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5-point Du Pont Analysis of the Indian Oil & Gas Sector: Pre and Post
Recession

Article  in  "Imperial Journal of Interdisciplinary Research (IJIR) · January 2016

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Imperial Journal of Interdisciplinary Research (IJIR)
Vol-2, Issue-9, 2016
ISSN: 2454-1362, http://www.onlinejournal.in

5-point Du Pont Analysis of the Indian Oil

& Gas Sector: Pre and Post Recession
Shivam Singhal1 & Srijan Narang2
1
Senior Undergraduate, Indian Institute of Technology (IIT) Delhi
2
Senior Undergraduate, Indian Institute of Technology (IIT) Delhi

Abstract: This term paper analyzes the effect of the
global recession of 2008 on the stocks of the Oil &
Gas Sector of the BSE (Bombay Stock Exchange) 500
Index in India. Although many papers indicate that
the effect of the global recession in India was not as
severe as that of the US but it is also true that India
as an economy was not completely shielded too. This
paper attempts to investigate the same by computing
Du Pont 5-Point ratios for two periods of 5 years
each: Pre 2008 recession and Post 2008 recession.
The paired T-test is used to support the analysis and
determine the significance of the global meltdown.
The results computed using the Du Pont 5-Point
financial ratios suggest that the Indian Oil & Gas
Sector was not very well shielded by recession and
has not been able to fully recover till 2013.
Keywords: Du Pont ratios, Recession, paired T-test,
Oil & Gas Sector
1. Introduction
The Indian Oil and Gas Sector, being a key
component of the six core industries in India namely
Crude Oil, Petroleum Refinery Products, Coal,
Electricity, Cement and Finished Steel is a major
driving factor for other sections of the economy as
well. After the 1991 Economic Liberalisation
Reforms, India has become a much more integral
part of the global economy than before [1]. Therefore
it is evident that any global economic crisis would
influence the Indian economy as well. The global
recession of 2008 although did not hit the Indian
economy as strongly as US but slowed the nation’s
Gross Domestic Product (GDP) growth rate from
9.3% in 2007-08 to 6.8% in 2008-09 [2]. India is the
fourth largest consumer of crude oil and petroleum
products in the world and the demand for oil & gas is
increasing every year owing to the growing GDP.
Rest of the sections in this term paper will now
aim to analyse the major drivers in the downfall of
the Indian Oil & Gas Sector about the year 2008 with
the help of 5 components of the Du Pont Ratios
being Tax Burden, Interest Burden, Operating Profit
Margin, Asset Turnover and Equity Multiplier. The
combined product effect of the 5 ratios determine the
Return on Equity. Du Pont analysis shows vital
performance measures of a company like leverage,
turnover and profitability [3].
Following the Du Pont analysis, T-test is used to
support the analysis. A t-test is any statistical
hypothesis test in which the test statistic follows a
Student's t-distribution if the null hypothesis is
supported. It can be used to determine if two sets of
data are significantly different from each other.
For calculations, data for various companies of
the Oil & Gas Sector was collected for the period
2003-2013 and divided into two parts: Pre-recession
period (2003-2007) and Post-recession period (2009-
2013).
2. Materials and Methods
A similar analysis was performed on the top three
companies of the Pharmaceutical Industry in India in
which important ratios like ROE and ROA were
calculated to determine their financial health [4].
The data used for calculating the components of 5
Point Du Pont analysis has been gathered from Ace
Equity Database (developed by Accord Fintech Pvt.
Ltd.) and the websites of the Bombay Stock
Exchange (BSE) and Make in India (a Government
of India initiative).
Primary analysis in this paper revolves around
Return on Equity (ROE) ratio which is the division
of Earnings after Taxes (EAT) by Shareholders
Equity. ROE being a product of Tax Burden, Interest
Burden, Operating Profit Margin, Asset Turnover
and Equity Multiplier ratios, is calculated using the
following formulas:

Imperial Journal of Interdisciplinary Research (IJIR) Page 462

Imperial Journal of Interdisciplinary Research (IJIR)
Vol-2, Issue-9, 2016
ISSN: 2454-1362, http://www.onlinejournal.in
Since ROE is a product of the 5 ratios stated
above, it could also be written as follows:
The Oil and Gas sector of the BSE 500 Index
comprises of the following 10 companies:-
1. Bharat Petroleum Corporation Ltd.
2. Cairn India Ltd.
3. Castrol India Ltd.
4. GAIL (India) Ltd.
5. Hindustan Petroleum Corporation Ltd.
6. Indian Oil Corporation Ltd.
7. Oil India Ltd.
8. Oil & Natural Gas Corporation Ltd.
9. Petronet LNG Ltd.
10. Reliance Industries Ltd.
But due to the presence of certain discrepancies in
the available financial data of some of the companies
listed above, we only included 7 of these companies.
Cairn India Ltd. was excluded from the calculations
because it was founded in 2007 hence the data before
that does not exist. Castrol India Ltd. was excluded
because the balance sheet data (snapshot) was
available for December whereas for rest of the
companies, it was available for March. Petronet LNG
Ltd. was excluded from calculations on similar
grounds. The final list of companies which were
selected for Du Pont analysis are as follows:-
1. Bharat Petroleum Corporation Ltd. (BPCL)
2. GAIL (India) Ltd.
3. Hindustan Petroleum Corporation Ltd.
4. Indian Oil Corporation Ltd. (IOC)
5. Oil India Ltd.
6. Oil & Natural Gas Corporation Ltd.
7. Reliance Industries Ltd.
In order to calculate Financial Ratios for the entire
sector, average of all the constituent companies was
taken according to their market capitalizations. The
market capitalizations of the seven companies over
the span of 11 years have been shown in Table 1.
Imperial Journal of Interdisciplinary Research (IJIR)
For comparing the means of two periods
(populations) – Pre-recession and Post recession with
different mean and different population size, t-test
used is Welch's t-test. The t statistic to test whether
the population means are different is calculated as:
where numerator is difference of means of two
population and denominator square is unbiased
estimator of the variance of two samples.
Denominator is defined as:
For use in significance testing, the distribution of
the test statistic is approximated as an ordinary
Student's t distribution with the degrees of freedom
calculated using:
where s1, s2 are standard deviation of the two
samples respectively and n1, n2 are number of
samples in population respectively.
We calculate p value (significance value) from t-
table using degrees of freedom and t-value is
calculated from the formula mentioned above.
3. Results and Discussion
3.1. Financial Performance of Oil & Gas
Companies
In this section, we aim to determine the financial
performance of companies in the Oil & Sector by
analysing the five component ratios of Du Pont.
Except for a few anomalies in the Tax Burden
Ratios for BPCL and IOC in Figure 1, the ratio has
been quite stable about the point of recession. This
indicates that recession did not induce any changes in
the amount of taxes levied on corporates by the
Government of India.
Page 463
Imperial Journal of Interdisciplinary Research (IJIR)
Vol-2, Issue-9, 2016
ISSN: 2454-1362, http://www.onlinejournal.in

Table 1. Market Capitalization (in Crores) of the considered companies for the period 2003-2013

Table 2. Tax Burden Ratio for the seven oil & gas companies

Table 3. Interest Burden Ratio for the seven oil & gas companies

Table 4. Operating Profit Margin Ratio for the seven oil & gas companies

It is quite evident from the plot of Interest Burden
Ratio that BPCL, HPCL and IOC were heavily
affected at the point of recession (see Figure 2). On
observing the data from the balance sheets carefully,
it became clear that while EBIT for these companies
was more or less the same but EBT suffered heavy
losses at the point of recession. One of the reasons
for this could be that the revenues for these 3
companies dipped but they still had to pay
instalments of long term loans.
It can be observed from Figure 3 above that the
Operating Profit Margin of almost every company of
the Oil & Gas Sector suffered a dip in the ratio about
the point of recession. Due to recession, the
operating costs of the companies increased thus
decreasing the division factor of EBIT over Net
Sales.
The immediate post-recession period saw a
decrease in the asset turnover ratio meaning that
there was more increase in total assets as compared
to net sales (see Figure 4). But the trend after 2010
also indicates that almost every company in the Oil
& Gas Sector recovered their Asset Turnover Ratio
and some of them even outperformed pre-recession
values.

Imperial Journal of Interdisciplinary Research (IJIR) Page 464

Imperial Journal of Interdisciplinary Research (IJIR)
Vol-2, Issue-9, 2016
ISSN: 2454-1362, http://www.onlinejournal.in
Figure 1. Plot of Tax Burden Ratio for the seven oil
& gas companies
Figure 2. Plot of Interest Burden Ratio for the seven
oil & gas companies
Figure 3. Plot of Operating Profit Margin Ratio for
the seven oil & gas companies
It is evident from the Figure 5 that there was no
visible impact of recession on the Equity Multiplier
Ratio. For all the companies, the ratio either remains
the same or it increases after 2008. It means that
there has been a greater increment in Total Assets as
compared to Shareholders Equity. One of the reasons
for this could be that the finance might have been
raised more through debt than equity post 2008.
Imperial Journal of Interdisciplinary Research (IJIR)
Figure 4. Plot of Asset Turnover Ratio for the seven
oil & gas companies
Figure 5. Plot of Equity Multiplier Ratio for the
seven oil & gas companies
Figure 6. Plot of Return on Equity (ROE) Ratio for
the seven oil & gas companies
It is evident from the Figure 6 above that almost
all of the companies in the Oil & Gas Sector have
suffered a setback in the Return on Equity Ratio.
While the Tax Burden Ratio and the Equity
Multiplier Ratio contributed to an increment in ROE,
the effect of the remaining 3 factors – Interest
Burden Ratio, Operating Profit Margin Ratio and
Asset Turnover Ratio has been stronger and led to
the decrement in ROE post 2008.
Page 465
Imperial Journal of Interdisciplinary Research (IJIR)
Vol-2, Issue-9, 2016
ISSN: 2454-1362, http://www.onlinejournal.in

Table 5. Asset Turnover Ratio for the seven oil & gas companies

Table 6. Equity Multiplier Ratio for the seven oil & gas companies

Table 7. Return on Equity (ROE) Ratio for the seven oil & gas companies

Table 8. Effective Du Pont Ratios for the Oil & Gas Sector

Imperial Journal of Interdisciplinary Research (IJIR) Page 466

Imperial Journal of Interdisciplinary Research (IJIR)
Vol-2, Issue-9, 2016
ISSN: 2454-1362, http://www.onlinejournal.in

3.2. Financial Performance of the Oil & Gas

Sector as a Whole
The market capitalization share of Reliance and
ONGC together is more than twice the combined
sum of rest of the companies in the Oil & Gas Sector.
Hence, it can be safely assumed that the effect of
these two companies in driving the ROE of Oil &
Gas Sector would be the strongest.

Figure 8. Plot of Effective Return on Equity (ROE)

Ratio for the Oil & Gas Sector

Figure 7. Plot of Effective Du Pont Ratios for the Oil

& Gas Sector

Table 9. T-test for the Oil & Gas Sector about 2008

The overall ROE of the Oil & Gas Sector very
clearly indicates a significant difference between the
pre and post-recession values. It can be further
observed that the Oil & Gas sector as a whole hasn’t
been able to fully recover its ROE value even 5 years
post the 2008 economics crisis.
3.3. Supporting Du Pont analysis of the Oil &
Gas Sector using T-test
For further analysis, we fixed the value of
confidence interval as 0.95. Now if the p value from
the test is less than 0.05, we reject the null hypothesis
and if the p value comes out to be greater than 0.05,
we fail to reject the null hypothesis.
Since the significance values of Tax Burden and
Equity Multiplier are greater than 0.05, it indicates
that the mean difference between the values pre and
post-recession is not that significant. This implies
that Tax Burden and Equity Multiplier did not have a
significant role to play in determining the value of
ROE about the point of recession.
On the other hand, the significance values of
Interest Burden, Operating Profit Margin and Asset
Turnover is less than 0.05 which signifies that the
mean difference between the pre and post-recession
periods have changed drastically. Hence, Interest
Burden, Operating Profit Margin and Asset Turnover
had a crucial role in determining the ROE about the
point of recession.

Imperial Journal of Interdisciplinary Research (IJIR) Page 467

 Imperial Journal of Interdisciplinary Research (IJIR)
Vol-2, Issue-9, 2016
ISSN: 2454-1362, http://www.onlinejournal.in
On observing the value of ROE for the Oil & Gas
Sector, it can be concluded that there is a greater than
99.99% chance that we reject the null hypothesis.
This is a very strong indication that recession
brought about a significant change in the mean value
of ROE before and after 2008.
4. Conclusion
On the basis of the 5-Point Du Pont analysis along
with the support of the T-test, it is evident that the
Oil & Gas sector was although not as badly hurt as
many companies in the US but was also not
completely shielded. The sector saw a significant dip
at the point of recession and it could not fully recover
from the effects even until 2013.
The above analysis also concluded that two
companies - Oil & Natural Gas Corporation Ltd. and
Reliance Industries Ltd. had a much larger effect to
the ROE of sector than rest of the Oil & Gas
companies.
The T-test analysis made it evident that Tax
Burden and Equity Multiplier did not have a
significant role whereas Interest Burden, Operating
Profit Margin and Asset Turnover played a crucial
role in determining the ROE about the point of
recession.
Although affected by the global recession of
2008, the Oil & Gas Sector managed to stabilise
itself at lower ROE levels. This notion has also been
supported by several academicians and economists.
Mangal Sain et. al. concluded that although the
Indian economy has been hurt by the global financial
crisis but it may be in a better position with quick
recovery than many of the other economies [5].
Further study of the Indian Oil & Gas sector and
the influence of global factors like crude oil prices,
policies set by The Organization of the Petroleum
Exporting Countries (OPEC) nations and elasticity of
demand might perhaps paint a different picture
altogether but on the basis of Du Pont analysis, it can
be concluded that the Oil & Gas sector was impacted
by the global financial crisis of 2008.
5. References
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[2] R. K. Bhatt, "Recent Global Recession and
Indian Economy: An Analysis," International
Journal of Trade, Economics and Finance, Vol. 2,
No. 3, 2011.
[3] M. Botika, "The use of DuPont Analysis in
Abnormal Returns Evaluation: Empirical Study of
Romanian Market", World Conference on Business,
Economics and Management (BEM-2012), Antalya,
Turkey, 2012.
Imperial Journal of Interdisciplinary Research (IJIR)
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[4] D. K. K. S. Christina Sheela, "Financial
Performance of Pharmaceutical Industry in India
using Du Pont Analysis," European Journal of
Business and Management, Vol 4, No.14, 2012.
[5] Mangal Sain, Aditi Mittal, “Impact of Recession
on India”, International Journal in Management and
Social Science, Vol. 1, No. 4, 2013.
[6] D. A. A. Almazari, "Financial Performance
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DuPont System of Financial Analysis," International
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2012.
[7] T. J. Liesz, "Really Modified Du Pont Analysis:
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[8] S. Tandon, S. Dhankhar, D. Goel, “Pre and Post-
Recession Operating Performance of Indian
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application of 5-point Du Pont Analysis on BSE
Sectoral Indices”, International Journal of
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[9] T. J. L. Steven J. Maranville, "Ratio Analysis
Featuring the Du Pont Method: An overlooked topic
in the Finance Module of Small Business
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[10] J. d. W. a. E. d. Toit, "Return on equity: A
popular, but flawed measure of corporate financial
performance," South African Journal of Business
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[11] Nakul Bhardwaj, Manik Kumar, “Impact of
Recession on Indian Economy”, International
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of Indian Stock Market”, Zenith, International
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[13] S. S. Y. P. J. Neelam Rani, "Post-M&A
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