechanism of administered price. All
investment proposals were approved by the Government of India (GOI). All resources,
(capital as well as foreign exchange for import of crude and finished product), were made
available by the government. The pricing policy tried to maintain a balance between the
inherent conflict between social objective of oil companies and their commercial viability.
Prices of petroleum products were determined so that a satisfactory level of capacity
utilization cost of production and reasonable amount of return on investment was ensured.
Thus the prices that were being set by the government were acceptable to all the OMCs and
they had to provide each other with the material at the predetermined prices. At the same
time, to ensure availability of this commodity to the weaker sections of the society, cross
subsidy across different products was introduced. This was the basis for fixing margins for
oil companies under the APM, guaranteeing a fixed reasonable rate of return. It was
ggoverned under the directive of Ministry of Petroleum & Natural gas (MoP&NG). Products
/ Infrastructure were shared amongst Oil companies. The distribution was under the
purview of Oil Coordination Committee, under MoP&NG (Ministry of Petroleum & Natural
Gas). All under recoveries were covered under Oil Pool Mechanism. All Refineries had same
Refinery Transfer Price. The guiding principle in distribution was to minimize product
positioning cost.
(Source: APM dismantling [Report]. - [s.l.] : IOCL, 2001-2002)


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~21~
iii. LIBERALIZATION IN PETROLEUM SECTOR

The economic liberalization led to the opening up of the petroleum sector as well. Private
sector refiners entered the industry with huge capacities. The government reduced its
stakes in HPCL, BPCL and IOCL. More and more products came out of APM and the oil
companies had the liberty to set their own prices as regulated by the market forces. Phased
dismantling of APM was done by the year 2001-2002 (1.4.02). Private sector (both Indian
and foreign) was allowed to enter petroleum industry.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~22~
iv. OIL MARKETING COMPANIES (OMC)

Currently, under OMC three major oil PSUs i.e. INDIAN OIL, BPCL and HPCL
work. It is basically a consortium between the above said companies to provide
goods and services to the other company in case the other company is not having
refinery or other facilities a particular place. This is being done to avoid the transit
cost which may be involved when that company gets the product from its far of
refinery and thus to help the economy as a whole. Here, there is no reimbursement
for logistics under-recoveries. RTP of refineries is based on Import Parity Price (for
Port refineries) and inland differential (for inland refinery). All taxes and duties
payable by the assisted company.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~23~
Major Oil Marketing Companies (OMCs) in the sector
Company Name Market Cap.
(Rs. cr.)
Sales Turnover
(Rs. cr.)
Net Profit
(Rs. cr.)
Total Assets
(Rs. cr.)
Government or
Private Entity

IOC

49,704.12 225,972.05 6,962.58 76,609.42 Govt.
BPCL

12,637.70 110,546.80 1,580.60 26,699.22 Govt.
HPCL

8,238.80 104,703.76 726.27 27,349.99 Govt.
Reliance
Petroleum

51,525.00 3,678.00 84.00 26,276.48 Private
Essar Oil

17,722.56 562.42 -41.65 13,616.31 Private

(Source: www.moneycontrol.com)

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~24~
INDUSTRY OVERVIEW



Ministry of
Petroleum and
Natural gas
UPSTREAM
Exploration and
Production
ONGC
OVL
OIL INDIA LIMITED
Pvt. E & P
Companies
DOWNSTREAM
Refining and
Marketing
Indian Oil Bharat Petroleum
IBP, CPCL, BRPL KRL, NRL
MRPL
HINDUSTAN
PETROLEUM
RELIANCE
INDUSTRIES LTD.
GAIL
Gas Transportation
& Petrochem
Other Private Cos.
Oil & Gas Marketing
INDUSTRY BODIES
Petroleum Planning
& Analysis Cell
Centre for High
Technology
PCRA
PETRO FED
Oil Industry Safety
Directorate
Petroleum India
International
Engineers India Ltd.
Director General of
Hydrocarbon

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~25~

MILESTONES SET THROUGH THE YEARS
As per Fortunes Global 500 listing of the worlds largest Corporation for fiscal 2005:
Ranking improved to 135, from 191 in the previous year.
Ranked 118th among Fortune 500 companies in terms of profit.
35th among Asias top 50 companies.
Among the 26 petroleum companies listed in the Fortune 500
16th largest company by sales.
12th in terms of profit.

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~26~
ORGANIZATIONAL CHART


PIPELINE DIVISION REFINERY
DIVISION
MARKETING
DIVISION
(HO - MUMBAI)
ASSAM OIL
DIVISION


NORTHERN
REGION
WESTERN
REGION
EASTERN REGION SOUTHERN
REGION
Delhi Mumbai Kolkata Chennai

(STATE OFFICES)

DSO
(delhi)
PSO
Chandigarh
RSO
Jaipur
UPSO
Lucknow


UPSO I
(Lucknow)
UPSO II
(Noida)


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~27~

Management IOC
Name Designation

Sarthak Behuria

Chairman / Chair Person
Serangulam Varadarajan Narasimhan Director
Gyan Chand Daga Director
Anand Kumar Director
Sthanunathan Sundareshan Director
Indira Parikh Director
Indu Shahani Independent Director
Michael Bastian Independent Director
S V Narasimhan Nominee Director
Brij Mohan Bansal Director
Vishan Chandra Agrawal Director
Basavaraj Ningappa Bankapur Director
Pranab Kumar Chakraborti Director
Pradeep Kumar Sinha Director
Anees Noorani Independent Director
Gautam Barua Independent Director
N K Poddar Independent Director



Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~28~










CHAPTER 2
LITERATURE REVIEW



Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~29~

LITERATURE REVIEW
This chapter deals with the study of literature of Petroleum Industry. There have
been innumerable studies in this industry to understand its impact on the society at
large. Petroleum (energy) is the prime source to drive the economy of a country and
keep its momentum.
In India, government forms committees on regular basis for the study of
pricing, demand, marketing, consumption and etc. of petroleum products. Standing
Committee on Petroleum and Natural Gas (2005) has presented report on Pricing
of Petroleum Products.
The history of oil pricing can be traced back to the late 1920s. During this
period, the private companies were marketing imported product - mainly kerosene.
No authority, either the Government or the companies, enforced any artificial
controls on the prices, which were allowed to float. This situation continued till the
advent of the Second World War. During the war and post war periods (1939-1948),
the oil companies maintained price pools for major products. The first attempt to
regulate the oil prices was based on Valued Stock Account (VSA) procedure agreed
to between the Government of India and Burmah Shell in 1948.
International Energy Agency has also shown its interest in Energy Sector of
India, a paper Petroleum Pricing in India: Where have all the Subsidies gone?
(2006), has thrown some light on the subsidies regime of India. This paper says that
despite being subsidised, petrol and diesel price are quite high in India. Petroleum
product pricing in India is frequently seen as a black hole of subsidies. Economists
and oil companies complain about the impacts those subsidies have on public
finances, financial performance of oil companies and demand-side management.
However, on closer analysis, the issue of petroleum product pricing in India is more
complex than the one-way flow of subsidies reported in the press. So the question to
be answered is: how high are subsidies really?

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~30~
Contrary to common perception, Indias retail prices for petrol and diesel are
relatively high despite subsidies. In fact, the total Government (central and states)
taxes and surcharges on petrol products exceed by far the annual budget subsidies
for these products.
In costing of petroleum products marketing cost is quite high and plays an
important role in deciding the ultimate price of these products. A committee formed
under the Indian government has studied this and presented the report Marketing
Cost of Petrol and Diesel (2006). This committee has mainly studied the following
points:

Governments decision regarding implementation of principle of Trade Parity
with reduction in customs duty on petrol and diesel from 10% to 7.5%.
Audited actuals for financial year 2005-06 along with reference to
recommendations of Dr. Rangarajan Committee and Trade Parity.
Representatives from IOC, BPC, HPC and ONGC can also be co-opted to the
group, if necessary.
The pricing formula as may be evolved based on such findings would be
submitted for approval.
PPAC in consultation with Public Sector Oil Marketing Companies prepared
a format showing current price built up of petrol (Motor Spirit) and diesel (High
Speed Diesel) and requested the oil Public sector undertakings to furnish marketing
data pertaining to the year 2005-06 under various heads which were prevalent when
Administered Price Mechanism was in force.
In 2002, government gave away with Administered Pricing Mechanism,
however, it was decided to continue to subsidize PDS kerosene and domestic LPG
on the ground that these were fuels of mass consumption largely consumed by
economically weaker sections of society. The subsidy on these two products was
to be continued on a flat rate basis financed from the budget and was to be phased
out in three to five years. The Oil Marketing Companies (OMCs) were to adjust the

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~31~
retail selling prices of these products in line with international prices during this
period.
This was studied and recommendation were made by Report of the
Committee on
Pricing and Taxation of Petroleum Products (2006).
A literature review of OMC transactions and referring to various books by renowned
authors on the subject has been carried out. Several research papers published in
various journals have also been referred to. This has been discussed in detail in
Chapter-2. The study of these books and articles gave an in depth understanding of
the alliances and the dynamics as well as the purpose of doing the same. Thus a
strong foundation was being created for the successful completion of the project.




Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~32~

World Oil Marketing in Transition
BRIAN LEVY
The past decade has witnessed an extraordinary rise in the international economic
power of the worlds oil producing nations. This transformation did not occur in one
fell swoop; oil-exporting countries have been nibbling away at the control of
international oil companies a little time. And each new shift in the power has had its
own implications for the pattern of international oil trade.
The most recent shift in control is the rise of direct marketing of crude oil by oil-
marketing countries. Until the early 1970s, multinational oil companies, especially
the seven oil majors, dominated crude oil trade in international markets. However,
since 1973, state-owned enterprises from producer countries have increased the
share of oil that they market directly to downstream users, bypassing entirely the
international oil companies. Directly marketed oil rose from 8 percent of trade in
1973 to 25 percent by 1976, and reached almost 45 percent in 1980. What explain the
timing and extent of this shift in international marketing? What are its implications
for the structure of the international market?


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~33~
No Justification for Raising Petrol Prices
There is no justification for raising the prices of petrol and other oils due to heavy oil
pool deficit, estimated to be about Rs. 18,000 crore, states Prof. J.D. Agarwal,
Director, Indian Institute of Finance. According to him, the massive oil pool deficit
has been a result of wrong estimates with regard to the volume of crude oil imported
from abroad in 1996-97 rather than international price of oil. The current prices of
petrol in the country were originally fixed when the international prices of petrol
were at a level of US $ 42/- per barrel. The petrol prices were of course been revised
upward in between as well due to oil pool deficit.
When the international prices of petrol fell down to half i.e. US & 22 per barrel, the
Govt. Should have reduced the petrol prices in the country. But the Govt. did not so
and acted as profiteer, exploiting the inelastic demand of petrol and the helpless
consumers stated Dr. Agarwal. According to Dr. Agarwal , the whopping increase in
oil import bill which may be estimated to be about US $ 10 bn. in 1997-98, would not
due to the rising prices but because of consumption and therefore has nothing to do
with the retail pricing of petrol. It is likely that the international crude oil prices
might fall further US $ 19 per barrel during 1997.The Ministry of petroleum should
generate more realistic estimates about the quantity of the oil to be imported. The
massive oil pool deficit is the reflection of the inefficiency of the Govt. regarding the
estimates generated by them in the past and also regulating the oil imports. The
Govt. should take serious note of such abnormal variances, particularly when the
international price of crude oil during the year has stagnated, urged Dr. Agarwal.
Moreover Dr. Agarwal feels that the increase in petrol and oil prices would fuel
inflation and bring down the quality of life of people. It will be an indirect tax on the
pockets of all without exception which will only promote inefficiency on the part of
those who are connected with oil industry. Dr. Agarwal has urged upon the Govt. to
adopt a more appropriate accounting system, where in the pricing of products like
oil should be done on cost plus basis, exactly the way industrial products are priced

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~34~
in a market driven economic system. Dr. Agarwal strongly feels that the objective of
a Govt. is maximization of of welfare of people in general rather than creating state
monopolies, breeding inefficiency and exploiting citizens, welfare of people in
general rather than creating state monopolies, breeding inefficiency and exploiting
citizens.
By :
Dr. J.D. Agarwal
Chairman Indian Institute of Finance



Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~35~






CHAPTER 2
RESEARCH METHODOLOGY


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~36~
2.1 METHODOLOGY
2.1.1 DATA COLLECTION
After having the basics of alliances through the way of literature review, I studied
the original agreement that was being made by the OMCs after the dismantling of
APM in 2002. That agreement formed the basis for all the transactions henceforth. It
contained the various accounting policies that were to be followed as it is quite
complex and involves a number of components. After getting a knowhow of the
accounting policies it was logical to take the actual data.
The major portion of the data has been collected from the software called OMC
software (which is in turn was integrated with SAP). As the objective of the project
was to analyze the impact of OMC transactions in the last quarter of the financial
year 2008-2009, the data of the transactions that were being made during this period
was being taken. This data was basically the RTP (Refinery Transfer Price) and the
Import Parity Price (IPP). No information of the cost price of the various products
was given in the SAP. Thus the data of corporate cost and retail prices was being
collected from valuation as well as the pricing department at Yusuf Sarai office.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~37~

2.1.2 PURPOSE OF THE PROJECT
The liberalization has granted a lot of autonomy to IOCL especially with the grant of
NAVRATNA status. Keeping all these things in mind, the goals of the project are
determined to be as follows:-

Analyze the various accounting procedures that are followed for OMC
transactions as per the agreement
Identify the impact of OMC Transactions on the IOCL for the last quarter of
the financial year (2008-2009).
Identify the various products that are profitable when they are being put for OMC as
against going out in retail.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~38~
Ratios
Mar '04 Mar '05 Mar '06 Mar '07 Mar '08
Investment Valuation Ratios

Face Value 10.00 10.00 10.00 10.00 10.00
Dividend Per Share 21.00 14.50 12.50 19.00 5.50
Operating Profit Per Share (Rs) 88.67 63.47 66.86 92.14 94.67
Net Operating Profit Per Share (Rs) 1,000.75 1,191.89 1,497.37 1,853.57 2,074.44
Free Reserves Per Share (Rs) 177.57 207.99 231.37 279.23 324.13
Bonus in Equity Capital 91.29 91.29 91.29 91.29 89.42
Profitability Ratios

Operating Profit Margin (%) 8.86 5.32 4.46 4.97 4.56
Profit Before Interest And Tax Margin
(%)
7.19 3.80 3.18 3.74 3.43
Gross Profit Margin (%) 9.22 5.66 4.68 5.09 3.46
Cash Profit Margin (%) 7.53 4.96 4.03 4.62 3.61
Adjusted Cash Margin (%) 6.95 4.89 3.65 3.73 3.61
Net Profit Margin (%) 5.94 3.48 2.78 3.43 2.78
Adjusted Net Profit Margin (%) 5.36 3.41 2.40 2.49 2.78
Return On Capital Employed (%) 26.79 14.92 12.60 15.97 14.06
Return On Net Worth (%) 30.39 18.82 16.77 21.51 16.99
Adjusted Return on Net Worth (%) 27.52 18.47 14.49 15.71 14.83
Return on Assets Excluding
Revaluations
196.69 222.18 250.38 296.88 343.53
Return on Assets Including
Revaluations
196.69 222.18 250.38 296.88 343.53
Return on Long Term Funds (%) 31.27 19.62 16.18 20.59 19.54
Liquidity And Solvency Ratios

Current Ratio 0.87 0.84 0.83 0.79 0.84
Quick Ratio 0.55 0.56 0.50 0.47 0.54
Debt Equity Ratio 0.53 0.67 0.90 0.78 0.86
Long Term Debt Equity Ratio 0.31 0.27 0.49 0.39 0.35

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~39~
Debt Coverage Ratios

Interest Cover 21.34 11.08 7.24 6.75 6.94
Total Debt to Owners Fund 0.53 0.67 0.90 0.78 0.86
Financial Charges Coverage Ratio 24.03 14.13 9.28 8.42 8.63
Financial Charges Coverage Ratio Post
Tax
19.86 12.53 8.16 7.82 7.23
Management Efficiency Ratios

Inventory Turnover Ratio 7.88 7.19 7.26 8.84 9.09
Debtors Turnover Ratio 29.29 28.81 28.23 32.23 36.50
Investments Turnover Ratio 9.38 8.21 8.26 10.10 9.09
Fixed Assets Turnover Ratio 4.46 4.70 5.26 6.01 4.38
Total Assets Turnover Ratio 3.32 3.22 3.15 3.51 3.24
Asset Turnover Ratio 3.22 3.50 4.02 3.97 4.38
Average Raw Material Holding 40.72 52.50 49.57 38.70 48.65
Average Finished Goods Held 30.41 28.60 27.21 22.26 21.49
Number of Days In Working Capital 6.93 14.52 13.35 6.70 18.93
Profit & Loss Account Ratios

Material Cost Composition 84.33 88.52 90.91 89.28 90.24
Imported Composition of Raw
Materials Consumed
75.93 75.68 80.46 84.09 84.46
Selling Distribution Cost Composition 4.30 4.21 3.84 3.57 3.53
Expenses as Composition of Total Sales 3.1a1 2.55 3.21 4.21 4.63
Cash Flow Indicator Ratios

Dividend Payout Ratio Net Profit 39.50 39.47 33.87 34.83 10.51
Dividend Payout Ratio Cash Profit 31.16 27.72 23.35 25.60 7.39
Earning Retention Ratio 56.24 59.72 60.73 52.06 87.96
Cash Earning Retention Ratio 66.25 71.88 74.20 67.96 91.89
Adjusted Cash Flow Times 1.49 2.52 4.09 3.32 3.94
Earnings Per Share 59.97 41.88 42.08 64.21 58.39
Book Value 197.32 222.47 250.88 298.22 344.58$

(Source: Self Generated)

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~40~
Ratio Analysis

We can classify ratios according to how they are constructed or according to the financial
characteristic that they capture.
Ratios can be constructed in the following four ways:
As a coverage ratio - A coverage ratio is a measure of a firms ability to cover, or
meet, a particular financial obligation. The denominator may be any obligation, such as
interest or rent, and the numerator is the amount of the funds available to satisfy that
obligation.
As a return ratio - A return ratio indicates a net benefit received from a particular
investment of resources. The net benefit is what is left over after expenses, such as operating
earnings or net income, and the resources may be total assets, fixed assets, inventory, or any
other investment.
As a turnover ratio - A turnover ratio is a measure of how much a firm gets out of its
assets. This ratio compares the gross benefit from an activity or investment with the
resources employed in it.
As a component percentage-A component percentage is the ratio of one amount in a
financial statement, such as sales, to the total of amounts in that financial statement, such as
net profit.
We can use financial ratios to evaluate five aspects of operating performance and financial
condition:
1. Return on investment
2. Liquidity
3. Profitability
4. Activity
5. Financial leverage

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~41~
1. LIQUIDITY RATIOS
Liquidity refers to the ability of a firm to meet its obligations in the short run, usually one
year. This is done by comparing a companys most liquid assets (those that can be easily
converted to cash), its short-term liabilities.
In general, the greater the coverage of liquid assets to short-term liabilities the better it is
for the company as it gives a signal that the company can pay its debts that are coming
due in near future and still fund its ongoing operations.
On the other hand, a company with low coverage rate should raise a concern for the
investors as it may be a sign that the company will have difficulty running its operations as
well as meeting its obligations.
The biggest difference between each ratio is the type of assets used in the calculation. While
each ratio includes current assets, the more conservative ratios will exclude some current
assets as they cannot be easily converted into cash.
i. CURRENT RATIO
Formula:





Current ratio is the most popularly used measure of liquidity of a company. It ascertains if a
companys short-term assets (cash, cash equivalents, receivables, marketable securities, and
inventory) are readily available to pay off its short-term liabilities (payables, current portion
of term debt, accrued expenses and taxes).
In theory, the higher the current ratio, the better it is for the company.

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~42~

ii. ACID TEST RATIO or QUICK RATIO
Formula:





It is a more stringent measure of liquidity, is used when liquidity of inventory is somewhat
doubtful. It further refines the current ratio by measuring the most liquid current assets
there are to cover current liabilities. It is more conservative than the current ratio as it
excludes inventory and other current assets, which are more difficult to convert into cash. A
higher ratio means a more liquid current position.
The higher the acid test ratio, the better it is for the company.
iii. CASH RATIO
Formula:





It is an indicator of a companys liquidity that further refines both the current ratio and the
quick ratio by measuring the amount of cash, cash equivalents or invested funds that are
there in current assets to cover current liabilities.
Higher is the cash ratio, better positioned is the company to meet its short-term debts.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~43~

iv. NET WORKING CAPITAL TO SALES RATIO
Formula:





Working capital = Current assets Current liabilities
It gives an indication of the performance of a company and the ability of a company to
convert its sales into working capital. Still another way to measure the firms ability to
satisfy short-term obligations is the net working capital-to-sales ratio, which compares net
working capital (current assets less current liabilities) with sales. This ratio tells us the
cushion available to meet short-term obligations relative to sales.
Higher is the net working capital to sales ratio, better positioned is the company to meet
its short-term debts.

2. LEVERAGE RATIO
Financial leverage refers to the use of debt in a firms capital structure. While debt capital is
a cheaper source of finance, it exposes the firm to greater risk. Debt capital is cheaper than
equity capital because interest on debt capital is a tax-deductible expense where as dividend
on equity capital is not. Hence, financial leverage has both returns and risk implications.
These ratios give users a general idea of the companys overall debt load as well as its mix of
equity and debt.
In general the greater the amount of debt held by a company the greater the financial risk
of bankruptcy.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~44~
i. DEBT-TO-EQUITY RATIO
Formula:





Net worth = Shareholders money Miscellaneous expenditure
It is a structural ratio showing the relative dependence on debt and equity sources of
financing. This is a measurement of how much suppliers, lenders, creditors and obligators
have committed to the company versus what the shareholders have committed.
A low value of this ratio means the company is less dependent on leverage, i.e., money
borrowed from and/or owed to others. In general, the higher the ratio, the more risk that a
company is considered to have taken on.
The lower the ratio, the less leverage a company is using and stronger is its equity
position.
ii. TIMES INTEREST EARNED RATIO OR INTEREST COVERAGE RATIO
Formula:





It is a coverage ratio reflecting the cover available for the interest burden. It is used to
determine how easily a company can pay interest expenses on outstanding debt. The lower
the ratio, the more the company is burdened by debt expenses.
Higher is the ratio, better is the company in a position to off the interest on outstanding
debt.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~45~
iii. LONG-TERM DEBT-TO-EQUITY RATIO
Formula:





It is another leverage ratio that compares a companys long-term liabilities to its
shareholders equity or net worth.
The lower the ratio, the less leverage a company is using and stronger is its equity
position.
iv. CAPITALIZATION RATIO
Formula:





It measures the debt component of a companys capital structure (i.e. sum of the long-term
debt and shareholders equity) to support a companys operations and growth. This ratio is
considered to be one of the more meaningful of the leverage ratios as it delivers the key
insight into a companys use of leverage.
The lower the ratio, the less leverage a company is using and stronger is its equity
position.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~46~

v. OWNERS FUND AS A PERCENTAGE OF TOTAL SOURCE
Formula:





It is a ratio similar to capitalization ratio.
The higher the ratio, the less leverage a company is using and stronger is its equity
position.
3. TURNOVER RATIOS
It is also referred to as asset management ratios, measure how efficiently the assets are
employed by the firm.
Activity ratiosfor the most part, turnover ratioscan be used to evaluate the benefits
produced by specific assets, such as inventory or accounts receivable or to evaluate the
benefits produced by the totality of the firms assets.
In common parlance it is understood in the financial world that the better (higher) this
ratio better is the financial health of the company.
i. INVENTORY TURN OVER RATIO
Formula:








Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~47~

It reflects the efficiency of inventory management. The inventory turnover ratio indicates
how quickly a firm has used inventory to generate the goods and services that are sold.
Higher the ratio, higher is the efficiency of inventory management in a company.

ii. RECEIVABLES TURN OVER RATIO
Formula:



()

In much the same way we evaluated inventory turnover, we can evaluate a firms
management of its accounts receivable and its credit policy. The accounts receivable
turnover ratio is a measure of how effectively a firm is using credit extended to customers.
The reason for extending credit is to increase sales. The downside to extending credit is the
possibility of defaultcustomers not paying when promised. The benefit obtained from
extending credit is referred to as net sales.
Higher is the ratio, higher is the efficiency of receivables management by the company.

iii. FIXED ASSET TURNOVER RATIO
Formula:





Fixed assets here involve namely the property, plant and equipments.
Higher is the ratio, higher is the efficiency of fixed asset utilization by the company.

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~48~

iv. TOTAL ASSETS TURNOVER RATIO
Formula:





The inventory and accounts receivable turnover ratios reflect the benefits obtained from the
use of specific assets (inventory and accounts receivable). For a more general picture of the
productivity of the firm, we can compare the sales during a period with the total assets that
generated these sales.
One way is with the total asset turnover ratio which tells us how many times during the
year the value of a firms total assets is generated in sales.
Higher is the ratio, higher is the overall efficiency of asset management in the company.
4. PROFIT MARGIN RATIOS
It reflects the relationship between (defined variously) and sales and are usually expressed
in percentages. It gives a good understanding of how well the company utilized its resources
in generating profit and shareholder value. The long term profit of the company is vital for
both the survivability of the company as well as the benefit received by shareholders. They
give us an idea of which factors make up a firms income and are usually expressed as a
portion of each rupee of sales. For example, the profit margin ratios we discuss here differ
only in the numerator. Its in the numerator that we can evaluate performance for different
aspects of the business.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~49~

i. GROSS PROFIT MARGIN RATIO
Formula:





Suppose the analyst wants to evaluate how well production facilities are managed. The
analyst would focus on gross profit (sales less cost of goods sold), a measure of income that
is the direct result of production management.
This ratio tells us the portion of each rupee of sales that remains after deducting production
expenses.
ii. OPERATING PROFIT MARGIN RATIO
Formula:





To evaluate operating performance, we need to consider operating expenses in addition to
the cost of goods sold. To do this, we remove operating expenses (e.g., selling and general
administrative expenses) from gross profit, leaving us with operating profit, also referred to
as earnings before interest and taxes (EBIT).


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~50~

iii. PRE-TAX PROFIT MARGIN RATIO
Formula:





iv. NET PROFIT MARGIN RATIO
Formula:





Both the gross profit margin and the operating profit margin reflect a companys operating
performance. But they do not consider how these operations have been financed. To
evaluate both operating and financing decisions, we need to compare net income (that is,
earnings after deducting interest and taxes) with sales.
The various profit margin ratios reflect profit margins at successive stages. At the final stage,
we have post-tax profit margin ratio referred to more commonly as net profit margin ratio,
which measures the overall effectiveness of production, administration, selling, financing
and tax management.
These ratios provide a valuable understanding of the cost and profit structure of the firm
and enables analyst to identify the sources of business efficiency/inefficiency.
Higher is the value of these ratios, better is the position of the company in terms of
utilizing its resources in generating profit.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~51~
v. RETURN ON ASSETS
Formula:





It indicates how profitable a company is relative to its total assets. It illustrates how well
management is employing the companys total assets to make profit.
The higher the ratio, the more efficient management is in utilizing its assets base.
vi. RETURN ON NETWORTH
Formula:





It measures how much the shareholders earned for their investment in the company.
The higher the ratio, the more efficient management is in utilizing its equity base and the
better return is to investors.
vii. RETURN ON CAPITAL EMPLOYED
Formula:





Capital employed= Long term debt + Net worth


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~52~
This measure narrows the focus to gain a better understanding of a companys ability to
generate returns from its available capital base. It also depicts how the use of leverage
impacts a companys profitability. It is a more comprehensive profitability indicator because
it gauges managements ability to generate earnings from a companys total pool of capital.
The higher the ratio, the more efficient management is in utilizing its total pool of capital
base to generate earnings.

5. RETURN ON INVESTMENT RATIOS
It reflects the relationship between profit and investment. Return on investment ratios
makes a lot of economic sense. Return-on-investment ratios compare measures of benefits,
such as earnings or net income, with measures of investment.
i. RETURN ON ASSETS
Formula:





It measures the overall efficiency of capital invested in the business. If you want to evaluate
how well the firm uses its assets in its operations, you could calculate the return on assets.
The higher the ratio, the more efficient management is in utilizing its assets base.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~53~

ii. EARNING POWER
Formula:





It focuses on operating performance and is not influenced by the financial leverage and tax
structure. This measure deals with earnings from operations; it does not consider how these
operations are financed.
The higher the ratio, the more efficient management is in utilizing its assets base.
iii. RETURN ON EQUITY
Formula:





It measures the productivity of funds by equity shareholders. If we look at the information
as investors, we may not be interested in the return the firm gets from its total investment
(debt plus equity), but rather shareholders are interested in the return the firm can generate
on their investment. The return on equity is the ratio of the net income shareholders receive
to their equity in the stock.
The higher the ratio, the more efficient management is in utilizing its equity base and the
better return is to investors.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~54~

6. VALUATION RATIOS
It indicates how the equity stock of the company is assessed in the capital market. Since the
market value of equity reflects combined influence of risk and return, the valuation ratios
may be deemed as the most comprehensive measure of a firms performance.
i. EARNINGS PER SHARE
Formula:






This figure tells us what profit has been earned by the common shareholder for every share
held.
It serves no purpose to compare the earnings per share in one company with that in another
because a company can elect to have a large number of shares of low denomination or a
smaller number of higher denominations. A company can also decide to increase or decrease
the number of shares on issue. This decision will automatically alter the earnings per share.
While the absolute value of earning per share tells nothing about a companys performance,
the growth in EPS over time is a very important statistics.
Growth in EPS tells us more about a companys progress than growth in absolute profits.
Growth in profits can result from great many things. For instance, a company could acquire
another for shares and thereby increase its profits. However, if the percentage increase in
profits is less than the percentage increase in number of shares, EPS will fall even with
higher profits.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~55~
Growth in EPS has a significant influence on the market price of the share. Not only is
the growth important but also its stability. A high quality rating is given to earnings that
are showing steady, non-volatile growth.
ii. DIVIDENDS PER SHARE
Formula:





The total return to the shareholder over time consists of the dividend received plus the
growth in share price. While for some investors growth is important, many shareholder and
potential investors pay very close attention to dividends.
Companies dislike having to reduce the dividend because this will drive away investors
with possibly serious effects on share price.
iii. PRICE-EARNINGS RATIO
Formula:





It primarily reflects growth prospects, risk characteristics, shareholder orientation, corporate
image and degree of liquidity.
The company has no direct control over the ratio. It may influence it over the short term by a
good public relations exercise. In the long run, however, it must deliver a good return to the
equity shareholder to secure a continued high rating.

Higher value of ratio indicates that the stock of the company is assessed high in the
capital market, showing better performance of the company. The wealth of the companys

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~56~
owners is increased in proportion. New funds can be raised at favorable price. The
possibility of a successful hostile takeover bid is much reduced. Most importantly, the
company has the means to make acquisitions on a favorable term by using papers
(shares) as opposed to cash.
iv. YIELD
Formula:





Yield, reflecting the rate of return on the equity stock, may be split into two parts:
Dividend/Initial price + Price change/Initial price
(Dividend yield) (Capital gains yield)
Higher value of ratio indicates better performance of the company which results in the
stock of the company being assessed high in the capital market.
v. MARKET PRICE TO BOOK VALUE RATIO
Formula:










It shows the value that the market places on every rupee of book investment in the
company.
Higher is the ratio, better it is for the company.

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~57~
vi. DIVIDEND PAY-OUT RATIO
Formula:





Companies adopt dividend policies to suit their business needs. Fast growing companies
have a great need for cash and they pay out little. On the other hand stable low growth
companies pay out a high percentage of earnings. Public utility companies are noted for
high stable payout policies. They are therefore very popular with the investors for whom
income is the main consideration.
On the other hand, some computer companies have never paid out dividend, even though
have made large profits over many years. These companies attract investors who look for
capital growth.
The importance of the dividend pay-out ratio is the indication it gives of the future
growth of the dividend:
A low pay-out ratio suggests that the dividend is fairly safe, because it can
be maintained in the face of any unexpected downturn in the profit.
A low pay-out also indicates a high retention policy, which suggests that
the company is aiming at high growth.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~58~

7. OPERATING PERFORMANCE RATIO

These ratios give the measure of effectiveness with which a company converts its
sales into cash and thus increases shareholders value.
Higher is this ratio, better is the financial health of the company.
i. FIXED ASSET TURNOVER RATIO
Formula:





Fixed assets here involve namely the property, plant and equipments.
Higher is the ratio, higher is the efficiency of fixed asset utilization by the company.
ii. SALES REVENUE TO EMPLOYEE RATIO
Formula:





A labour intensive company will have a lower value for this ratio when compared with a
capital intensive company. Therefore one should either compare historical data of the firm
or compare the ratio of two similar companies.
Higher is the value of the ratio, higher is the efficiency of utilization of labour force of the
company.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~59~

8. OPERATING CYCLES
Liquidity depends not just on the size of the current assets. The composition and the quality
of the current assets affect the liquidity. How liquid are the debtors? The ratio used to assess
the quality or the liquidity of debtors is called debtors turnover.
Formula:





Debtor turnover ratio can also be determined in terms of days: debtor days or average
collection period. The ratio in days will show the number of days of sale remaining in the
form of debtors.

Formula:





Is the company having slow moving inventory? Can the company convert inventory into
sales as when required to meet the short term liabilities? These questions can be answered
partly by the inventory turnover ratio. Inventory turnover shows relationship between
inventory and sales.
Formula:







Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~60~
Conventionally, higher the ratio better is the quality of inventory or better is the liquidity
position of the company
Inventory turnover can also be calculated in terms of days.
Formula:





Operating cycle represents the time take for converting the stock into cash. It represents the
working capital cycle. It is also defined as the average time between purchasing inventory
and receiving cash from its sale. It shows how long cash gets stuck in receivables and
inventory.
Formula:
Operating Cycle = Debtor day + Inventory Days Creditor days
Lower is the operating cycle; lower is the time between purchasing inventory and
receiving cash from its sale and better it is for the efficiency of the company.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~61~
ACCOUNTING OF OMC TRANSACTIONS

After the dismantling of Administered Price Mechanism (APM) on 1.4.2002, the heads of the
OMC companies happen to meet at headquarters every fortnightly and settle the prices of
the various goods that are needed to be transacted. Some of the details of the accounting
procedures that are being followed are written next.
The various companies that are involved are as follows:-
a) IOCL, their successors and assigns
b) BPCL, their successors and assigns
c) HPCL, their successors and assigns
d) IBP (now a division of IOCL)


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~62~

2.1 PRODUCTS INVOLVED
The major products that are involved in the OMC transactions are:
Motor Spirit (MS)
High Speed Diesel (HSD)
Superior Kerosene Oil (SKO) for Public Distribution System(PDS)
Aviation Turbine Fuel (ATF)
Liquefied Petroleum Gas (LPG) for domestic consumption
2.2 DETERMINATION OF QUANTITY
All the measurements for the purpose of billing are done on the basis of volume determined
at 15
0
degree C for MS, HSD, SKO and on weight basis for LPG i.e. MT (Metric Ton).
Products can be purchased directly from refineries or upcountry locations, and moved
coastally to destinations by one OMC and if stored in other OMC terminals due to lack of
storage problem treated on safe keeping accounts as mutually agreed.
2.3 PRICING ELEMENTS
The comprehensive list of pricing elements can be had from the Appendix of price elements.
Major ones are described below:-
2.3.1 Refinery Transfer Price (RTP)

The RTP is the price at which the marketing division gets the products from the
refinery division. As refinery division is a separate profit center, the refinery margins
are included in the RTP.

All the inland refineries of the Indian Oil are attached to a port refinery. For the
purpose of accounting of OMC transactions, the RTP of the port refinery that is

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~63~
attached to the inland refinery is being charged. This concept is known as the Import
Parity Price (IPP). The port refinerys RTP is same as that of its IPP. For a detailed
knowledge of the inland and port refineries, please refer to the Appendix. Some
details are also given below.
Refinery Transfer Price (basic price)LPG:-
It is in line with the import parity price as advised by Head Office pricing
from time to time and the same is being governed by relevant clauses of agreement.

2.3.2 Terminal ling charges (for MS , HSD and SKO)
In addition to the basic price, terminal ling charges as per the rates given below is
paid to assisting OMC and their owned/ associate/ JV refineries for usage of
facilities by assisted OMC for rail/road and pipeline dispatches.

Table 1: Terminal ling charges
For Products other than LPG
Mode of delivery Rs./MT
Rail / Road dispatches 96.39
Pipeline dispatches 27.92
Local pipeline transfers 15.00

(Source: Self Generated)




Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~64~
2.3.3 Excise Duty, Taxes and Other Statutory levies
Local sales tax payable on sales/purchase transactions if any will be paid by the
assisted company to the assisting company on the due date of payment as per
applicable sales tax laws.
Settlement of irrecoverable taxes and CST between the OMCs is governed by the
scheme of Govt. of India.
In OMC transactions, various other taxes are also there such as VAT (Value Added
Tax), GST (Goods & Services Tax) and other service taxes. For the current rates, refer
to Appendix. For a typical debt note refer appendix.
As regards the CST element on Inter Oil Company transactions wherever involved,
necessary liability will be created on provisional basis for oil companies and the
same will be projected provisionally as under recovery under under/over recovery
CST-OMC transactions. Likewise, any CST payment made by IOCL on sale of
product to OMCs shall be booked as receivable from the respective oil companies.
Any other irrecoverable levies involved and incurred by IOCL on OMC transaction
is accounted under irrecoverable levies OMC transactions.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~65~
2.4 ACCOUNTING OF LPG BULK RECEIPTS

The accounting procedure for LPG is quite different from that of other products.
Some important concepts in this regard are being discussed below:
By Road:-
The quantity of the product received by the operating company by tank
Lorries will be determined by weighing the full and empty tank Lorries and the
difference in the weights shall constitute the weight of the net product received. Any
shortages observed will be recorded on the reverse of the tank lorry invoices and the
vehicle drivers signature will be obtained. Transit losses are to be borne / settled by
the assisted company / operating company who moves the product.
By Rail:-
The receipt by tank wagons will be accounted for on the basis of dispatch document
quantity less 0.15% stock loss (lump sum) on account of transit losses.
By Pipeline:-
The receipt by pipeline is accounted as per the mass flow meter installed at
operating company bottling plant. The accuracy of the mass flow meters would be
+/- 0.05% or the accuracy as mutually agreed with the pipeline service provider
whichever is higher. The mass flow meters would be stamped by weights &
measures dept. of the respective states.



Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~66~

Terminal ling charges:
LPG:-
Refineries commissioned prior to 01.04.1998 : Rs. 208/- per MT
Refineries commissioned post to 01.04.1998 : Rs. 313/- per MT


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~67~
IMPACT OF OMC TRANSACTIONS ON IOCL

Although the net effect on the economy as a whole of the OMC transactions is nil
due to the fact that when one company is assisted from incurring losses then the
other assisting company is providing its services to the assisted company. But this
effect when is seen in isolation for each company is different. This difference is
pertaining to the difference in the infrastructure that the company have and the
market share it possess. Thus, taking the view of IOCL, the effect is also not nil. This
chapter deals with the calculation of impact of OMC transactions in Delhi state
locations that is there for the last quarter of the year 2008-2009. This chapter also
deals with the in-depth analysis of the product wise profitability when it is sold
through the OMC route as compared to retail route.
3.1 DATA COLLECTED
For the purpose of analysis only the marketing locations of Delhi state is selected,
studied and analyzed. Actually the whole India operations are divided into 8 state
offices, namely, Delhi state office, UP state office1, UP state office 2, Gujarat state
office, Rajasthan state office, Punjab state office, Karnataka state office and Andhra
state office. The states that come under Delhi zone are Delhi and Haryana.
The locations that come under Delhi are:-
Location Code
Bijwasan 119
Shakur Basti 124
Palam AFS 141
NITC Palam 640


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~68~
The RTP for these areas are that of Mathura refinery. This is due to the fact that these
areas are linked to the nearest refinery, Mathura and all the products come at these
locations from that refinery only. But the Import Parity Price (IPP) of these locations
corresponds to the RTP of Kandla port. This is due to the fact that the billings of the
OMC transactions are done at IPP, which is just the same price at which the product
must have been imported from third party. The ATF is not accounted by this
mechanism. For ATF, the RTP of the inland refinery itself is the IPP.
LOCATION RTP IPP
BIJWASAN MATHURA KANDLA
SHAKUR BASTI MATHURA KANDLA
PALAM AFS MATHURA MATHURA
NITC PALAM MATHURA MATHURA



Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~69~
3.2 PRODUCT WISE IMPACT ANALYSIS
The products that were transacted through OMC at Delhi locations in the time period of last
quarter of 2008-09 are:-
Aviation Turbine Fuel (ATF)
SKO (Superior Kerosene Oil)
Euro-III MS (Motor Spirit)
BS-III HSD (High Speed Diesel)

Aviation Turbine Fuel (ATF)
Product code is 32. The quantities of ATF that is being transacted through the OMC
route is tabulated below:-

DISPATCH LOCATION DURATION QUANTITY (IN KL)
BIJWASAN 1-15 JAN 09
35413.708
16-31 JAN 09
40906.774
1-15 FEB 09
36513.309
16-28 FEB 09
26003.535
1-15 MAR 09
36555.195
16-31 MAR 09
43106.928
(Source: Self Generated)

For the location Bijwasan, the RTP is the RTP of Mathura refinery and Import Parity
Price is that of Kandla refinery. For Palam AFS and NITC Palam, who majorly deals
with the ATF, the RTP as well as IPP of their products is the RTP of Mathura
refinery. Thus, the following table depicts the various rates that prevailed.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~70~
PRODUCT DURATION RTP (MATHURA)
ATF 1-15 JAN 09
19049.87
16-31 JAN 09
19049.87
1-15 FEB 09
19396.91
16-28 FEB 09
19396.91
1-15 MAR 09
17340.94
16-31MAR09
17340.94
(Source: Self Generated)
With the help of the data that is refined above, profit/loss that was incurred through
OMC transactions was calculated. The cost is given in the table. The selling price is
the IPP of that particular location, as all the billings are done in the IPP as per the
agreement.

PRODUCT

DURATION PROFIT/(LOSS) on (TOTAL QTY.)
ATF JAN 09
(242785374.905)

FEB 09
226492899.296

MAR 09
159160142.027

TOTAL PROFIT/(LOSS)
142867666.418

(Source: Self Generated)
Thus, the total profit that is being generated in Jan-march of 2009 in the Delhi
locations for ATF amounts to Rs. 142867666.418

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~71~

SUPERIOR KEROSENE OIL
Product code is 40. The quantities of SKO that is being transacted through the OMC route is
tabulated below:-
DISPATCH LOCATION

DURATION QUANTITY (IN KL)
BIJWASAN

1-15 JAN 09 1102.507


16-31 JAN 09 -


1-15 FEB 09 1308.448


16-28 FEB 09 1773.554


1-15 MAR 09 954.079


16-31 MAR 09 602.622
(Source: Self Generated)




Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~72~

The following table depicts the various rates that prevailed.
PRODUCT

DURATION RTP (MATHURA) RTP (KANDLA) COST (PER KL)
SKO

1-15 JAN 09
20,048.99 19325.84 23313


16-31 JAN 09
20,048.99 19325.84
23313


1-15 FEB 09
19,620.62 18897.47 16392


16-28 FEB 09
19,620.62 18897.47
16392


1-15 MAR 09
17,571.87 16848.72 15634


16-31 MAR 09
17,571.87 16848.72
15634
(Source: Self Generated)
With the help of the data that is refined above, profit/loss that was incurred through
OMC transactions was calculated. The cost is given in the table. The selling price is
the IPP of that particular location, as all the billings are done in the IPP as per the
agreement. The calculations are shown below in a concise manner:-


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~73~
PRODUCT DURATION PROFIT/(LOSS)
(TOTAL QTY.)
SKO

1-15 JAN 09
(3598593.873)



16-31 JAN 09
-



1-15 FEB 09
4224481.382



16-28 FEB 09
5726131.915



1-15 MAR 09
1848881.072



16-31 MAR 09
1167803.095

TOTAL PROFIT/(LOSS)


9368703.591

(Source: Self Generated)
Thus, the total profit that is being generated in Jan-march of 2008 in the Delhi
locations for SKO amounts to Rs.47954365.18.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~74~
EURO-III MS
Product code is 625. The quantities of EURO-III MS that is being transacted through
the OMC route is tabulated below:-
DISPATCH LOCATION

DURATION QUANTITY (IN KL)
BIJWASAN

1-15 JAN 09 8777.02


16-31 JAN 09 17143.126


1-15 FEB 09 4982.446


16-28 FEB 09 14874.784


1-15 MAR 09 -


16-31 MAR 09 11373.731
(Source: Self Generated)



Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~75~

The following table depicts the various rates that prevailed.
PRODUCT

DURATION RTP (MATHURA) RTP (KANDLA) COST(PER KL)
EURO-III MS

1-15 JAN 09 13,245.83

12415.2

15952



16-31 JAN 09 14,211.83

13381.2

15952



1-15 FEB 09 16,955.35

16124.72

14757



16-28 FEB 09 18,250.13

17419.5

14757



1-15 MAR 09 18,344.22

17513.59

15791



16-31 MAR 09 17,644.41

16813.78

15791

(Source: Self Generated)
With the help of the data that is refined above, profit/loss that was incurred through
OMC transactions was calculated. The cost is given in the table. The selling price is
the IPP of that particular location, as all the billings are done in the IPP as per the
agreement. The calculations are shown below in a concise manner:-


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~76~

PRODUCT

DURATION PROFIT / (LOSS) (TOTAL QTY.)
EURO-III MS

1-15 JAN 09 (23752108.213)



16-31 JAN 09 (29831953.571)



1-15 FEB 09 10953160.164



16-28 FEB 09 51959554.234



1-15 MAR 09 -



16-31MAR09 21080186.773

TOTAL PROFIT/(LOSS)

30408839.386

(Source: Self Generated)
Thus, the total profit that is being generated in Jan-march of 2009 in the Delhi
locations for EURO-III MS amounts to Rs. 30408839.386


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~77~

BS-III HSD
Product code is 636. The quantities of BS-III HSD that is being transacted through
the OMC route is tabulated below:-
DISPATCH LOCATION

DURATION QUANTITY (IN KL)
BIJWASAN

1-15 JAN 09 11927.116


16-31 JAN 09 16493.587


1-15 FEB 09 9954.825


16-28FEB 09 12378.061



1-15 MAR 09 10956.824
16-31 MAR 09 5929.812

(Source: Self Generated)



Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~78~

The following table depicts the various rates that prevailed.
PRODUCT

DURATION RTP
(MATHURA)
RTP
(KANDLA)
COST
(PER KL)
BS-III HSD

1-15 JAN 09
20,211.71

19236.02

24031



16-31 JAN 09
20,791.49

19815.8 24031



1-15 FEB 09
19,479.08

18503.39

15708



16-28FEB 09
17,698.97

16723.28

15708



1-15 MAR 09
16,606.96

15631.27

15404



16-31 MAR 09
17,640.81

16665.12 15404

(Source: Self Generated)



Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~79~

With the help of the data that is refined above, profit/loss that was incurred through
OMC transactions was calculated. The cost is given in the table. The selling price is
the IPP of that particular location, as all the billings are done in the IPP as per the
agreement. The calculations are shown below in a concise manner:-
PRODUCT DURATION PROFIT/(LOSS)
(TOTAL QTY.)
BS-III HSD

1-15 JAN 09 (45553114.868)



16-31 JAN 09 (53431140.022)



1-15 FEB 09 37540441.461



16-28FEB 09 24644348.109

1-15 MAR 09

13180620.999

16-31 MAR 09

13263862.780

TOTAL PROFIT/(LOSS)

(10354981.541)

(Source: Self Generated)
Thus, the total Loss that is being generated in Jan-march of 2009 in the Delhi
locations for BS-III HSD amounts to Rs. (10354981.541)


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~80~
3.3 RETAIL Vs OMC ANALYSIS
The two options that the company have in front of them are firstly, through OMC or
secondly through the retail route. Indian oil sells the goods and services to OMCs at
almost par. But as the petroleum sector is under the regulation of the government,
the retail rates are subsidized so as to keep the burden away from the general public.
Thus, it is imperative to calculate the difference of profit/loss by the way of above
mentioned routes. For the purpose of simplicity, the average retail price for major
products is compared to the average OMC selling price and hence a net profit or loss
figure (approximate) is calculated.
The following are the Ex-depot rates (of March 09) of the Bijwasan terminal:-
Product RTP Ex-depot Cost Profit/loss
OMC Retail
ATF 18,447 19,733 17,952 494 1,781
BS III HSD 18,820 21,220 18,511 309 2,709
EURO III MS 17,272 19,764 16,165 1,106 3,598
SKO 20,111 8,035 18,821 1,290 -10,785
(Source: Self Generated)
Thus from the above made analysis it is clear that the OMC sales are more profitable
to the company as compared to the retail sales.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~81~
Petroleum Product Pricing in India
4.1 Administered Price Mechanism
The country has traditionally operated under an Administered Pricing Mechanism
for petroleum products. The oil companies were told how much to sell and at what
price i.e. the prices as well as the quantity sold was administered/regulated by the
government. This system is based on the retention price concept under which the oil
refineries, oil marketing companies and the pipelines are compensated for operating
costs and are assured a return of 12% post-tax on net worth. Under this concept, a
fixed level of profitability for the oil companies is ensured subject to their achieving
their specified capacity utilisation. Upstream companies, namely ONGC, oil and
GAIL, are also under retention price concept and are assured a fixed return.
The administered pricing policy of petroleum products ensures that products used
by the vulnerable sections of the society, like kerosene, or products used as
feedstocks for production of fertilizer, like naphtha, may be sold at subsidized
prices.
To get a clearer picture let us take a quick look at the selling mechanism of the four
main petroleum products used in India - petrol, diesel, kerosene and LPG.
4.1.1 Petrol (motor spirit)
Earlier, due to government control, price of petrol was always higher than that of
other fuels (like diesel). Petrol prices have been kept at Rs 33 per litre while for diesel
it stands at Rs 17 per litre.
Further, over the years, both petrol and diesel have been amongst the highest taxed
of all commodities through state-related sales tax and customs and excise duties.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~82~
All these factors have led to an overall higher consumption and usage for diesel
compared to petrol. Petrol accounts for a sale of 9.3 m tonnes though margins on sale
of petrol are higher than that of diesel.
4.1.2 (High speed) diesel
This is the highest selling amongst the fuels accounting for 85 per cent of the
automotive fuels.
Sales are through two forms - at the wholesale level to state-owned corporations like
the railways and transport companies, and secondly through retail pumps to heavy
commercial vehicles and the agricultural sector.
This is the market, which has caught the eye of most of the leading domestic and
international oil companies, where they visualize greater expansion.
2.4.1 Superior Kerosene Oil (Kerosene)
This is sold through the public distribution system (PDS) of various state
governments and through retail sales outlets. Because of its wide-scale usage the
government has and will continue the subsidy for the PDS kerosene.
2.4.2 LPG (Liquefied Petroleum Gas)
This is one of the fastest growing segments for oil companies and the consumer base
and the distribution/penetration of the product is growing over the years.



Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~83~

4.2 Mentioned below are some objectives of APM:-

1. To optimize the utilisation of refining and marketing infrastructure by
treating the facilities of all oil companies as common industry infrastructure,
the access of which would be available to oil companies by hospitality
arrangements, thus eliminating wasteful duplication of investment.
2. To make available all products at uniform price ex-all refineries so as to
minimise cross-haulage of products and associated energy costs.
3. To ensure continuous availability of products/crude to refiners by
recognising import needs wherever there are deficits in indigenous
production.
4. To ensure that the returns to oil companies are reasonable, in line with
operational efficiencies as also generation of sufficient resources to enable the
industry to set up facilities to meet the growing needs.
5. To ensure stable prices by insulating domestic market from the volatility of
prices in the international market.
6. To achieve socio-economic objectives of the government by ensuring
availability of certain products at subsidised rates for weaker sections of the
society and priority sectors in the industry through cross-subsidisation of
products.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~84~

4.3 Dismantling of APM
On 1 April 2002, the Administered Pricing Mechanism (APM) for petroleum
products was abolished as part of the continuing reform of the petroleum sector
towards a sector based on market mechanism. In theory, Indias public downstream
oil companies would now be free to set retail prices of all petroleum products based
on an international parity pricing formula under the supervision of a petroleum
sector regulator. The Government would abstain from influencing petroleum
product pricing. Up to then, prices were controlled (or administered) for two
transport fuels, petrol and high speed diesel, and two cooking fuels, kerosene and
LPG.
Now the prices for kerosene & LPG are determined on the basis of import parity
prices & for petrol & diesel, it is determined on the basis of trade parity pricing
model. In a situation where there is no domestic manufacture of a product, the cost
of supplying it in the domestic market would be the landed cost, which would be the
import parity price, i.e. the international price plus the insurance and freight cost
plus the customs duty. In a situation (as in India) where there is domestic
manufacture, the import parity price can be taken as the international competitive
price that sets the ceiling for the domestic price. Notional charges are taken as $2/bbl
which includes the free on board price, ocean freight, insurance, exchange rates,
customs duties, losses during transit and port charges. The import parity principle,
in effect, enables Indian refining companies to import at inflated prices, which bear
no relation to the actual cost of production in the country. The notional method of
pricing petroleum products overstates the losses of OMCs. It is important to
differentiate between oil companies losses and under-recoveries. The latter is
purely related to the notional price that the companies would charge if they were
free to do so. The trade-parity pricing model for diesel and petrol is the weighted
average of the import parity and export parity prices in the ratio of 80:20. Trade

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~85~
parity pricing takes into account the emergence of India as an exporter of products
like petrol and diesel.
Oil companies buy petroleum products from their own refineries on a trade-parity
basis, which to a large extent reflects global prices. However, the government
regulates the sale of petroleum products in India and the PSU oil marketers are
compelled to sell their products below cost. However, under the current subsidy
mechanism, the government compensates for almost 76% of the losses by way of oil
bonds and discounts from the upstream oil firms namely, ONGC, GAIL and OIL
leaving 24% to be borne by the oil firms. The government has been issuing special oil
bonds at various intervals to the oil marketing Companies (OMCs) in lieu of the
under-realisation on sale of sensitive petroleum products.
4.4 Under recoveries of Oil Marketing Companies
Under recoveries by the Oil Marketing Companies (OMCs) have been rising with the
spiraling crude prices. The following table shows the data for the past few years
showing the amount of under recoveries on different petroleum products.
Under Recovery 2004-05 2005-06 2006-07 2007-08
PDS Kerosene 9480 14384 17883 19102
Domestic LPG 8362 10246 10701 15523
Petrol 150 2723 2027 7332
Diesel 2154 12647 18776 35166
Total 20146 40000 49387 77123
(Source: Self Generated)



Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~86~

This year, State-run Indian Oil Corporation (IOC), Hindustan Petroleum
Corporation (HPCL) and Bharat Petroleum Corporation (BPCL) together are
reported to lose Rs1,03,908 crores on fuel sale in fiscal 2008-09. OMCs are currently
losing Rs 0.5 on every litre on petrol they sell, Rs 32 per 14.5 kg domestic LPG
cylinder and Rs 12 per litre on PDS kerosene. However, Diesel is earning a surplus of
Rs 3 per liter.



Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~87~

4.5 Mechanism for sharing under recoveries
Shared by 2005-06 2006-07 2007-08 2008-09
Upstream Companies 127.45 205.00 239.12 320.00
Issue of Oil Bonds 115.00 241.2 306.62 709.67
Refinery discounts 44.00 9.2 53.16 -
Total 286.45 455.40 545.74 1029.67
Net under recovery (Borne by OMCs) 113.55 38.45 172.33 9.41

(Source: Self Generated)

4.6 Impact of crude oil prices on under recoveries
After a brief honeymoon with over-recoveries on sale of petrol and diesel, the
countrys oil marketing companies are back to square one, reporting under-
recoveries on the sale of these subsidized products.
From an over-recovery of as high as Rs 12.35 on a litre of petrol and Rs 2.70 on diesel
in the first fortnight of December 2008, the OMCs are back to reporting under-
recoveries on petrol at Rs 1.40 and a marginal over-recovery of 0.80 paise on sale of
diesel currently.
While margins on petrol remained flat in February, diesel was fetching positive
margins of Rs 4.35 to the OMCs. However, these margins were eroded when crude
oil spiked to an average $46.02 per barrel in March, from $43.22/barrel in February.
The companies are still making losses of Rs 9 per litre on sale of kerosene and Rs 117
per cylinder of on sale of per cylinder of liquefied petroleum gas (LPG).

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~88~
However, it is considered that the over-recovery or under-recovery did not impact
the company as long as the government issued adequate bonds to cover up such
losses.
While these companies are required to sell petrol, diesel, LPG and kerosene at
subsidised rates, the losses incurred in the process get compensated through grants
of government bonds.
Crude oil was trading around $40 per barrel in January against $35 in December
2008. The Indian crude basket price has averaged $50.87 per barrel in April,
compared with $46.02 in March.
However, OMCs are deriving solace from that fact that their daily under-recoveries
have fallen from close to Rs 500 crore per day in April 2008 to Rs 60 crore a day in
April 2009 an 88 per cent decrease.
Starting with a projected under-recovery of Rs 2,45,000 crore at the beginning of the
financial year 2008-09, the OMCs closes the year with Rs 1,03,908 crore a decrease
of approx. 57 per cent. However, they have been compensated with Rs 70,967 crore
in the form of government bonds, while another Rs 32,000 crore have been absorbed
by the upstream companies.
The average Crude Oil price has hardened in the past couple of months. The average
price was at $ 43 per barrel in February, $47 per barrel in March, $51 per barrel in
April and $54 per barrel in May. Current under-recoveries are Petrol Rs 0.5 per liter,
Kerosene Rs 12 per liter, LPG Rs 32 per cylinder. However, Diesel is earning a
surplus of Rs 3 per liter.
Thus, it can be said that the OMCs could continue to report under-recoveries as long
as crude prices rule above $45 per barrel.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~89~

4.7 Price Gap
Crude oil accounts for some 90 per cent of the cost of production of refined
petroleum products, it is to be expected that crude and retail product prices move in
tandem. However, the Indian retail prices are not fully reflective of the changes in
crude prices, as the data in Table below demonstrate.
As of March Crude oil price per barrel*(in $) Retail price per litre, in Delhi (in Rs.)
2005 43.47 43.23
2006 60.30 49.16
2007 65.93 49.53
2008 86.58 50.51
2009 46.02 40.47
* London (Brent) price
If we go by the 2005 and 2008 prices changes, the change in crude price [86.58
(2008)/43.47(2005)] would imply a present Indian retail price of 2 x the price in 2002,
or a little less than Rs 86, which is way above the current Rs 50.51. Also if we
compare the crude prices of 2005 and 2009, the change in the crude prices
[46.02(2009)/43.47(2005)] would imply a present retail price of 1.06 x the price of
2005, i.e. nearly equal Rs. 45.58 which is above the current price of Rs. 40.47 .
Also in 2005, the retail price was Rs. 43.23 as against the crude oil price of
43.47$/barrel which in a way is higher than the current retail price of Rs. 40.47
against the crude oil price of 46.02$/barrel.



Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~90~
Therefore, despite the Government announcement to dismantle the Administered
Price Mechanism (APM) effective from April 2002, Government is still controlling
the prices of petrol, diesel, PDS kerosene and domestic LPG.
Despite tremendous changes in international oil prices, the Government has not
increased prices of kerosene sold under the public distribution system and cooking
gas. The Government has only brought a marginal change in petrol and diesel prices.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~91~
4.8 Past trend v/s present scenario
The past formula specifies that the government would issue oil bonds worth 42.7%
of the losses while 33.3% would be borne by upstream companies, and the remaining
24% by the OMCs.
However, the government has now increased (applicable for FY 2008-09) the
proportion of oil bonds to 57%, against the past 42.7% of the under-recoveries, along
with granting SLR status to the bonds, to reduce the burden borne directly by
OMCs. The under-recoveries by the oil companies were Rs 718.08bn for 2007-08.
Based on the past burden-sharing formula, the government issued bonds worth Rs
306.62bn.


(Source: Self Generated)
Oil Bonds
43%
Upstream
Companies
33%
OMC
24%
Past trends of sharing under recoveries
Oil Bonds
43%
Upstream
Companies
33%
OMC
24%
Present mechanism of sharing under
recoveries

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~92~
However, looking at the figures of FY 2008-09, it can be seen that the government
has issued oil bonds more than the decided proportion of 57%. Also the burden
borne by the upstream companies as well as the OMCs was less than the decided.
This way government came to the rescue of OMC helping them reduce their losses.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~93~
Profit & Loss account ------------------- in Rs. Cr. -------------------
Income Mar '04 Mar '05 Mar '06 Mar '07 Mar '08
Sales Turnover 1,33,911.1
1
1,53,588.5
2
1,93,216.8
8
2,38,348.3
7
2,70,402.3
0
Excise Duty 17,022.57 14,374.20 18,321.76 21,849.52 23,051.25
Net Sales 1,16,888.5
4
1,39,214.3
2
1,74,895.1
2
2,16,498.8
5
2,47,351.0
5
Other Income 1,494.67 1,197.76 1,605.16 3,810.01 3,136.73
Stock Adjustments 728.72 1,653.90 2,599.33 -180.73 1,958.09
Total Income 1,19,111.9
3
1,42,065.9
8
1,79,099.6
1
2,20,128.1
3
2,52,445.8
7
Expenditure
Raw Materials 98,575.39 1,23,234.2
7
1,59,012.8
6
1,93,290.8
0
2,23,214.6
4
Power & Fuel Cost 350.32 401.6 218.29 291.31 357.82
Employee Cost 1,537.18 1,829.10 1,799.23 2,586.80 2,894.86
Other Manufacturing
Expenses
547.76 851.19 742.93 821.56 1,200.32
Selling and Admin Expenses 5,602.28 6,533.28 7,435.51 8,528.96 10,084.29
Miscellaneous Expenses 615.27 581.88 867.22 526.75 642.54
Preoperative Exp Capitalised 0 0 -406.74 -542.83 -403.58
Total Expenses 1,07,228.2
0
1,33,431.3
2
1,69,669.3
0
2,05,503.3
5
2,37,990.8
9
Mar '04 Mar '05 Mar '06 Mar '07 Mar '08
Operating Profit 10,389.06 7,436.90 7,825.15 10,814.77 11,318.25
PBDIT 11,883.73 8,634.66 9,430.31 14,624.78 14,454.98
Interest 470.86 604.17 995.44 1,496.25 1,589.73
PBDT 11,412.87 8,030.49 8,434.87 13,128.53 12,865.25
Depreciation 1,873.79 2,072.80 2,201.46 2,590.31 2,709.70
Other Written Off 0 0 10.47 113.43 236.53
Profit Before Tax 9,539.08 5,957.69 6,222.94 10,424.79 9,919.02
Extra-ordinary items 144.33 21.45 498.45 76.73 178.64
PBT (Post Extra-ord Items) 9,683.41 5,979.14 6,721.39 10,501.52 10,097.66
Tax 2,646.40 1,063.80 1,790.38 2,949.46 3,104.54
Reported Net Profit 7,004.82 4,891.38 4,915.12 7,499.47 6,962.58
Total Value Addition 8,652.81 10,197.05 10,656.44 12,212.55 14,776.25
Preference Dividend 0 0 0 0 0
Equity Dividend 2,452.83 1,693.62 1,460.02 2,250.89 732.29
Corporate Dividend Tax 314.27 237.29 204.77 361.72 0
Per share data (annualised)
Shares in issue (lakhs) 11,680.12 11,680.12 11,680.12 11,680.12 11,923.74
Earning Per Share (Rs) 59.97 41.88 42.08 64.21 58.39
Equity Dividend (%) 210 145 125 190 55
Book Value (Rs) 197.32 222.47 250.88 298.22 344.58
(Source: www.moneycontrol.com)


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~94~
Balance Sheet ------------------- in Rs. Cr. -------------------
Mar '04 Mar '05 Mar '06 Mar '07 Mar '08
Sources Of Funds 12 mths 12 mths 12 mths 12 mths 12 mths
Total Share Capital
Equity Share Capital 1,168.01 1,168.01 1,168.01 1,168.01 1,192.37
Share Application Money 1,168.01 1,168.01 1,168.01 1,168.01 1,192.37
Preference Share Capital 0 0 0 24.36 0
Reserves 0 0 0 0 0
Revaluation Reserves 21,879.40 24,816.35 28,134.66 33,664.92 39,893.88
Networth 0 0 0 0 0
Secured Loans 23,047.41 25,984.36 29,302.67 34,857.29 41,086.25
Unsecured Loans 3,175.21 2,491.23 7,793.54 5,671.42 6,415.78
Total Debt 9,003.35 14,829.01 18,610.77 21,411.27 29,107.39
Total Liabilities 12,178.56 17,320.24 26,404.31 27,082.69 35,523.17
35,225.97 43,304.60 55,706.98 61,939.98 76,609.42
Mar '04 Mar '05 Mar '06 Mar '07 Mar '08
Application Of Funds 12 mths 12 mths 12 mths 12 mths 12 mths
Gross Block 36,386.16 39,869.26 43,662.84 54,770.29 56,731.50
Less: Accum. Depreciation 14,339.55 16,488.47 18,639.42 21,400.07 23,959.68
Net Block 22,046.61 23,380.79 25,023.42 33,370.22 32,771.82
Capital Work in Progress 5,261.30 8,719.47 9,620.03 4,394.30 9,170.22
Investments 5,595.43 5,554.93 14,521.39 19,990.86 21,535.78
Inventories 14,951.08 19,504.82 24,277.79 24,702.69 30,941.48
Sundry Debtors 3,973.12 5,689.87 6,699.48 6,736.06 6,819.23
Cash and Bank Balance 697.66 434.7 729.54 916.24 815.05
Total Current Assets 19,621.86 25,629.39 31,706.81 32,354.99 38,575.76
Loans and Advances 11,436.06 11,791.63 10,729.93 11,601.54 14,920.93
Fixed Deposits 0.41 11.62 14.63 9.73 9.38
Total CA, Loans & Advances 31,058.33 37,432.64 42,451.37 43,966.26 53,506.07
Deffered Credit 0 0 0 0 0
Current Liabilities 20,928.14 24,553.64 28,377.36 32,305.52 39,326.07
Provisions 7,880.85 7,262.68 7,589.38 7,633.41 1,172.99
Total CL & Provisions 28,808.99 31,816.32 35,966.74 39,938.93 40,499.06
Net Current Assets 2,249.34 5,616.32 6,484.63 4,027.33 13,007.01
Miscellaneous Expenses 73.29 33.09 57.51 157.27 124.59
Total Assets 35,225.97 43,304.60 55,706.98 61,939.98 76,609.42
Contingent Liabilities 14,955.23 11,466.17 8,724.76 22,676.47 25,574.96
(Source : www.moneycontrol.com)


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~95~

Cash Flow Statement

Indian Oil Corporation
Cash Flow ------------------- in Rs. Cr. -------------------
Mar '04 Mar '05 Mar '06 Mar '07 Mar '08
12 mths 12 mths 12 mths 12 mths 12 mths
Net Profit Before Tax 9690.84 5955.18 6705.99 10485 10080.4
Net Cash From Operating Activities 9097.74 4380.29 -962.04 -3141.71 -9382.79
Net Cash (used in)/from
Investing Activities -3645.27 -6360.29 -5437.09 6960.16 4376.55
(Source: www.moneycontrol.com)











Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~96~








CHAPTER 4
ANALYSIS


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~97~

SIGNIFICANCE OF COMPARATIVE PROFIT AND LOSS STATEMENT
FOR YEAR 2008 AND 2009
Gross sales increased by 21.58%. Commission and discounts increased by
26.62% and excise duty increased by 26.92% so the net sales increased by
20.99% over the previous year.

Total Income has increased by 26.50%. But the total expenditure has increased
by 27.23% which is due to increase in the interest payment on short term
loans from subsidiaries by 2800%, amortization on intangible assets by
144.66%, interest payment on short term loans from banks by 94.95% and
interest payment on fixed period loan from banks/financial
institutions/others by 73.48%.

But interest payment on public deposit decreased by (26.71%) and interest
payment on loan from others decreased by (69.74%).

Profit before tax has increased by 12.60%. But profit after tax increased by
0.48% which is due to increase in current tax by 57.13% and deferred tax by
237.94%.

Final dividend (proposed) increased by 25%. But general reserve decreased by
(23.92%) which is not a good sign for the company.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~98~

FOR YEAR 2009 AND 2010
Gross sales increased by 20.58%. Commission and discounts increased by
26.54% and excise duty increased by 20.14% so the net sales increased by
20.57% over the previous year.

Total Income has increased by 22.05%. But the total expenditure has increased
by 21.49% which is due to increase in the interest payment on loan from
others by 317.95%, interest payment on short term loans from banks by
58.28%, amortization on intangible assets by 80.50%.

But interest payment on short term loans from subsidiaries decreased by
(89.65%) and interest payment on public deposit decreased by (59.37%) which
is a good sign for the company.

Profit before tax has increased by 56.35%. But profit after tax increased by
52.57% which is due to increase in current tax by 30.53% and deferred tax by
618.97%.

But fringe benefit tax decreased by (31.84%).

Final dividend (proposed) increased by 6.16%. And general reserve increased
by 87.80% which is a good sign for the company. So in this year company has
performed very well.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~99~

FOR YEAR 2010 AND 2011
Gross sales increased by 12.10%. Commission and discounts increased by
13.61% and excise duty increased by 7.80% so the net sales increased by
12.55% over the previous year.

Total Income has increased by 15.53%. But the total expenditure has increased
by 15.45% which is due to increase in the interest payment on loan from
others by 202.74% and interest payment on short term loans from banks by
19.07%.

But interest payment on short term loan from subsidiaries decreased by
(100%), interest payment on public deposit decreased by (74.35%) and interest
payment on fixed period loan from banks/financial institutions/others
decreased by (35.70%).

Profit before tax has decreased by (3.85%). But profit after tax decreased by
(7.15%) which is due to increase in current tax by 46.06%.

But fringe benefit tax decreased by (26.57%) and deferred tax by (99.38%).

Final dividend (proposed) decreased by (57.69%). But general reserve
decreased by (86.21%) which is not a good sign for the company. So company
has not performed well.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~100~

Interpretation of comparative Balance Sheet for March 2008 & 2009
No increment in Equity Shares. Reserves and surplus have increased by
13.37%, which reflects the increase in profits. It has made the financial
position of the company strong.

Fixed Assets have increased by 6.93%. It is because the increase in the Plant
and Machinery and Building. Intangible Assets have increased by 34.98%

Investments have increased by 161.41%.

Current Assets and Current Liabilities have increased by 15.13% and 16.57%
respectively. It means current liabilities have increased more than current
assets i.e. 1.44%.It has resulted in Increased Working Capital 11.85%, which
has been financed by increase in Loan.

Current Assets have increased because the increase in the cash and bank
balance by 66.73%, inventories by 24.47% and debtors by 17.74%.

Current Liabilities have increased because the increase in Sundry Creditors.

Secured loans and unsecured loans have increased by 212.83% and 25.50%
respectively over the previous year, which is due to increase in loans and
advances from banks and financial institutions.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~101~

Interpretation of comparative Balance Sheet for March 2009& 2010
No increment in Shares capital. Equity Shares to be issued to the Shareholders
of erstwhile IBP, amounting Rs.24.36 crore as per the scheme of
Amalgamation as on 31st March 20007, have been disclosed under Share
Capital Suspense Account.

Reserves and surplus have increased by 19.65%, this increment is more than
previous year which was 13.37%, which reflects the increase in profits. It has
made the financial position of the company strong. It is good sign for the
company.

Fixed Assets have increased by 32.99%. And Intangible Assets have increased
by 119.94%.

Investments have increased by 37.66% which is a good sign for the company.

Current Assets and Current Liabilities have increased by 7.05% and 15.69%
respectively. It means current liabilities have increased more than current
assets i.e. 8.64%.It has resulted in decreased Working Capital (13.46%).

Current Assets have increased because increase in the other current assets by
2357.52%, cash and bank balance by 24.42%, and loan and advances by
25.07%.

Secured loans of the company decreased by (27.22%) and unsecured loans
increased by 15.04%


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~102~
Interpretation of comparative Balance Sheet for March 2010& 2011
Share capital has increased by 2.08%. It has made the financial position of the
company strong. and Share Capital Suspense Account decreased by (100 %),
Transferred during the year to Share Capital on allotment of 2,43,62,106
Equity shares of Rs. 10 each issued as fully paid up to the shareholders of
erstwhile IBP Co. Ltd. as per the Scheme of amalgamation.

Reserves and surplus have increased by 18.50%, this increment is less than
previous year which was 19.65%, which reflects the increase in profits. It has
made the financial position of the company strong. It is good sign for the
company.

Fixed Assets have decreased by (1.75%) which is due to decrease in plant and
machinery and railway sidings. And Intangible Assets have decreased by
(6.79%).

Investments have increased by 7.72% which is a good sign for the company.

Current Assets and Current Liabilities have increased by 35.51% and 16.39%
respectively. It means current assets have increased more than current
liabilities i.e. 19.12%.It has resulted in increased Working Capital 96.23%. It
clearly indicates that the working capital of the firm is not being managed
properly.

Current Assets have increased because increase in the loan and advances by
129.09%, inventories by 25.25%, debtors by 1.18% and other current assets by
1.90%.

Secured loans of the company increased by 13.12% and unsecured loans
increased by 35.94%.

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~103~
SWOT ANALYSIS
For a long time the company had monopoly in the downstream sector but with the changing
time, more and more private and multinational companies are entering the sector, IOC is
facing competition. But with the vast distribution and pipeline network, it will have an edge
over them. The following analysis throws light on the various facets of the present position
of Indian Oil.
STRENGTHS
A. Most powerful player
B. Experience
C. Pipeline network
D. Distribution infrastructure
E. Rural reach
WEAKNESSES
A. Governments control
B. Large size
C. Peoples perception
D. Retail market share
OPPORTUNITIES
A. More revenue
B. Modernization
C. Intensifying infrastructure
THREATS
A. Tastes of competition
B. Price wars
C. Better-equipped competitors

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~104~








CHAPTER 5
CONCLUSION


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~105~
Conclusion
As Government-owned oil companies are forced to sell petroleum products at
subsidised prices, each increase in crude oil prices means additional burden of so-
called under recoveries on the companies. Therefore, the oil companies are cutting
costs by:-
Reducing fuel inventories to cut daily working capital

Processing sour crude oil in large amount, which is cheaper than sweet crude
oil

Increasing refinery capacity utilization

Liquidating oil bonds

Borrowing more funds

The present market share of the oil PSUs are 98.85% for diesel and 96.8% for petrol
which makes it clear that the competition from the private sector has been virtually
eliminated due to avoidance of private companies from the subsidy package. Also,
the under-recoveries for the oil marketing companies are partly getting compensated
by high refining margins and to some extent by the issue of oil bonds by the
Government and discounts from upstream companies like ONGC & GAIL. Refining
margins may continue to be high because of a shortage of petrol and diesel globally
and higher capacity utilisation of refineries. Refining margins are continuing to
increase almost in tandem with crude oil.



Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~106~

Therefore it is believed that the present subsidy sharing mechanism is positive for all
the oil marketing companies and due to this formula; oil marketing companies will
only bear 10% of the gross under-recoveries from 24%.
Going forward, the performance of state-run OMCs will continue to depend on the
support they receive from the government. The Government has therefore taken a
decision in favour of Oil Marketing Companies, on rising crude oil prices and
petroleum products prices, in order to reduce the burden of their under recoveries.



Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~107~
Why the OMCs transactions are important?
OMC transactions are important due to certain reasons. Some of them are stated as follows:-
i. Huge Capital Requirement
ii. Feasibility
iii. Requirement of Large place
iv. Cost Beneficial

i. Huge Capital Requirement: - In order to set up refineries to cater the
requirement of the petroleum products in the market. As per the survey the
requirement of the Indian market is one petrol pump at each kilometer. It is
very important for a company to open that many outlets so that the
requirement can be fulfilled. In order to open those many outlets huge
amount of capital is required. Therefore to avoid the usage of huge capital it is
very important that oil companies should go under the OMC transactions.

ii. Feasibility: - It is not feasible for a company to open their own outlets &
refineries at every kilometer and every point respectively. Therefore it is very
important that the Oil Marketing Companies should sell their product to each
other companies. So that the amount spent on opening of the refineries and
the surplus amount available with the refineries can be sold to other
companies.

iii. Requirement of Large place: - To open a refinery a large place is required and
that is to in a isolated place far from the residential area. The requirement of
so big place is the biggest problem for any company these days. Therefore
OMC transactions are the best solution for the problem.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~108~
iv. Cost Beneficial: - As all the Oil Companies dont have their refineries all over,
it is very costly affair for the company to transport the products to their retail
outlet and depots. This all increases the cost of the product while reaching the
destination. Therefore by indulging into the OMC transactions the company
tries to reduce the transportation cost by exchanging their product from the
depots.

After doing the in-depth financial analysis of the OMC transaction, it is
desirable to transform the learnings into conclusions and hence give
recommendations on them.

Thus the conclusions can be stated as:-
All the four products which were studied viz. ATF, SKO, EURO-III MS and
BS-III HSD is generating net profit for INDIAN OIL in the Delhi based
locations.

The profits that are being generated are due to the fact that there are no
subsidies involved.

OMC transactions are necessary as they bring down the overall cost of
economy and hence help the country as a whole.

Taking the view of INDIAN OIL, it is profitable to sell to OMCs rather than in
retail. This is due to the fact that there are subsidies involved.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~109~
Upon taking a deep look at the petroleum sector, it has been felt that the oil
companies are bleeding due to the rampant increase in the Brent Crude prices. Also
as the current year is election year, the Government of India is reluctant to increase
the retail prices. As regards the OMC transactions are concerned the Indian oil is
having the largest market share and is also the largest refinery set up amongst the
PSU companies. Thus the company is in a better position and hence is not much
dependent on the other oil marketing companies for the procurement of goods
except for in the southern region. Overall also the Indian oil is in a stronger position
to provide the other companies with goods and services. Thus there is no choice in
hand of Indian oil whether to say no to any OMC. But it is now established that the
company is making huge profits by the way of OMC transactions and hence the
thrust should be on the OMC transactions.
As the companies have authority to negotiate within themselves, they can make
contracts for those products which are more profitable over others.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~110~

The Indian system of petroleum product and crude oil pricing is opaque. While this
project talks about the huge subsidies in the petroleum sector, even this is not yet the
entire story. The net position of the consumer, and tax payer, is not clearly
determined.
The practice of retail price setting was different from the theory right from the
beginning of the post-APM period. The public downstream Oil Marketing
Companies(OMC), implemented regular retail price adjustments for petrol and
diesel during the first two FYs following the abolishment of the APM. Despite these
regular price increases the OMC incurred minor shortfalls for the sale of petroleum
and diesel. However, those shortfalls were mitigated through the refining margins
which now benefited from the import-parity pricing formula.
The intervals between price revisions grew larger, following a few years post
dismantle, and the OMCs started to incur substantial under-recoveries for these two
products in line with the drastic increase in international crude prices. The formula
gave the public the impression that prices were indeed set by the market while in
reality OMCs were still required to seek approval from the Ministry of Petroleum
and Natural Gas for each price adjustment.
In the second section of the project, a comparison was made between the
profitability of the different products under-Retail vs. OMC. The results show
different product to be profitable under different option except Superior Kerosene
Oil which is reporting losses when sold through retail outlet. Also, certain products
seem to be more profitable when sold through retail outlet rather than to OMC. In
spite of this Indian Oil has no option but to provide its petroleum product to the
other OMCs at price as decided by the Government.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~111~
Suggestion
1. Promote Participation of private players in the petroleum sector
As part of the petroleum sector reforms the private sector was finally allowed to
retail petrol products. Several domestic private companies invested heavily in
setting up retail stations. Reliance, Indias largest private company, currently
operates over 1,000 retail outlets and had plans to build over 5,000. Given that
private retailers are faced with the option to continuously encounter losses if they
price products on par with subsidized public retailers, or to increase prices and to
lose market share, several private sector companies have put further expansion plans
on hold and are even discussing to exit from the retail sector all together. Moreover,
several private players have also deferred investments in the refinery sector other
than those destined for export. The uncertainty about the Governments long-term
sector policies and the experiences several foreign and domestic private investors
have already made in the natural gas sector, which suffers from a very similar set of
problems, have made international companies cautious about entering Indias
downstream petroleum sector. For a country that aims to grow by over 8% annually
over the next 20 years this is not reassuring. Therefore including private players in
the subsidiary package seems to be necessary.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~112~

2. Strengthen the long term policy
The ultimate looser in the current picture are the public oil sector companies. They
do incur heavy losses on the sale of the four products which have been doubling
annually since the APM years. While the companies are still making profits, those
are reducing sharply in terms of installed capacity. This will impact on their capital
investment plans, especially in the refining sector which has the potential to
jeopardize the long-term security in the petroleum sector. Increasing R&D
investments might also become more difficult. Indias upstream companies need to
make heavy investments to prevent, or at least, delay the continuous decline of
domestic production. Moreover, India has substantial unexplored acreage of
potential oil and gas deposits, mainly in difficult geological terrain. However, major
foreign oil companies treat cautiously due to the uncertainty of the sectors long term
policy. The OMC are working as per the guidelines provided by the government.
They themselves do not plan much. However the need of the hour is to strengthen
their policies.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~113~

3. Effective demand-side management
The central as well as the state exchequers depend substantially on the total
revenues from the petroleum sector. However, the government does incur indirect
losses as for example LPG is converted for other uses and thus, the Government does
not only pay subsidies but looses revenues from higher taxed alternative products. It
is not unusual for Governments worldwide to heavily tax the petroleum sector due
to its low price elasticity which makes it a relatively steady and reliable revenue
source. However, high taxation is generally also seen an instrument of demand side
management. Increasingly, Government is concerned with the externalities of
consumption of petroleum products. Taxation is seen as straight forward instrument
to induce behavioral changes in consumers and foster the development of advanced
technologies. However, in the case of India, despite the high tax portion in final
retail prices, the existing gap between retail price and import or trade parity price
remains thereby undermining the Governments ability for effective demand side
management that is crucial with a view to Indias oil security.

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~114~

4. Rationalize the economic fuel choices
Indias current pricing system is not conducive to economic decision making by
consumers. Relative prices between alternative fuels are distorted. Price disparities
on account of unequal taxation between petrol and diesel and with other petroleum
products result in inefficient substitution of one fuel with the other. Alteration of
petroleum products, primarily kerosene with diesel, is major problem and caused
substantial leakage of subsidies. Thus, the need to introduce a rational and
transparent energy pricing system is compelling in the broader context of Indias
energy security.



Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~115~

5. Include the real poor in the subsidy package.
Research has consistently shown that subsidies for LPG and kerosene do not reach
the intended beneficiaries. LPG is an urban middle-class fuel. The poor are typically
too poor to be able to afford the purchase cost of a cylinder, which represents a
considerable lump-sum investment to them. Moreover, LPG customers are required
to make a large deposit for the actual cylinder and to pay connection charges. And,
ultimately, they need to owe or buy a purpose-build LPG stove. Several pilot
projects to assist poor families in financing the initial LPG connecting costs are being
implemented, frequently by NGOs. Also, smaller cylinder sizes of 5kg instead of the
typical 14.2kg have been issued by the OMCs to address the problems of the poor
and to make LPG more affordable. Still, it is correct to say that current LPG subsidies
are primarily benefiting a politically well-organized and vocal middle class. It is
easier for the poor to benefit from subsidized kerosene although there are
quantitative restrictions on the availability of kerosene. Still, as kerosene is often
diverted for other uses or is being adulated, poor consumers, especially in remote
rural areas, cannot always claim their allocation. Moreover, there is a question as to
how much kerosene the poor actually consumes per month and whether the
subsidized quantities are not much too large. Therefore a system is required to
address these issues effectively.



Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~116~

6. Create a common market in India
There are public voices in India that claim that their countrys tax structure is even
more diverse than that of the EU. The introduction of the VAT in 2005 and its
gradual adoption by all 28 states and territories is a major step towards a single
Indian market. However, petroleum products are not officially covered under the
VAT and the regional differences in petroleum product retail prices are huge. Thus,
there is currently no common market for petroleum products in India. As long as the
states depend heavily on revenues from the petroleum industry the political
progress towards a harmonized Indian tax system will be limited if the states are not
assured to retain their financial revenues.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~117~

LIMITATIONS

1. The study is carried out taking data only for the Bijwasan terminal. Different
results would have been obtained if the study was carried out for the entire
northern region.

2. A comparison of the current year data with the last year results would also have
provided better understanding and estimate. But the last year data was not easily
available.

3. Here only sale and purchase of goods are taken into account as the hospitality
and safe keeping accounts are being provided approximately at par and hence
the effect of these transactions is considered to be negligible on the balance sheet,
considering the huge quantities transacted.

4. The companies that are being considered to be in the consortium are HPCL and
BPCL only as IBP has merged with IOCL in 2007.

FUTURE SCOPE OF PROJECT
This project can be further taken up by the way of removing the limitations mentioned
above. The study can be made on a pan India basis and also for the whole of the financial
year. This way a better picture of the OMCs operations can be made.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~118~

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Asbury, Herbert. The Golden Flood: An Informal History of America's First Oil
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connect.in.com/profile/Indian_Oil_Corporation/295827

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Joint study done by Office of Chief Advisor (Cost), Ministry of Finance &
Director (F), Petroleum Planning & Analysis Cell, Ministry of Petroleum and
Natural Gas

Report of the Committee on Pricing and Taxation of Petroleum Products

IOCL MANUAL

ACCOUNT MANUAL

SAP MANUAL


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~127~
WEBLOIGRAPHY:
IOCL Intranet

www.iocl.com

www.mysap.com

www.google.com

www.scribd.com

www.mapsofindia.com

www.iif.com

www.wikipedia.org

www.moneycontrol.com

www.indiainfoline.com

www.scholar.google.com

www.iocltech.com

business.mapsofindia.com/india-company/ioc.html

www.ibef.org/industry/oilandgas.aspx

www.rncos.com/Report/IM038.html

www.thaindian.com/.../under-recoveries-on-petroleum-
products-to-be-less-than-feared_100155482.html

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~128~

www.domain-b.com/industry/oil.../20081010_banks_roll.html

www.groundreport.com/.../Hike-in-petrolium-product-
prices-in-India

www.theindiastreet.com/.../psu-oil-marketing-firms-in-
india-losing.html

www.pump-zone.com/.../indian-oil-marketing-
companies-suffer-from-loss-of-government-fuel-
subsidies.html

www.prlog.org/10010290-subsidies-to-all-public-or-
private-oil-petroleum-companies-in-india-viable-
suggestion.html




Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~129~










Annexure


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~130~

Indian Oil operations based on the regions

(Source: Indian Oil Intranet)
Northern Region Eastern Region
Punjab Himachal Pradesh JK Bihar
Delhi Haryana Orissa
Rajasthan West Bengal
Uttar Pradesh North East

Eastern Region Southern Region
Gujarat Karnataka
Maharashtra Goa Kerala
Madhya Pradesh Tamil Nadu
Andhra Pradesh


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~131~
Major Indian Oil Refineries in India
1. Panipat Refinery
Panipat Refinery is an oil refinery that was set up in 1998. It is located in Baholi
village, Panipat, Haryana. Panipat is the seventh refinery belonging to Indian Oil
Corporation Limited. The cost of the refinery's construction was Rs 9024 crores. It
has a capacity of twelve MMTPA.
The refinery's highlights include:
Zero discharge of effluent gases.
The presence of four ambient air monitoring stations that were in place well
before the refinery was in use.
It is an eco-friendly refinery, as indicated by a green belt outside it.
The establishment of a totally electronic-based communication system within
the refinery.
It has the lowest manpower of all refineries in the region with similar
capacities.
Panipat Refinery holds several quality certifications from DNV, including:
ISO 9002
ISO 14001
OHSAS 18001


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~132~
2. Mathura Refinery

The Mathura Refinery, owned by Indian Oil Corporation, is located in Mathura,
Uttar Pradesh. The refinery processes low sulphur crude from Bombay High,
imported low sulphur crude from Nigeria, and high sulphur crude from the Middle
East.

The refinery, which cost Rs.253.92 crores to build, was commissioned in January,
1982. Construction began on the refinery in October 1972. The foundation stone was
laid by Indira Gandhi, the former prime minister of India. The FCCU and Sulphur
Recovery Units were commissioned in January, 1983. The refining capacity of this
refinery was expanded to 7.5 MMTPA in 1989 by debottlenecking and revamping. A
DHDS Unit was commissioned in 1989 for production of HSD with low sulphur
content of 0.25% wt. (max.). The present refining capacity of this refinery is 8.00
MMTPA.

In January 2009, the plant shut down for a period of time due to a strike.
The refinery was in the news for allegedly causing the white marble of the Taj Mahal
to yellow. It is located about 50 kilometers away from the Taj Mahal. It is currently
asking the Indian government to allow an expansion, raising the capacity to 11
million tonnes. The refinery also wants to create a new garbage disposal site, which
has garnered new outrage from environmental activists because the site will be
located even closer to the Taj Mahal. The India government hired a panel to examine
the effects of the refinery on the Taj Mahal. The panel found that the air has high
levels of suspended particulate matter, caused by factory emissions, dust,
construction, and exhaust from automobiles. These are causing the Taj Mahal to
change colour.
Mathura Refinery is known to be the number one amongst all 14 refineries in India.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~133~

3. Haldia Refinery

The Haldia Refinery for processing 2.5 MMTPA of Middle East crude, was
commissioned in January, 1975 with two sectors - one for producing fuel products
and the other for Lube base stocks. The refinery is in Haldia near Kolkata (West
Bengal).The fuel sector was built with French collaboration and the Lube sector with
Romanian collaboration. The refining capacity of the Refinery was increased to 2.75
MMTPA in 1989 through debottlenecking measures. The refining capacity was
further expanded to 3.75 MMTPA with the commissioning of new crude distillation
unit of 1.0 MMTPA in March, 1997. The present refining capacity of this Refinery is
6.00 MMTPA.

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~134~

4. Barauni Refinery

Barauni Refinery in the Bihar state of India was built in collaboration with the Soviet
Union at a cost of Rs.49.4 crores and went on stream in July, 1964. The initial capacity
of 2 MMTPA was expanded to 3 MMTPA by 1969. The present capacity of this
refinery is 6.00 MMTPA. A Catalytic Reformer Unit (CRU) was also added to the
refinery in 1997 for production of unleaded motor spirit. Projects are also planned
for meeting future fuel quality requirements.
In 1997 the refinery was reported to be the target of Assamese rebels.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~135~

5. Guwahati Refinery

Guwahati Refinery is an oil refinery near Guwahati, India owned by the Indian Oil
Corporation

It was the first in the public sector and was set up in collaboration with Romania at a
cost of Rs.17.29 crores and commissioned on 1 January 1962 with a design capacity of
0.75 MMTPA. The present capacity of this Refinery is 1.00 MMTPA.

A hydrotreater unit for improving the quality of diesel has been installed and was
commissioned in 2002. The refinery has also installed in 2003 Indmax Unit, a novel
technology developed by its R&D Centre for upgrading heavy ends LPG, motor
spirit and diesel oil.

As part of a recent culture exchange, Helen Miller-Clarke has commissioned the
building of a mock Guwahati Refinery in Solihull, Birmingham which is due for
completion in June 2008.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~136~

6. Gujarat Refinery
The Gujarat Refinery at Koyali (Near Baroda) in Gujarat in Western India is Indian
Oil Corporations largest Refinery. It is the largest Public Sector Refinery of India
and most energy efficient Refinery of IOCL.
Overview
Its facilities include five Atmospheric Crude Distillation Units (ADU). The major
secondary units include CRU, FCCU and the first Hydrocracking unit of the country.
Through a product pipeline to Ahmedabad and a recently commissioned product
pipeline connecting to BKPL product pipeline and also by rail wagons/trucks, the
refinery primarily serves the demand for petroleum products in western and
northern India.
When commissioned, the Refinery had an initial installed capacity of 2 MMTPA
(Million Metric Tonnes Per Annum) and was designed to process crude from
Ankleshwar, Kalol and Nawagam oilfields of ONGC in Gujarat. The Refinery had
further modified to handle imported & Bombay high Crude. Secondary processing
facilities like CRU, FCC, Hydrocracker, DHDS, are also commissioned time to time.
Its present day capacity is 13.70 MMTPA. The company has already commissioned
the facilities for MTBE and Butene-1 production. The refinery also produces a wide
range of specialty products like Benzene, Toluene, MTO, Food Grade Hexane,
solvents, LABFS, etc.
The Gujarat Refinery achieved the distinction of becoming the first refinery in the
India to have completed the DHDS (Diesel Hydro De-sulphurisation) project in June
1999, when the refinery started production of HSD with low sulphur content of
0.25% wt (max.).


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~137~

History
Following the conclusion of an Indo-Soviet agreement in 1961 February, a site for the
establishment of a 2 MMTPA Oil Refinery in Gujarat at Koyali near Vadodara was
selected on the 17th April 1961. The Soviet and Indian engineers signed a contract in
October 1961 for the preparation of the project report jointly. The first Prime Minister
of India, Pandit Jawaharlal Nehru laid the foundation stone of this Refinery on 10
May, 1963.
The Refinery was commissioned with Soviet assistance at a cost of Rs. 26.00 crores
and went on stream in October 1965. The first million tonnes Crude Distillation Unit
was commissioned for trial production on 11 October 1965 and full production at the
rated capacity was achieved on 6 December 1965. The throughput was further
increased by 20% beyond the designed capacity in January 1966.
Dr. S Radhakrishnan, the then President of India, dedicated the refinery to the nation
with the commissioning of second crude distillation unit and Catalytic Reforming
Unit on 18 October, 1966.
The third 1.0 MMTPA crude distillation unit (AU-3) was commissioned in
September 1967 to process Ankleshwar & North Gujarat crudes. In December 1968,
Udex plant was commissioned for production of benzene & toluene using feedstock
available from CRU. By 1974-75 with in-house modifications, the capacity of the
refinery was further increased by 40% to a level of 4.2 MMTPA. To process imported
crude the refinery was expanded during 1978-79 by adding another 3 MMTPA
Crude Distillation unit (AU-4) along with downstream processing units like Vacuum
Distillation, Visbreaker & Bitumen Blowing Unit. By 1980-81 this unit started
processing Bombay High crude in addition to imported crudes. It was for the first
time in Indian petroleum industry that Indian engineers independently handled
such a big project.

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~138~

To recover high value products from the residue, the secondary processing facilities
consisting of Fluidized Catalytic Cracking Unit (FCCU) of 1.0 MMTPA capacity
along with a Feed Preparation Unit (FCCU) of 1.0 MMTPA capacities, were
commissioned in December 1982. Refinery also set up Pilot Distillation Facilities
(PDF) for the production of N- Heptane & light Aluminum Rolling Oils (LARO).
Meanwhile, to enable absorption of increased indigenous crudes the crude
processing capacity of the refinery was further increased to 9.5 MMTPA.
In 1993-94, Gujarat commissioned the country's first Hydrocracker Unit of 1.2
MMTPA for conversion of heavier ends of crude oil to high value superior products.
Country's first Diesel Hydrodesulphurisation Unit (DHDS) to reduce sulphur
content in diesel was commissioned by Gujarat Refinery in June 1999. Also
commissioned in September eliminate lead in MS. Also MTBE Unit was
commissioned in September 1999 to eliminate lead in MS. Conceptualised and
commissioned South-East Asia's largest centralised effluent treatment plant by
dismantling all the four old ETP's in June 1999. By September 1999 with
commissioning of atmospheric distillation unit (AU-5), Gujarat Refinery further
augmented its capacity to 13.7 MMTPA making it the largest PSU refinery of the
country.
A project for production of high value LAB (Linear Alkyl Benzene -- which is one of
the major raw materials used in manufacturing detergents) from Kerosene streams
has been implemented. In order to meet future fuel quality requirements, MS
Quality improvement facilities was commissioned in 2006.
LAB (Linear Alkyl Benzene): The year 2004-05 marked IndianOils big-ticket entry
into petrochemicals with the commissioning of the countrys largest Linear Alkyl
Benzene (LAB) plant at Gujarat Refinery in August 2004. It is also the largest
grassroots single train Kerosene-to-LAB unit in the world, with an installed capacity

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~139~
of 1,20,000 MTPA. Currently, two grades of LAB high molecular weight and low
molecular weight are being produced. The quality of the LAB produced here has
found wide acceptance in the domestic and overseas markets. Built at a cost of Rs.
1,248 crore and commissioned in a record 24 months time, the plant produces
superior quality LAB for manufacturing environment-friendly biodegradable
detergents, using state-of-the-art Detal technology from M/s UOP, USA. The key
raw materials for the plant, catering to domestic as well as export market
requirements meeting the latest and most stringent quality standards, are Kerosene
and Benzene produced at Gujarat Refinery.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~140~
7. Digboi Refinery
The Digboi Refinery was set up at Digboi in 1901 by Assam Oil Company Ltd.. The
Indian Oil Corporation Ltd (IOC) took over the refinery and marketing management
of Assam Oil Company Ltd. with effect from 1981 and created a separate division.
This division has both refinery and marketing operations. The refinery at Digboi had
an installed capacity 0.50 MMTPA (million metric tonnes per annum). The refining
capacity of the refinery was increased to 0.65 MMTPA by modernization of refinery
in July, 1996. A new delayed Coking Unit of 1,70,000 TPA capacity was
commissioned in 1999. A new Solvent Dewaxing Unit for maximizing production of
microcrystalline wax was installed and commissioned in 2003. The refinery has also
installed Hydrotreater to improve the quality of diesel.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~141~

Details of Peer Companies
Hindustan Petroleum

HPCL is a Fortune 500 company, with an annual turnover of over Rs 1,31,802
Crores (US$ 25,618 Millions) during FY 2008-09, having about 20% Marketing
share in India and a strong market infrastructure. Corresponding figures for
FY 2007-08 are: Rs 1,03,837 Crores (US$25,142 Million).

HPCL operates 2 major refineries producing a wide variety of petroleum fuels
& specialties, one in Mumbai (West Coast) of 5.5 Million Metric Tonnes Per
Annum (MMTPA) capacity and the other in Vishakapatnam, (East Coast)
with a capacity of7.5 MMTPA. HPCL holds an equity stake of 16.95% in
Mangalore Refinery & Petrochemicals Limited, a state-of-the-art refinery at
Mangalore with a capacity of 9 MMTPA. In addition, HPCL is constructing a
refinery at Bhatinda, in the state of Punjab, as a Joint venture with Mittal
Energy Investments Pvt. Ltd.

HPCL also owns and operates the largest Lube Refinery in the country
producing Lube Base Oils of international standards, with a capacity of 335
TMT. This Lube Refinery accounts for over 40% of the India's total Lube Base
Oil production.

HPCL's vast marketing network consists of 13 Zonal offices in major cities
and 90 Regional Offices facilitated by a Supply & Distribution infrastructure
comprising Terminals, Aviation Service Stations, LPG Bottling Plants, and
Inland Relay Depots & Retail Outlets, Lube and LPG Distributorships.
HPCL, over the years, has moved from strength to strength on all fronts. The
refining capacity steadily increased from 5.5 MMTPA in 1984/85 to 13
MMTPA presently. On the financial front, the turnover grew from Rs. 2687
Crores in 1984-85 to an impressive Rs 1,31,802 Crores in FY 2008-09.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~142~

Essar Oil




The Exploration and Production (E&P) business of the company has participating
interests in several hydrocarbon blocks for exploration and production of Oil & Gas.
This includes the Ratna and R-Series blocks on Bombay High and an E&P block in
Mehsana, Gujarat, which has currently started commercial production. It has also
been awarded a Coal Bed Methane (CBM) block at Raniganj in West Bengal, and two
more E&P blocks in Assam, India. The overseas E&P assets include three onshore oil
& gas blocks in Madagascar-Africa, and one offshore block each in Vietnam and
Nigeria.
Essar was the first Indian company to recognise the CBM potential in India in the
early 1990s and undertake drilling, hydro-fracturing and de-watering of 3 CBM
wells, in the Cambay Basin, near Mehsana, Gujarat, India. The economic viability of
the project was established through this pioneering work.
Essar is a horizontally integrated enterprise with full service capability including
drilling rigs, services equipment, engineering and construction, etc. that are
important business segments of the group. The multi-disciplinary team approach
facilitates the use of resources in personnel, hardware / software and the right
alliances to adopt best practices in exploration and development.
Essar Oil has set up a highly enriched technical team that includes geologists,
geophysicists, petrophysicists, petroleum engineers, reservoir engineers, well
loggers, project managers and drillers, along with a highly motivated management
team, consisting of specialists in finance, business development, logistics, human
resources, and project consultancy. This team operates all our E&P blocks using best
international oil industry practices with due regard to Health, Safety & Environment
and also respecting the local socio-political environment in the various countries of
operations.



Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~143~
Bharat Petroleum

Bharat Petroleum Corporation Limited (BPCL) is one of India's largest PSU
companies, with Global Fortune 500 rank of 287 (2008). Its corporate office is located
at Ballard Estate, Mumbai. As the name suggests, its interests are in petroleum
sector. It is involved in the refining and retailing of petroleum products.
Bharat Petroleum is considered to be a pioneer in Indian petroleum industry with
various path-breaking initiatives such as Pure for Sure campaign, Petro card, Fleet
card etc.
BPCL's growth post-nationalisation (in 1976) has been phenomenal. One of the
single digit Indian representatives in the Fortune 500 & Forbes 2000 listings, BPCL is
often referred to as an MNC in PSU garb. It is considered a pioneer in marketing
initiatives, and employs Best in Class practices.
History
The 1860s saw vast industrial development. A lot of petroleum refineries came up.
An important player in the South Asian market then was the Burmah Oil Company
Ltd. Though incorporated in Scotland in 1886, the company grew out of the
enterprises of the Rangoon Oil Company, which had been formed in 1871 to refine
crude oil produced from primitive hand dug wells in Upper Burma.
The search for oil in India began in 1886, when Mr. Goodenough of McKillop
Stewart Company[1] drilled a well near Jaypore in upper Assam and struck oil. In
1889, the Assam Railway and Trading Company (ARTC) struck oil at Digboi
marking the beginning of oil production in India.
While discoveries were made and industries expanded, John D Rockefeller together
with his business associates acquired control of numerous refineries and pipelines to
later form the giant Standard Oil Trust. The largest rivals of Standard Oil - Royal
Dutch, Shell, Rothschilds - came together to form a single organisation: Asiatic
Petroleum Company to market petroleum products in South Asia.

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~144~
In 1928, Asiatic Petroleum (India) joined hands with Burmah Oil Company - an
active producer, refiner and distributor of petroleum products, particularly in Indian
and Burmese markets. This alliance led to the formation of Burmah-Shell Oil Storage
and Distributing Company of India Limited. A pioneer in more ways than one,
Burmah Shell began its operations with import and marketing of Kerosene. This was
imported in bulk and transported in 4 gallon and 1 gallon tins through rail, road and
country craft all over India. With motor cars, came canned Petrol, followed by
service stations. In the 1930s, retail sales points were built with driveways set back
from the road; service stations began to appear and became accepted as a part of
road development. After the war Burmah Shell established efficient and up-to-date
service and filling stations to give the customers the highest possible standard of
service facilities.
From Burmah Shell to Bharat Petroleum
On 24 January 1976, the Burmah Shell Group of Companies was taken over by the
Government of India to form Bharat Refineries Limited. On 1 August 1977, it was
renamed Bharat Petroleum Corporation Limited. It was also the first refinery to
process newly found indigenous crude Bombay High, in the country.
Products
Bharat Petroleum produces a diverse range of products, from petrochemicals and
solvents to aircraft fuel and speciality lubricants and markets them through its wide
network of Petrol Stations, Kerosene Dealers, LPG Distributors, Lube Shoppes,
besides supplying fuel directly to hundreds of industries, and several international
and domestic airlines.
Refineries
BPCL has Refineries at Mumbai and Kochi(Kochi Refineries) with a capacity of 12
Million Metric Tonnes (MMT) and 7.5 MMTPA respectively for refining crude oil.
BPCL's subsidiary at Numaligarh has a capacity of 3 MMT.
International rankings
BPCL is a Fortune Global 500 company as per the ranking of 2008. It was ranked at
position 287. It was ranked at position 325 as per the ranking of 2007.
BPCL was featured on the Forbes Global 2000 list for 2008 at position 967

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~145~

Reliance Petroleum


Reliance Petroleum Limited was set up by Reliance Industries Limited (RIL), one of
India's largest private sector companies. Currently, RPL is subsidiary of RIL. RPL
also benefits from a strategic alliance with Chevron India Holdings Pte Limited,
Singapore, a wholly owned subsidiary of Chevron Corporation USA (Chevron),
which currently holds a 5% equity stake in the Company.
Jamnagar Refinery
Refining activities of Reliance Industries Limited are carried out at the Jamnagar
refinery complex with refining capacity of 27 million tonnes per annum (540,000
barrels per day).
The refinery is able to process a wide variety of crudes- from very light to very
heavy (from 18 to 45 degree API) and from sweet to very heavy (with sulphur
content from 0 to 4.5%).
RPL commenced its crude processing on 25 December 2008. The secondary
processing units are now under synchronization and commissioning. The entire
refinery complex is expected to attain full capacity shortly.
With an annual crude processing capacity of 580,000 barrels (92,000 m3) per stream
day (BPSD), RPL will be the sixth largest refinery in the world. It will have a
complexity of 14.0, using the Nelson Complexity Index, ranking it amongst the
highest in the sector. The polypropylene plant will have a capacity to produce 0.9
million metric tonnes per annum.
The refinery project is being implemented at a capital cost of Rs 270,000 million
being funded through a mix of equity and debt. This represents a capital cost of less
than US $10,000 per barrel per day and compares very favourably with the average
capital cost of new refineries announced in recent years. The International Energy
Agency (IEA) estimates the average capital cost of new refinery in the OECD nations
to be in the region of US $15,000 to 20,000 per barrel per day. The low capital cost of
RPL becomes even more attractive when adjusted for high complexity of the
refinery.

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~146~
Upcoming Project of Indian Oil Corporation Limited
Paradip Refinery
Indian Oil Corporation's refinery project at Paradip in Orissa would be operational
from November 2012 after its completion in August that year.
Work on the IOC's refinery project, is running behind its original schedule of going
to operation in 2010, is now on full swing with the public sector oil company having
spent Rs 1,600 crore so far on the project.
The new schedule of commissioning the refinery project was informed to Orissa
Chief Secretary A.K. Tripathy through a letter signed by IOC's Director (Projects)
B.N. Bankapura.
The State government had signed an MoU with IOC on February 16, 2004 for setting
up the refinery with a capacity of 9 MTPA.
However, the capacity of the proposed refinery was later enhanced to 15 MTPA with
an investment of Rs 45,000 crore.
The company had also proposed a petro-chemical complex along with the refinery
project.
The board of directors, reduced the project cost to Rs 29,777 crore citing global
meltdown.
Company is already looking after the procurement of equipment and engaging
contractors in Paradip.
The construction of roll-on and roll-off jetty has already begun, and the jetty facilities
would be in place by August 2009.
The jetty would be used to offload large equipments for the refinery.

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~147~
PROFILE OF INDIAN OIL
MISSION STATEMENT OF THE COMPANY

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 quality of life of the community and preserve ecological
balance and heritage through a strong environment conscience.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~148~

FINANCIAL MISSION
To provide high quality financial staff support for decision making control to
all levels of management-corporate divisional, unit and location to enable the
achievement of overall corporate objectives and goals.

To play a lead role in scanning the domestic and international financial
environment, the formulation and achievement of all the financial policies and plans
for different time spans consistent with and conducive to the business plans for the
expansion, diversification, productivity etc.

To interact pro-actively with the relevant government agencies on pricing and
investment and with financial institutions, depositors and creditors, with sensitivity
and promptness, for mobilization and provision of funds for uninterrupted
operations and project execution at optimal costs.

To maintain, review and update all relevant accounting records, systems and
procedures for discharging the fiduciary responsibilities and enabling compliance
with statutory obligations.

To inculcate financial awareness, cost benefit attitudes and system orientation
in the entire organization.

To develop the human resources, systems and techniques of finance for
continuing innovation and contribution towards corporate excellence.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~149~

Vision
A major diversified, transnational, integrated energy company, with national leadership
and a strong environment conscience, playing a national role in oil security and public
distribution.
Indian Oil operates under the aegis of the Ministry of Petroleum & Natural Gas
(MOP&NG), Government of India.

VALUES
Indian Oil nurtures the core values of CARE, INNOVATION, PASSION & TRUST across
the organization in order to deliver value to its stakeholders.

Care stands for
Concern

Empathy

Understanding

Cooperation

Empowerment


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~150~
Innovation stands for

Creativity

Ability to learn

Flexibility

Change

Passion stands for

Commitment

Dedication

Pride

Inspiration

Ownership

Zeal and Zest

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~151~
Trust stands for
Delivered Promises

Reliability

Dependability

Integrity

Truthfulness

Transparency


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~152~
OBJECTIVES
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 countrys 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 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.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~153~
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 Indias 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.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~154~

OBLIGATIONS
Towards customers and dealers
To provide prompt, courteous and efficient service and quality products at
competitive prices.

Towards suppliers
To ensure prompt dealings with integrity, impartiality and courtesy and help
promote ancillary industries.

Towards employees
To develop their capabilities and facilitate their advancement through
appropriate training and career planning.

To have fair dealings with recognized representatives of employees in
pursuance of healthy industrial relations practices and sound personnel
policies.

Towards community
To develop techno-economically viable and environment-friendly products.

To maintain the highest standards in respect of safety, environment
protection and occupational health at all production units.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~155~
Towards Defense Services
To maintain adequate supplies to Defense and other Para-military services
during normal as well as emergency situations.

To ensure adequate return on the capital employed and maintain a reasonable
annual dividend on equity capital.

To ensure maximum economy in expenditure.

To manage and operate all facilities in an efficient manner so as to generate
adequate internal resources to meet revenue cost and requirements for project
investment, without budgetary support.

To develop long-term corporate plans to provide for adequate growth of the
Corporations business.

To reduce the cost of production of petroleum products by means of
systematic cost control measures and thereby sustain market leadership
through cost competitiveness.

To complete all planned projects within the scheduled time and approved
cost.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~156~

FINANCIAL OBJECTIVES
To ensure adequate return on the capital employed and maintain a reasonable
annual dividend on equity capital.

To ensure maximum economy in expenditure.

To manage and operate all facilities in an efficient manner so as to generate
adequate internal resources to meet revenue cost and requirements for project
investment, without budgetary support.

To develop long-term corporate plans to provide for adequate growth of the
Corporations business.

To reduce the cost of production of petroleum products by means of
systematic cost control measures and thereby sustain market leadership
through cost competitiveness.

To complete all planned projects within the scheduled time and approved
cost.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~157~

FLAGSHIP BRANDS
SERVO
Indian Oils SERVO is the largest selling lubricant brand in India, with one of the largest
ranges of automotive and industrial lubricants. The country's leading SERVO brand
lubricants from Indian Oil, with over 42% market share and 450 grades are sold through
8,000 retail outlets, besides a countrywide network of bazaar traders.
INDANE
Indian Oil reaches Indane brand cooking gas to the doorsteps of over 35 million households
in over 2,000 markets through the country's largest network of over 4,000 distributors. The
Corporations 82 LPG plants bottle about 3,380 thousand tonnes of LPG per annum.
PREMIUM FUELS
IOCL has pioneered branded fuels and higher octane petrol in India. At present IOCL sells
Xtrapremium to consumers across India through 800 retail outlets. Unlike the other branded
fuels available in the market, which are created by blending additives with normal Petrol,
Xtrapremium is produced with a higher-Octane index at the refinery end using superior
technology.
AVIATION SERVICES
Indian Oil's ISO-9002 certified Aviation Service, with 68% market share, meets the fuel and
lubricants needs of domestic and international flag carriers, Defense Services and private
aircraft operators.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~158~

AUTOGAS
Auto Gas (LPG) has been introduced in Hyderabad, Bangalore and Mumbai markets. This
alternative fuel is a good business proposition in the long term, and Indian Oil intends to
further expand its marketing in a big way.
COMPETITION
The major competitors of IOC are Reliance petroleum limited, Kochi refineries limited,
Chennai Petroleum Corporation limited & Mangalore refinery & petrochemicals limited.
Since the rates of the oil companies are almost same but with the privatization of HPCL &
BPCL the share price of Indian Oil will increase as compare to both the companies.


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~159~
Departments under the Marketing Division


HUMAN RESOURCES LPG
AVIATION SALES
LAW DIVISION OFFICE
FINANCE FINANCE
INTERNAL AUDIT AREA OFFICE
SALES FIELD OFFICE
QUALITY CONTROL LUBES
MAINTAINANCE
AND INSPECTION
P&A
OPERATIONS OPERATIONS
ENGINEERING ENGINEERING
INFORMATION
SYSTEMS
INFORMATION
SYSTEMS
CORPORATE
COMMUNICATIONS
TERMINALS

(Source: Indian Oil Corporation Limited, New Delhi)



Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~160~
DATA COLLECTED
PRODUCT NAME WITH THE STANDARD UNITS OF MEASUREMENT
KL= KILO LITRE
MT= METRIC TON
Product Name Unit
5% ETH PRE BENZ MS KL
ATF KL
AUTO LPG MT
BENZ-MS KL
BENZMSE KL
BITUMEN 60-70 MT
BITUMEN 80-100 MT
BITUMEN 80-100(P) MT
BS II XTRZ PREM KL
BS-II MS KL
BS-III HSD KL
EMSBENZ KL
EPGMS KL
ETH BL BSII XTRA PRE KL
ETH BLD XTRAPREMIUM KL
ETH. BLD. MS KL
EURO-III ETH KL
EURO-III MS KL
FO KL
HAN MT
HPS/LSHS MT
HSD KL
HSD SUPER KL
IND LPG MT

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~161~
LDO KL
LPG(B) MT
LPG(P) MT
MS KL
MS-93 KL
MSE KL
MS-T KL
NA KL
NAPTHA MT
RFO MT
SKO KL
SKO KL
SKO-IND KL
UL-HSD KL
XTRA PREM BSII MS 88 KL
XTRAMILE EURO-III HS KL
XTRAMILE SUP HSD KL
XTRAPREM EUROIIIMS KL
XTRAPREM ULSMS KL
(Source: Self Generated)


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~162~

Port code Port Name
0 NA
3 MANGALORE
4 VIZAG
122 MATHURA
154 PANIPAT
230 BARAUNI
232 HALDIA
300 MUMBAI
326 SABARMATI
336 KANDLA
3105 JAMNAGAR
(Source: Indian Oil Corporation Limited, New Delhi)


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~163~

PRICE ELEMENTS
Charge code Description
0 ALL
1 RTP
2 FRT
3 TERMINALLING
4 MI
5 HANDLING
6 FILLING
7 ED
8 AED
9 CST
10 GST
11 MST
12 ARF
13 DOCUMENTATION
14 SERVICE TAX
15 HYDRANT
16 PANIPAT FRT
17 LPG TERM CH.
18 LPG FRT
19 PROCESSING FEES
20 CONCESS. ED
21 CONSUMABLES
22 VAT
23 CST-SKO,LPG
24 CST-ON NED
25 ENTRY TAX
26 ETHANOL-WT AVG



Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~164~

(Source: Indian Oil Corporation Limited, New Delhi)


27 EMS RTP
28 EDU. CESS
29 CST U/REC
30 COST SHARING
31 IMPORT LICENCE FEES
32 ELECTRICITY
33 SPACE
34 SUMP CHARGES
35 DEMURRAGE
36 CESS RAJASTHAN
37 INFRA CESS
38 SERV TAX-PPL
39 STATE DEV TAX
40 VAT REBATE
41 DEDUCTIBLE ST
42 CONTRA DED. ST
200 RECOVERY FRT
501 AV
502 DEPOT PRICE
700 RECOVERY ED
701 SIDING/SHUNTING
702 DOC CH.

Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~165~

SALES FIGURES OF 2008-2009
Sum of Qty 15
0
c
Customer Product Total
BPC ATF 29,815,257,837.88
BITUMEN 60-70 127,844,294.50
BITUMEN 80-100 153,004,563.50
BS-II MS 7,419,118,324.62
BS-III HSD 17,623,680,319.07
EPGMS 421,663,954.14
EURO-III ETH 4,939,328.55
EURO-III MS 4,715,642,765.99
IND LPG 164,346,070.29
LPG(B) 1,106,872,468.23
LPG(P) 0
NAPTHA 726,233,822.97
SKO 4,878,054,916.93
UL-HSD 31,508,126,439.87
BPC
Total 98,664,785,107.00
(Source : Self Generated)




Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~166~


Sum of Qty 15
0
c
Customer Product Total
HPC ATF 884,688,887.22
AUTO LPG 56,866,716.89
BITUMEN 60-70 171,817,707.00
BITUMEN 80-100 468,491,030.62
BS-II MS 8,312,451,818.33
BS-III HSD 10,746,086,418.58
EPGMS 535,464,042.86
EURO-III ETH 114,694,062.64
EURO-III MS 4,102,420,738.08
FO 281,920.64
IND LPG 128,740,021.97
LPG(B) 1,992,777.10
MS-93 8,703,571.17
SKO 6,679,391,689.57
SKO-IND 15,879,912.06
UL-HSD 27,002,013,065.34
HPC Total 59,229,984,380.07
(Source : Self Generated)


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~167~

PURCHASE FROM OMC

Qty at 15
0

Customer Product Grand Total
BPC ATF 451055
BS-II MS 3770.64
BS-III HSD 259.932
SKO 2361.52
UL-HSD 4642.17
BPC Total 462089
(Source : Self Generated)

HPC Product Grand Total
BS-II MS 5599.37
BS-III HSD 1098
EPGMS 562.402
EURO-III ETH 283.699
EURO-III MS 2038.72
FO 1156.34
LPG(B) 11.42
SKO 11008.1
UL-HSD 12107.1
HPC
Total 33865.1
(Source : Self Generated)


Vaibhav Rastogi/4108175175/MBF Indian Institute of Finance/ 2008 10 ~168~

IBP Product
Grand
Total
BS-III HSD 4103.24
EPGMS 24
EURO-III ETH 3217.82
IBP Total 7345.07
Grand
Total 503299
(Source : Self Generated)