Financial statement analysis of Hindustan

petroleum corporation limited

Submitted to: Submitted by:

Dr. Meena Bhatia Group 6:

Aishwarya Choudhary 20DM013

Alvin Subash 20DM021

Apoorva Mathur 20DM039

Amit Kumar Hooda 20DM028

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Business Model of HPC
HPCL has developed its 5-year strategy roadmap christened ‘T20’ along with a detailed
implementation plan up to the year 2020-21 to traverse through uncertainties and challenges of
future business environment. As envisaged in the plan, HPCL is continuously enhancing its
ability to navigate future challenges by strengthening existing businesses of refining and
marketing and incorporation of new business lines including petrochemicals & natural gas. The
R&D capabilities of the Corporation are continuously being scaled up towards development of
new technologies and products. The Greenfield and brownfield refinery expansion projects have
achieved significant physical and financial progress during the year. Various marketing
infrastructure expansion projects were commissioned during the year. In Natural gas sector,
HPCL and its JVs are enhancing the foothold with availability of authorisation for setting up of
CGD network in 20 geographical areas in nine states with planned participation in the entire
value chain of Natural gas. With identification of Petrochemicals as a key lever for future
growth, focussed actions has been initiated for foraying in the Petrochemical sector. Large-scale
investments are underway for building the Petrochemical manufacturing capacities. HPCL is
exploring new business opportunities with participation in Electric.

Decision of Bank based on the Ratio Analysis

The ability of the company to pay its long-term debt can be analysed using the debt to equity
ratio and the Interest coverage ratio. Both these ratios have seen a sharp decline in financial year
19-20. This shows the difficulty of the company to pay off its debts. The equity they generate is
insufficient to pay of its debts. This can be closely related to the increase in long term borrowing
of the company during the last financial year. Moreover, the company has seen a decrease in the
Net Profit margin in the last financial year.

Debt to Equity Interest Coverage

2.50 25.00

2.00 20.00

1.50 15.00

1.00 10.00

0.50 5.00

0.00 0.00
FY 19-20 FY 18-19 FY 17-18 FY 16-17 FY 15-16 FY 19-20 FY 18-19 FY 17-18 FY 16-17

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 Net Profit Margin
3.5

2.5

1.5

0.5

0
FY 19-20 FY 18-19 FY 17-18 FY 16-17 FY 15-16

The liquidity position of the company is strong. The liquidity ratios like the Quick ratio and
Current ratio has increased. This is a good sign for the company and shows its ability to convert
assets into cash and pay off its current liabilities.

Quick ratio Current Ratio

0.6 1.2

0.5 1

0.4 0.8

0.3 0.6

0.2 0.4

0.1 0.2

0 0
FY 19-20 FY 18-19 FY 17-18 FY 16-17 FY 15-16 FY 19-20 FY 18-19 FY 17-18 FY 16-17 FY 15-16

As far as this analysis is concerned, the ability of company to repay its debt has seen a decrease
and their net profit has also decreased due the economic situations prevailing. The company has
also inquired a large long term borrowing in the last financial year. Therefore, the bank is not
willing to give away loan to this company at least for the upcoming financial year.

Key Changes on the basis of Trend line Analysis

Balance Sheet:
1. The long-term borrowings of the firm have increased drastically from 6.5% in FY19 to 110%
in FY20 compared with the FY16. Due to this drastic change the non-current liabilities of the
company have also shown a significant increase compared to the previous financial years.

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 This can be closely read with the increase in capital work in progress. Also, this also supports
the sudden rise in financial costs of the company.

2. The current liabilities of the company have increased at the rate of 82%in FY20 and 50% in
FY19. Therefore, the liabilities of the company have increased sharply in the last 2 financial
years when this data is related with the increase in the long-term borrowings.

3. The company has shown a very sharp increase in the Capital Work in progress. The fixed
assets of the company have also increased. This has been funded from the long-term
borrowings. The company is increasing its fixed assets. This will help the company to raise
collateral easily.

Long Term Borrowings

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%
FY 19-20 FY 18-19 FY 17-18 FY 16-17 FY 15-16

P&L Account:
1. The increase in revenue from operations in FY20 has decreased compared to the previous
years. This also reduced the taxes paid and other expenses. This can be associated with the
global economic slowdown and the Covid19 related issues.
2. The expenses of financial costs have increased owing to the increase in the long term
borrowing in the trend analysis. When compared to the revenue increase, it’s quite high. This is
also caused by the unprecedented situations happening around the world.

Revenue From Operations

94.00%

92.00%

90.00%

88.00%

86.00%

84.00%
FY 19-20 FY 18-19 FY 17-18 FY 16-17 FY 15-16

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 Accounting Policies
Property, Plant and Equipment
 Freehold lands are carried at cost. All other items of Property, Plant and Equipment are stated
at cost, net of accumulated depreciation and accumulated impairment losses, if any.
 Technical know-how/ licence fee relating to plants/ facilities are capitalized as part of cost of
the underlying asset.
 Expenditure during construction period: Direct expenses incurred during construction period on
capital projects are capitalised.
 Subsequent expenditure is capitalised only if it is probable that the future economic benefits
associated with the expenditure will flow to the Corporation.
 Spare parts which are meeting the requirement of Property, Plant and Equipment are
capitalized as Property, Plant and Equipment in case the unit value of the spare part is above the
threshold limit. In other cases, the spare parts are inventorised on procurement and charged to
Statement of Profit and Loss on consumption.
 An item of Property, Plant and Equipment and any significant part initially recognised
separately as part of Property, Plant and Equipment is derecognised upon disposal; or when no
future economic benefits are expected from its use or disposal; or when the Property, Plant
Equipment has been re-classified as ready for disposal. Any gain or loss arising on de-
recognition of the asset is included in the Statement of Profit and Loss when the asset is
derecognised.
 The Corporation has chosen the carrying value of Property, Plant and Equipment existing as
per previous GAAP as on date of transition to Ind AS i.e. 1st April, 2015 as deemed cost
Inventories

Inventories
Inventories (including in-transit) of different categories are as under: -

a) Crude oil is valued at cost on First in First Out (FIFO) basis or at net realisable value,
whichever is lower. Crude oil is not written down below cost except in cases where their prices
have declined subsequently and it is estimated that the cost of the finished goods will exceed
their net realisable value.
b) Raw materials for lubricants are valued at weighted average cost or at net realisable value,
whichever is lower.
c) Stock-in process is valued at raw material cost plus cost of conversion or at net realisable
value, whichever is lower.
d) Finished products other than Lubricants are valued at cost (on FIFO basis month-wise) or at net
realisable value, whichever is lower.
e) Finished products (lubricants) are valued at weighted average cost or at net realisable value,
whichever is lower.
f) Empty packages are valued at weighted average cost.
g) The net realisable value of finished goods and stock in trade are final selling prices for sales to
oil marketing companies and depot prices applicable to the locations. For the purpose of stock
valuation, the proportion of sales to oil marketing companies and consumer sales are
determined on location wise and product wise sales of subsequent period.
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Revenue Recognition:
 The Corporation satisfies a performance obligation by transferring control of a promised
goods/ services to a customer; Financial Statements CORPORATE OVERVIEW
STATUTORY REPORTS 68th 153 Annual Report 2019-20
 Transaction price is allocated on each performance obligation and is recognised as and
when the particular performance obligation is satisfied either at a point in time or over a
period of time;
 The transaction price is the amount of consideration to which an entity expects to be
entitled in exchange for transferring promised goods or services to a customer including
excise duties, as applicable and is measured at the fair value of the consideration received
or receivable, net of returns, taxes or duties collected on behalf of the government and
trade discounts or rebates, as applicable;
 it is probable that the entity will collect the consideration to which it will be entitled in
exchange for the goods or services that will be transferred to the customer. Revenue is
allocated between Loyalty Programs and other components of the sale. The amount
allocated to the Loyalty Program is deferred, and is recognised as Revenue when the
Corporation has fulfilled its obligation to supply the products under the terms of the
Program or when it is no longer probable that the points under the Program will be
redeemed. Where the Corporation acts as an agent on behalf of a third party, the associated
Revenue is recognised on a net basis.
 Interest income is recognised taking into account the amount outstanding and the
applicable effective interest rate.
 Dividend is recognised when right to receive the payment is established.

Potential security in capital structure:

The Corporation has an adequate fund and non-fund-based lines from various banks. The
Corporation has sufficient borrowing limits in place duly, approved by its Shareholders and
Board. Domestic and international credit rating from reputed credit rating agencies enables
access of funds both from domestic as well as international market. Corporation’s diversified
source of funds and strong operating cash flow enables it to maintain requisite capital structure
discipline. Corporation diversifies its capital structure with a mix of instruments and financing
products across varying maturities and currencies. The financing products include syndicated
loans, foreign currency bonds, TREPS loan, commercial paper, non-convertible debentures,
buyer’s credit loan, clean loan etc. Corporation taps domestic as well as foreign debt markets
from time to time to ensure appropriate funding mix and diversification of geographies. Given
the above there is nothing mentioned of potential securities in the capital structure.

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Quality of Earnings:
A company’s quality of earnings is revealed by dismissing the anomalies, accounting tricks, or
one-time events that may skew the real bottom line numbers on performance. Companies that do
not manipulate their earnings have a high quality of earnings. This is because as a company's
quality of earnings improves, its need to manipulate earnings to portray a certain financial state
decrease.

If we analyse the quality of earnings of HPC, the net income of the company has shown a
decrease when compared to the last financial year. The sales on credit has decreased compared to
the last financial year. The cash flow of the company from the operating activities is positive and
this shows that the company has not tried to inflate its income and decrease the expenses.

A company can manipulate popular earnings measures such as earnings per share and price-to-
earnings ratio by buying back shares of its own stock, which reduces the number of shares
outstanding. In this way, a company with declining net income may be able to post earnings-per-
share growth. But HPC has shown a constant shareholder equity of 1525 crores over these years
where the data was compared.

Hence, we can say that HPC has show a good quality in its earnings and have not tried to skew
its values to a higher value.