PROJECT REPORT

INDIAN OIL CORPORATION LIMITED (IOCL),PIPELINE HEAD OFFICE (PLHO), NOIDA

A Report onFinancial Analysis of IOCL and DFR on Proposal for Investment Approval of Branch Pipeline from BKPL to Motihari and Baitalpur

Submitted by: Under the Guidance of: Arpit Verma Ms. Navleen Kaur A1802012113 Assist. ProfessorMBA-IB(2012-14) Amity UniversityAIBS, Noida.Amity University, Noida.

Report onFinancial Analysis of Indian Oil Corporation Limited and DFR onProposal for Investment Approval Of Branch PipelineFrom Barauni-Kanpur Pipeline to Motihari and Baitalpur for leveraging the transportation tariff

Submitted By: Arpit VermaEnrollment No. : A1802012113Faculty Guide: Ms. Navleen Kaur Company Guide: CA Gaurav Gupta A report submitted in partial fulfillment of the requirements of MBA-IB Program of Amity University, Noida

Authorization

The making of this report has been authorized by CA Gaurav Gupta, Senior Accounts Officer at Pipelines Division Head office, Noida (Indian Oil Corporation Limited).I hereby declare that all the work shown in my project is true to my knowledge and has been completed at IOCLs office. The research study was conducted over a span of 45 days from June 2013 to July 2013.This project is meant for a partial fulfillment of the MBA-IB program at Amity International Business School, Amity University, Noida.

AcknowledgementsI take this opportunity to express my heartfelt thanks to CA Gaurav Gupta, Senior Accounts Officer at Pipelines Division, Head Office, Noida (IOCL). He has been the guiding light in the organization right from first day of my joining. He has always had trust in my abilities and has appreciated the same. The project would not have been complete without his immense guidance and support.I would also like to thank Ms Navleen Kaur, Assistant Professor, AIBS, Amity University , Noida, who has been available at all time to help and support me whenever I needed during the course of my internship.I am extremely indebted to Ms. Deepti Goel , Senior Accounts Officers at Pipelines Division, Head Office, Noida (IOCL) and the Technical Department for providing me with valuable inputs that helped me in my study.

TABLE OF CONTENTSAuthorization3Acknowledgement4Executive Summary7Introduction to the report8Capital Investment Analysis in IOCL9Objective of the study19Methodology19Limitations20Introduction about Oil & Gas sector20History of Oil and Gas sector In India22Economic Analysis of the Sector23Trend Analysis25Oil Reserves25Price build-up for petrol in India an example using Delhi city28Downstream Players in India29Company Overview31IOCLs dominance in downstream Oil sector32Corporate History33Major Proven Track Record of IOCL34Subsidiaries and Joint Ventures36Highlights of Beyond Boundaries Subsidiaries37Core operations37Board Structure &Shareholding Pattern44Project Proposal62Brief Description of the Proposal62Completion Schedule65Need and Justification of the Proposal65Estimation of Capital Cost68Estimation of Operating Cost70Phasing of Expenditure72Calculation of Interest on Capital Cost72Analysis of Financial Viability73Conclusion75Analysis of Risk and Assessment75Conclusion76Recommendations76Benefits to the Organization76Learning from the SIP77Attachments79References87

Executive Summary

The project proposed is to study the financial ratio analysis of IOCL for last six to eight years and making a comparative study for it and also studying the financial feasibility of a major capital intensive project in the Pipelines Division of Indian Oil Corporation Limited. With an aim to optimize the transportation tariff, actions have been initiated to put up a branch pipeline from Barauni-Kanpur Pipeline to Motihari and Baitalpur, which is developed indigenously by the Companys Research & Development department.The project involved learning the functioning of the Finance department in the pipelines in analyzing the financial viability of such proposals by the Technical department. The project is then aimed towards developing an understanding the various guidelines that the company follows to determine the feasibility of Capital Budgeting decisions. These understanding formed the basis for conducting the future study necessary to go ahead with the project. The first step in exercise was to have a brief idea about the background and process description of the technology, reviewing the need and justification established by the technical department and the consequences if the project is not implemented. The analysis of available alternatives to fulfill the same need is also very important. The current throughput of the 3 products i.e. Motor Spirit (MS), Superior Kerosene Oil (SKO) and High Spirit Diesel (HSD) were compared with their future throughputs and demands.The next part of the project involved identifying and bifurcating the details and basis of the project cost, compare the cost with similar projects and determine the phasing of expenditures. Finally, the financial analysis of the proposed project was done to determine its viability and profitability. This analysis is basically required in the pipelines to analyze the financial aspects of any capital investment project along with its technical feasibility. It is very important for capital intensive companies to determine the return for every project because an unprofitable venture might prove disastrous for the growth and survival of the company.Along with the above mentioned on site project, the report comprises of industry and company analysis. It focused on building on an understanding of the oil and gas sector in India, in terms of size of the market, production consumption and other relevant information. This is followed by an introduction to IOCL, its history and progress, revenues and profitability analysis and financial ratio analysis. CHAPTER 1 INTRODUCTION

Introduction about Oil & Gas sectorThe energy sector in India is one of the key economic drivers in India. Fulfilling the need for energy for both domestic and commercial consumption, the sector has emerged as the 4th largest energy consumer in the world, after the United States, China and Japan. As per the Ministry of Petroleum and natural Gas, oil in India accounts for close to 30% of the total energy consumed. To satisfy demand, Indian upstream oil companies have acquired stakes in overseas assets. Existing domestic oil reserves and production is insufficient to meet the demand in India. More than 80% of Indias crude oil demand was met through imports as of FY12.Economic growth witnessed by India, has led to more economic activity across states thus resulting in high demand for oil and gases to continuous fuel the growth further. Employing more than 1.3 lakhs individuals and with a favorable policy environment the sector has emerged as one of the key core sectors driving the economy. The sector is primarily dominated by state owned firms like ONGC and IOCL. The sector also acts as a major source of tax revenue generation for Indias central and state governments. Prices of many oil, natural gas and petroleum products are controlled by the central government. This sometimes forces downstream companies to sell finished products at unprofitable prices. Government subsidies partially cover the shortfall, but this puts a strain on central government finances and bloats the fiscal deficit. In FY13, the government instituted a slew of reforms geared toward reducing the subsidies, such as limiting the number of subsidized cylinders and incremental decontrol of diesel prices. These moves are expected to improve the earnings of industry operators in coming quartersAs per the BP statistics report published in 2013, India has proved oil reserves of about 9.0 billion barrels, with an average production of about 826,000 barrels/day. Indian Oil & Gas sector has two levels of activities.

1. Upstream Segment: This primarily deals with exploration of crude oil from reserves across regions. Oil and Natural Gas Corporation (ONGC) is the leading player in this sector, operating with close to 75% of the market share in terms of crude oil output.2. Downstream Segment: This segment deals with transportation, refining and marketing of crude oil. Indian Oil Corporation (IOCL) has mastered this activity. Operating over 12,163 Km of pipeline for crude transportation with a capacity of 1.4 million barrels per day, the firm operates with close to 75% of the total market share in terms of pipelines. IOCL is again a market leader in this segment, operating 10 out of 22 refineries across India. IOCL being a state owned enterprise faces its closest competition from Reliance Industries limited

Company OverviewIndian Oil is Indias largest commercial enterprise and flagship national oil company with business interest comprising the entire hydrocarbon value chain. It is a leading Indian Corporate in fortune Global 500 listing, rank at the 83rd position by the sales turnover for the year 2013. Indian Oil and its subsidiaries have a dominant share in the petroleum products market, national refining capacity and downstream pipeline capacity. It has been helping meet Indias energy demands over five decades now with business verticals spread over Refineries, Pipelines, Marketing, Research & Development and Business Development- E&P, Petrochemicals and Natural Gas. It is controlling Indias 10 out of 22 refineries with a group refining capacity of 65.7 MMTPA and a cross country network of crude oil, product and gas pipelines arching over 10,900 km with a capacity of 77 MMTPA as well as maintains a marketing network with 37000 touch points (52%). With an aim of maintaining its market leadership and providing best quality product and services, IndianOil is investing over Rs. 47,000 crores in a host of projects for amplification of refining and pipeline capacity, product quality up gradation, expansion of marketing infrastructure etc. Indian Oil services every nook and corner of the country, every hour of the day with customer sales points supplying by bulk storage in terminals and depots, aviation fuel stations and LPG bottling plants.

IOCLs dominance in downstream Oil sector:

IndianOil has the largest refining capacity in India comprising of almost 31% of the market share. It has the highest Petroleum products market share of 46% 87% downstream market share in crude oil pipelines. Largest provider of pipelines for petroleum products of 50% approximately 89% market share of bulk consumer pumps 52% market share in LPG dealership 54% of total consumer touch points

Core Operations

Refining : Indian Oil controls 10 refineries spread across the country in Barauni(6.0 MMT), Guwahati(1 MMT), Digboi(0.65 MMT), Bongaigaon(2.35 MMT), Haldia(7.5 MMT), Panipat(15 MMT), Mathura(8 MMT), Koyali(13.7 MMT) along with two subsidiaries in Narimanan(1 MMT) and Chennai(10.6 MMT). A new refinery of IOCL is still under construction in Paradip (15 MMT). The refineries in the north eastern part of the company benefits from excise duty concession and has the ability to supply in the North Indian market at low cost by leveraging pipeline network. The total refining industry capacity is 215.066 MMTPA and IndianOil with a capacity of 65.7 MMTPA and holds 31% of the entire market. IOCLs share among the PSUs stands at 49%. It is the only oil company to have presence in high consumption North Indian region comprising of Uttar Pradesh, Punjab, Haryana, Rajasthan, Himachal Pradesh, Uttaranchal and Jammu & Kashmir. The Corporation has been consistently maintain a capacity utilization of 100% and above in the wake of planned revamp shutdowns for implementation of quality upgradation projects in all the refineries.

Operating Highlights Strategic inland refinery locations with most effective supply and evacuation system through pipelines Highest ever throughput of 55.6 MMT Lowest ever specific energy consumption at 57 MBN against 59 MBN in FYE 2010-11 Highest ever distillate yield of 77.8% All refineries are Euro III/IV compliant

Pipelines: IndianOil owns and operates Indias largest network of crude and product pipelines getting closer to the clients with increasing length. With the commissioning of new pipelines the total network of product, crude and gas is operating at 10,777 km during the year. With a length of 4,376 km and a capacity of 40.40 MMTPA comprises of 73% downstream market share and product pipelines with a length of 6401 km and capacity of 35.36 MMTPA comprises of 50% of downstream market share. It provides low cost crude transportation to all the companys refineries. The highest ever throughput of 75.5 MMT was achieved by IOCLs pipelines in FYE 12. Also, it achieved the highest ever capacity utilization of 118% for crude oil pipelines.

The recently completed product pipelines are: 290 km long Chennai Bangalore product pipeline. 265 km long Koyali Ratlam product pipeline. 275 km long Panipat Jalandar LPG pipeline. 36 km long ATF pipeline connecting IOCLs Devanagonthi terminal to Bengaluru International Airport. 95 km long pipeline connecting CPCLs Manali refinery to Meenabakkam AFS.Marketing- Sales: IOCL has a share of 52% in the Marketing infrastructure with 4 Regional offices, 16 State offices, 100 Divisional offices (66 retail and 34 consumers) and 45 Indane Area Offices.The organization is continuing to leverage its distributors to maintain leadership.

Rural Penetration through MarketingFY 2012 made an impressive record by commissioning of 731 KSKs during the year. Also, 9.2% of total IOCs sales (MS & HSD) was record which was the highest since 4 years.

Research and Development: The R&D department of IndianOil was established in 1972 and currently has 438 scientist and support staff. The major focus of the department mainly now is to reduce the carbon footprints of IOCLs process, products and technologies; endeavor to reduce company. Commercialisation of Technologies INDMAX : For maximisation of LPG & light distillates from refinery residue Marine Oils : One of six companies to have developed Original Equipment Manufacturer Approved Marine Technology Equipment Needle Coke : One of three companies in the world that possesses technology to make high value needle coke

Lubricants 154 product formulations developed, 108 commercialised, 56 approvals obtained from user industries/OEMs In a first overseas business gain, Mauritius Shipping Corporation adopted indigenously developed Servo marine grades

Patents Six patents granted during the year

Widening horizons New petrochemical and polymer labs fully functional MOU with the department of Bio-Technology to set up Advanced Bio-energy research centre Diversified Customer Base and Product Suite

The various diversification initiatives towards clean energy are:Wind power project: Commissioned in Kachchh, Gujrat in January 2009 has a capacity of 21 MW( 14 WEG of 1.5 MW each) Considering further investment in Wind power projects.Solar Power Plant: IOCL won bid to set up 5 MW Solar PV Power Plant at Barmer, Rajasthan under Jawaharlal Nehru National Solar Mission. More than 3000 solar lanterns sold from retail outlets, LPG distributors for lighting rural homes and shops. Three solar charging stations installed for poorer villages at pilot basis to centrally charge lanterns for renting to customers.Nuclear Power: JV Company incorporated to set up Nuclear Power Plants in India. Equity participation (26%) in Rawatbhata, Rajasthan.Biofuels: Energy Crop Plantation Captive plantation for Jatropha in India. In Uttar Pradesh plantation under MNREGS funded Public- Private- Panchayat partnership model: 10 ha completed Further proposed to extend plantation to 5000 ha.

SWOT Analysis of IOCL (Division Vise)SWOT Analysis With Respect To Marketing DivisionStrengths: Indias highest ranked Fortune 500 Company and a market leader with 50% share of Petroleum products.

Possess the largest Pipeline Network; and thus has a vital competitive edge in transportation costs and thus helps to access in deficit markets. IOC controls 10 refineries, by virtue of which it has a total share of around 34% of Indias overall refining capacity. There are more than 35600 sale points all over India which is 55% of industry. There are about 5096 distributors of Indane Cooking gas for catering 56 million households. Reaching the doors of bulk customers: Bulk Consumer Pumps 7,593 (89%). Strong Brand name for its products (For example, SERVO which covers 42% market shares, with more than 450 grades). Excellent credibility and international corporate image for raising funds. IOC also acquired management control of the marketing company IBP, thereby strengthening its position in these activities. There are around 229 active Patents which includes 125 international patents. The company has already entered overseas markets such as Sri Lanka, Maldives, and Oman and is presently considering entering Turkey through a JV. The company is in talks with Caliak of Turkey to set up an I0 million TPA grassroots refinery with an investment of $2 billion and establish retail business. IOC is also weighing the possibility of entering Indonesia. IOC has also started exploring the overseas markets for increasing its scope of operations. Its interests include downstream activities in Sri Lanka, Maldives, Oman, and Nepal; interest in the lubes business in Maldives, Dubai, Bangladesh, Sri Lanka, etc; among others.

Weaknesses: The functioning of IOC is greatly influenced by the government policy and regulation. The government has 82% stake in the company, thus gaining the control of the company. There is always a risk of its proposals being rejected as there is uncertain political environment prevailing in the country. The Advertisement strategy of IOCL is not extremely effective. For example, Xtra Premium is the best petrol available in the market, but due to lack of effective advertisement, the sale of the product is not in the desired level, where as Castrol is known for its celebrity advertisement. Even though IOC controls most retail outlets it has market share of only 33.8% in the petrol and 39.6% in diesel registering an increase of 0.5% and 0.3% respectively over the last year. This is comparatively very small as compared to its size, reach and production. This is because of the fact that its retail outlets are concentrated more in semi-urban area and rural area.

Opportunities: Enhancement of the distribution network must be made especially in the deficit regions. Distribution / sale of alternative products through existing retail network can be chalked out. With gas emerging as an attractive alternative fuel due to the twin benefits of low pollution and better economics, IOCL has planned to quickly establish itself in the gas market also. The LNG and Hydrogen business offers an attractive environment for its future business. Gas is steadily growing into the most preferred fuel among utility providers such as power, fertilizers and transportation. IOC plans to set up a nationwide gas distribution network for serving major Indian cities to market CNG for automobiles and to import LNG. IOC signed a MOU with the National Iranian Oil Company (NIOC) for importing 2.5 MMTPA LNG and also for taking part in the LNG midstream projects in Iran. The initial efforts turned successful with IOC already becoming the lead supplier of LNG to Essar Steel and Gujarat State Petroleum Corp. IOC has procured Exxon Mobils regas from Qatar for a period of twenty five years from April 2004 to meet rising demand. All these efforts would stimulate the growth and profitability of the company in the near term. Improvement of customer management services at the retail end (a customer satisfaction has shown only 65% customer satisfaction level).

Threats: In the post APM scenario, IOC will face competition in the area of crude / product import. Consequently it has affected the margin of Rs.5000crore which it earns from trading operations. Increase in number of players, specialization in lube marketing (such as HPCL, BPCL, and Reliance). Introduction of LNG / CNG in some metro cities (e.g., Delhi) can reduce the demand of petrol or diesel in near future. Consumption of marine fuel procured by some major public sector shipping companies is showing a decreasing trend. Deregulation of Indian Petroleum sector: The deregulation of the petroleum sector in India during 2002 abolished the monopoly stakes of IOC. The company is now facing stiff competition from several players, striving to gain market share. There exists a close competition between ONGC and IOC in the Indian oil market. RIL has also emerged as an important player competing in the upstream sector subsequent to the deregulation of the petroleum sector. Demographic issues are also posing some serious threats to IOCL. IOCLs north east operations continue to suffer from certain constraints.

SWOT Analysis With Respect To Refineries Division

Strengths: The refineries are designed in a flexible way, which gives over 100% efficiency, competitive cost and caters for variety of needs. About 34% of refining capacity in the country is owned by IOCL.

58% of IOCs refining capacity is located in the Northern and Western regions, which are high demand and high growth areas. Pioneer in quality management with its Mathura Refinery as the 1st in Asia and 3rd in the world to earn ISO14001 Certification. High quality LOBS produced by refineries contribute to world class lubes. No financial constraints in modernizing and improving facilities for refineries.

Weaknesses: Operating cost is comparatively higher than new refineries of competitors (e.g. Jamnagar Refinery of Reliance Petroleum). There is less flexibility option of handling various types of crude (both sweet & sour) unlike new refineries of competitors.

Opportunities: Need for additional refining capacity to meet rising demand in petroleum product. Installation of pipeline infrastructure for deficit regions and increased application of pipelines as a preferred mode of transportation for lower logistics cost as compared to road / rail transport. Improvement / creation of new infrastructure storage, transportation and distribution. Globalization in refining, pipeline and consultancy.

Threats: The decontrol in Hydrocarbon sector is likely to bring in new players specially the MNCs, with new refining capacity having the flexibility to improvise the product mix according to the nature of market demand. Growth of merchant refining can be a new source of competition. Higher Capital needs to modernize existing infrastructure.

Pipelines An Introduction The term pipeline in broader sense means a facility used to transport commodities from point of receipt to the point of delivery. Many commodities are transported through pipelines. Crude oil and petroleum products are perhaps the most common commodities transported by pipelines.Development of Pipelines in India Most of the earlier refineries in India were installed at coastal locations, Thus depending on coastal movement of Crude Oil. Further, The Refining capacities being low, The products were either consumed locally or transported to the consumption centres by Rail or Road. After 1960, Most of the Refineries were installed in Land-Locked locations and Crude and Product Pipelines were prompltly laid. The First Crude Oil Pipeline was laid from DIGBOI Oil fields to DIGBOI Refinery. During 1960-63, OIL INDIA LIMITED laid the First Trunk Crude Oil Pipeline, 1156 Km long from Naharkatiya and Moran Oil fields to the refineries at GuwahatiI and Barauni. The First Cross Country Product Pipeline was laid during 1962-64 to transport products from Guwahati Refinery to Siliguri. Subsequently , A number of product and Crude Oil Pipelines were laid in the 60s, 70s and 80s, including sub-sea Crude Oil Pipelines. The country today has about 24,000 Km of major Crude Oil and Product Pipelines. The Pipelines laid during the 60s were Designed, Engineered and Constructed by Foreign Companies. However, The exposure to this Technology enabled indian engineers to gain confidence, and the Pipelines which came up later, were designed and constructed with indigenous expertise. The country today has about 24,000 Km of major Crude Oil and Product Pipelines.Pipeline Transportation of Liquid Petroleum : The Indian Scenario Indian oil industry has over four decades of experience in transportation of crude oil and finished petroleum products.

The crude oil pipelines transport waxy crude as well as low sulphur & high sulphur crude.

The finished product pipelines transport primarily light and middle distillates, including aviation turbine fuel, in multi-product pipelines.

ADVANTAGES OF PL TRANSPORTATION Cost effective Economies of scale Negligible transit loss Energy efficient Reliable Safe, environment friendlyWEAKNESS IN PIPELINE TRANSPORTATION SYSTEM Capital intensive Viability depends on utilization Once laid, it is sunk cost/No alternate use Inventory carrying cost Less flexibility regarding batch size Interface and contamination of product Door to Door delivery not possible MODES FOR TRANSPORTATION OF PETROLEUM PRODUCTS A COMPARISONRoad Rail Pipeline

Energy cost Very High High Low

Operating cost Very High High Low

Pollution High Low Nil

Movement congestion High Low Nil

Handling loss High Low Negligible

Safety Hazards High Low Negligible

Reliability Low Low 100%

EXISTING CRUDE OIL & GAS PIPELINESCrude Oil Pipelines

S. No Name of the Pipeline Length (KM) Diameter (Inch) Refinery Capacity (MMTPA)

1. SALAYA-MATHURA (WR) 1870 28 / 24 J/M/P 21.6

2. PARADIP HALDIA-BARAUNI (ER) 1312 30/18 H/B/BN 11

3. MUNDRA-PANIPAT (NR) 1194 28 / 22 P 8.4

TOTAL 4376 41.0

Gas PipelinesS. No Name of the Pipeline Length (KM) Diameter (Inch) RefineryCapacity (MMSCMD)

1. DADRI-PANIPAT - NR 132 30 P 9.5

PRODUCT PIPELINESS. No. Name of the Pipeline Length (KM) Diameter (Inch) Capacity (MMTPA)

EASTERN REGION

1. GUWAHATI-SILIGURI 435 8 1.4

2. BARAUNI-KANPUR 745 20/12 3.5

3. HALDIA-BARAUNI 525 12 1.25

4. HALDIA-MOURIGRAM-RAJBANDH 277 12 1.35

WESTERN REGION

5. KOYALI-SANGANER 1056 18/12 4.6

6. KOYALIDAHEJ 197 14/12 2.6

7. KOYALI-RATLAM 265 16 2.0

8. KOYALI-AHMEDABAD 116 8 1.1

9.VIRAMGAM KANDLA 23116/22-

S. No. Name of the Pipeline Length (KM) Diameter (Inch) Capacity (MMTPA)

NORTHERN REGION

10. MATHURA-DELHI 147 16 3.7

11. MATHURA-TUNDLA 77 16/8 1.2

12. BIJWASAN-PANIPAT NAPHTHA 111 10 -

13. PANIPAT-AMBALA-JALANDHAR 434 14/12 3.5

14. PANIPAT-BHATINDA 219 14 1.5

15. PANIPAT-REWARI 155 12 1.5

16. PANIPAT-DELHI 182 14 -

17. PANIPAT-JALANDHAR LPG 274 10 0.7

S. No. Name of the Pipeline Length (KM) Diameter (Inch) Capacity (MMTPA)

SOUTHERN REGION

18. CHENNAITRICHYMADURAI 683 14/12/10 2.30

19. CHENNAI-BANGALORE 290 14/12 2.45

OTHERS

20. CHENNAI ATF 95 8 0.18

21. NARIMANAM-NAGAPATTINAM 7 18 0.368

22. BENGALURU ATF 36 8 0.66

23. DIGBOI-TINSUKIA 75 8/6 1.0

TOTAL 6632 36.858

PROJECTS UNDER IMPLEMENTATION S. No. Projects Description App. Cost (`/ Crore) Capacity (MMTPA) Length (km) Dia (inch)

1. Hook-up of Tikrikalan Terminal with MJPL 59- 8 14

2. Paradip- Raipur-Ranchi Pipeline 17935.0 1065 18/10

3. Integrated Crude Handling Facilities at Paradip 1492- 70 48

4. Addl Tanks and blending facility at Vadinar 267- - -

5. De-Bottlenecking of SMPL 15844 767 28/24

6. Kolkata ATF Pipeline 450.13 28 8

7. Guwahati ATF Pipeline 440.07 35 8

8. Cauvery Basin Refinery - Trichy Pipeline 980.40 114 8

9. Paradip-Haldia-Durgapur LPG Pipeline9130.8571012/10

10. PHBPL Augmentation5864.26418

11. Branch Line from BKPL to Motihari & Baitalpur 276-27510

12. Last Mile connectivity to NFL from DPPL10-1.810

TOTAL 716714.653137.80

GROWTH OF PIPELINE NETWORK

GROWTH OF PIPELINE CAPACITY

INCOME- Pipelines Division

Freight Recovery. This is a contra item in Divisional Accounts and is nullified at Corporate level. Since Pipeline freight includes an element of profit, the margin is eliminated for closing stock valuation. Consultancy Income/ Training & Development Sale of Scrap/Wind Power Recoveries from employees/contractors Unspent/ Unclaimed Liabilities written back Interest on Employee advances EXPENSES- Pipelines Division

Power & Fuel -30% Repairs & Maintenance-13% Chemical Consumption- 2% Establishment Cost-14% Depreciation-28% General Administration expenses-13%

Introduction to the report

BackgroundFinancial Ratio Analysis Ratio Analysis compares one figure in one financial statement (say P&L account or Balance Sheet) with another figure in the same financial statement or in another financial statement of the company. A ratio is expressed in the numerator denominator format. Thus the numerator and denominator can be either from the P&L account or the Balance sheet of the same company.Hence, ratio analysis facilitates intra firm comparison. i.e. comparison of your companys performance in the current year with your companys performance in the previous year. It also facilitates inter firm comparison. i.e. comparison of your companys performance in the current year with your competitors performance in the current year. Peer review, as this is called, helps you benchmark your performance with your peers. Ratios help in ascertaining the financial health of the company and also its future prospects. These ratios can be classified under various heads to reflect what they measure. There may be a tendency to work a number of ratios. But we believe that being thorough in the computation and interpretation of a few ratios (Say 20-25) would be ideal, since too much of analysis could lead to paralysis.

Capital Budgeting DecisionsThe Capital Investment plays a very vital role in the growth and financial health of any company. Such investments are necessary for continued growth of the organization, updation of technology, removal of operational bottlenecks, improvement in efficiency and productivity, enhancement of capacities, fulfillment of social objectives etc. Capital Investment decisions would generally include expansion, acquisition, modernization and replacement of long term assets.Decisions involving Capital Investments requires special attention due to the following reasons: Growth: Investment decisions are generally long term and taken for future benefits. It has to be endured for a longer period than consequences of current operating expenditure. A wrong decision can prove disastrous for the growth and survival of the company, unprofitable ventures can hamper to compete successfully and even result in loosing on its market share. Risk: Capital investment decision even changes the risk complexion of a company. If adoption of a particular investment increases the average gain of the firm and along with that also brings in frequent fluctuations in its earnings, the overall risk profile of the company increases. Funding: Long term commitment of funds generally involves large amount of funds, which makes it imperative for the company to take it decisions very carefully and arrange in advance the procurement of finance internally or externally. Irreversibility: These decisions are generally irreversible and the company would incur heavy losses if such assets are scrapped as the marketability of such investments is very less. Further, if the fixed charges required to be incurred can make difficult the very survival of the company if there is no commensurate income to meet them. Complexity: Capital investment decisions are an assessment of future benefits and difficult to predict.

Capital projects in Indian Oil Corporation Limited can be broadly divided into:

As per revised DOA effective from April 9, 2001, all capital investment proposals above Rs 100 crore require boards approval as under: Above Rs. 100 crore : Board Above Rs. 50 crore to Rs. 100 crore: Planning and Project Committee Board Above Rs. 10 crore to Rs. 50 crore: Chairman Upto Rs. 10 crore: Functional DirectorProject costing Rs. 250 crore and above requires approval of Project Evaluation Committee.

Capital Investment Analysis in IOCLNeed and Justification: The foremost issue that needs to be described in the capital investment proposal pertains to the identification of the basic objective or need which is sought to be fulfilled by the implementation of the proposed project. The proposal shall present the complete perspective, rationale and background of the need for the project.Types of Needs :The need for a project can be on account of: Capacity enhancement due to demand and supply imbalances. Economic considerations Technical/ operational necessity Marketing considerations Improvement in existing operations through removal of constraints/updation of technology Government/ Strategic policy decision Safety/ Environment and other statutory requirements Expansion into new business- Diversification/ Globalization Research and Development activitiesHere, all the possible alternatives for meeting the need shall be briefly indicated and thereafter, be evaluated based on the qualitative and quantitative aspects. Some of the criteria that may be considered are cost benefit analysis, techno- commercial feasibility, synchronization with Govt. / Corporate policies, time schedule, statutory requirements, inter-relation with other operations etc.

Market and Commercial AssessmentCommercial or market viability is the starting point for assessing the feasibility of capital investment proposals. It determines the need for a new project or for the expansion of an existing project.Three critical questions to be asked are: Where and how much is the demand ? What is the price? Is the proposal consistent with the organizations expertise and strategy?Factors affecting commercial viability are: Existing and potential demand and supply - both domestic and international Proposed product mix and volume Possible future changes Expected market share of the proposed product Reasonability of selling price Impact of tariffs on imports, where imports are alternative sources of supply Export potentials of the productProject costAn accurate and realistic cost estimation of the project is very necessary as it directly affects the analysis of the financial viability of the project. The following components are taken into consideration while preparing the project cost estimates: Prime Cost: includes the total cost of land, building, equipment, material, civil construction and other items viz, mechanical, electrical, instrumentation, fire fighting, safety, pollution control etc. The major component wise breakup will be annexed to the proposal. The cost estimates are generally compiled based on the data maintained by various units all over the country. The proposal will be a comparative analysis with similar projects, all statutory levies related to the project cost Custom/ Excise duty, sales tax etc shall be provided and foreign exchange requirement of the project will be separately reflected. Provision for design and scope changes: This provision needs to be justified on case to case basis. Normally the provision for design and scope change is not required for repetitive projects where the cost estimates are amply clear at the time of preparation. Provision for contingencies: Provision for contingencies not exceeding 3% to 5% of the total estimated cost can be normally included while estimating the project cost. Forward cost escalation: The cost estimates will correspond to recent dates not dated more than three months old from the date of proposal and as such no forward cost escalation shall be considered. Financing cost: Financing cost during construction period shall be reflected separately, wherever applicableTechnical Feasibility Study: Technical appraisal is important to ensure that the necessary physical requirements are available and choose the best possible alternative to procure them. While formulating the proposal the following checklist given under should be taken into consideration.

Financing of the project: Projects taken up by the corporation are partly financed from internal funds and if required from external borrowings. When no specific financial plans have been finalized a debt to equity ratio of 1:1 shall be considered. However the ratio needs to be reviewed on case to case basis. Internal resources will be assumed for non-plan schemes. The following issues are needed to be dealt where financing is envisaged by external borrowings: Extent of loans available and terms thereof like rate of interest, repayment schedule, moratorium, commitment charges etc. Break up of financing into foreign exchange and Indian Rupee Component. Deferred credit if available.Phasing of expenditure: Phasing of year wise expenditure with Interest during Construction (IDC) and without IDC shall form a part of the Capital Investment proposal. The following aspects should be kept in mind while assessing the year wise need of expenditure: The various critical activities as per the activity chart and requirement of funds for those activities. Terms and conditions at which external funds are to be mobilized. Terms of payments for major equipments and work wherever applicable. Detailed capital expenditures should be linked with activities in high value projects.Budget/ Plan provision: The proposal shall also present the availability of the proposal in the Budget and if the proposal has not been included or partly included the source of re-apportionment of funds shall be clearly defined.Integrated linked projects: Many times projects are integrated across divisions like a grass root refinery may require a crude product pipeline and a marketing terminal. In such a case project formulation will be done in totality of the scheme and therefore the following aspects will be ensured for proper coordination to implement the linked projects:

Under-utilization / Abandonment of existing plant/ facilities: While putting up any new proposals for new facilities, it should clearly mention if any existing plant are under- utilized or will be abandoned including the financial implication.

Financial Analysis by IOCLIntroductionThe financial analysis is vital for assessing the viability and feasibility of the project and helps in decision making process. It gives the estimate of financial gains the company will earn if the project is implemented. This analysis comprises of determination of yearly cash flows of the project, computation of key decision criteria like Net Present Value (NPV), Internal Rate of Return (IRR), Debt service coverage ratio (DSCR) etc. Financial analysis of Capital Investment proposals shall be carried out based on realistic assumptions taking into consideration present input/ output prices, market forces etc.Determination of Cash FlowsIt is the most crucial step of financial analysis and shall be determined for three components namely: Initial investment: This component mainly represents net cash outlay in the period when the asset is purchased or constructed. It comprises of the total project cost as mentioned in the proposal and an incremental working capital wherever required. In projects where external borrowings are envisaged for financing interest payments or principal repayments will not be considered while calculating Return on Investment (ROI). However these are considered while calculating Return on Equity (ROE). Operating Cash Flows: This component of cash flow represents year wise cash flow after the project has been commissioned. The capacity utilization should not exceed 60% in the first year and 90% from the second year onwards till the project life cycle. This cash flow entails the determination of operating income, input/raw material cost and operating expenses. When computing gross operating income in the Organization the following issues are to be kept in mind: Refinery Gate Price( 3 years average excluding abnormal fluctuation) based on 80% import parity and 20% export parity considering all applicable Ocean freight, loss, insurance, present duties, inland freight etc is to be reckoned in price build up of Refinery projects. For Petroleum products, 3Years average of import parity( 80% import parity and 20% export parity) prices on landed cost basis shall be assumed. However if the competitors prices are lower than the same shall be considered. Marketing margin of 8% or actual margin whichever is low shall be considered. The impact of discounts like extension of credits, freight under recovery should be accounted while considering the prices. In case of cap by government or regulatory authority is applicable should be given due consideration and subsidy component any to be borne by the corporation should be factored in. Alternate mode of transport in case of pipeline products should be considered as benchmark. Freight is to be compared for analyzing the Return on Investment (cost of capital). 70% of Notional Railway Freight shall be considered as revenue generation for the base case. Tariff cap by regulatory authority shall be given due consideration. Prices for new products are based on landed cost of substituted products and for diversification products prices are considered as per Govt. policy or competitors prices. In case of Export Parity prices selling price would be considered based on three years FOB price of similar or near similar products in the nearest market minus 5% to take care of the extra supply in the market plus the freight charges. Terminal Cash Flows: This cash flow represents the salvage value of the project in the terminal year plus a release of incremental working capital, if any. It shall be considered as under: Land to be valued at original cost Other items to be valued at 30% of the original cost without financing cost. Tax on capital gain shall be considered. Capital gain is calculated as terminal value minus the written down value as per income tax act.

Financial EvaluationAfter determining the cash flows as per the methodologies enumerated, the next step is to financially evaluate the proposal. The following two methods will be considered to evaluate the project proposal of IOCL: Internal Rate of Return (IRR): It is the discounting rate at which the present value of cash outflows will be equal to the present value of cash inflows. In other words, the discount rate that yields a zero Net Present Value is known as IRR. Projects having a IRR less than the hurdle rate (cost of capital+ premium) shall not be considered commercially viable and shall be justified on non- commercial grounds, wherever applicable. For calculation of Return on Equity Principal Repayment along with interest outgo shall be taken into consideration. Net Present Value (NPV): The present value of a future sum of money can be found by discounting it to the present time in time or Year 0 at the required rate of return /discount rate. Required rate of return shall not be less than cost of capital. Under this method, the present value of each years net cash flow is calculated, starting from the Year 0 till complete project life i.e. 15 years. This discounting rate adopted shall be the hurdle rate. If the project has a positive NPV, the project is considered to be commercially viable.

Other Measures: For debt financed projects, the Debt Service Coverage Ratio (DSCR) is calculated to ascertain the debt serving capacity of the project. It is calculated as:Profit after tax + Depreciation + Interest on long term loan/Interest on long term loan + loan repayment installment. Break even analysis is a tool to compute the level of sales required to meet the funds requirement (fixed + variable). It can be used as a sensitivity analysis tool and can be computed as under:Total fixed cost/ Unit selling price- Unit variable cost.Other intangible benefits:Apart from analyzing the financial viability of the project it is equally important that the proposal indicates other intangible benefits of the project. These are benefits related to socio and strategic needs of the country and includes project for pollution control, safety needs, staff welfare etc. The benefits that can be quantified and measured from such projects will not be considered as intangible benefits. It shall be considered for the purpose of economic and financial analysis.

Analysis of Risk and AssessmentAll capital investment proposals involve some risk or uncertainty with respect to their completion, capacity utilization, fulfillment of specified need, safety and profitability etc. as the underlying assumptions made at the project formulation stage may not hold good during the project life. Therefore analysis of risk and uncertainty is an essential part of formulation of capital investment proposal. This not only facilitates the preparation of sound proposals but also helps in systematic consideration of risk by the approving authorities.

Types of Risks Financial Risk : Impact of various risks finally affect the profitability as a result of change in cash flows from the values considered at proposal stage. Some quantification of financial risk helps in decision making. Many techniques are available for determining financial risk involved with the project like Sensitivity Analysis

Sensitivity AnalysisSensitivity Analysis is a quantitative process of measuring change in value of a dependent variable consequent to change in the value of one or more other variables. A further aspect of such analysis is evaluation of its sensitivity to possible errors in estimation of each or some of the critical variable.For the purpose of carrying out the sensitivity analysis, it is utmost necessary in the first place to identify the important variables of the projects. These may be assumptions regarding incremental throughput/sales, capital cost, operating cost, completion schedule, prices of various input/output, reduction in duty protection, Cenvat Benefit etc. After identification of these important variables, sensitivity analysis shall be carried out to assess the impact of marginal changes in these variables on final results of the project i.e. IRR/NPV of the project.

Other Risks : Some of them which shall come under such risks are given below: Risk in getting input/linkage with input sources Risk in disposing output/linkage with market, downstream plants etc. Risk in obtaining Government clearances Risk of technology obsolescence Reduction in duty protection

CHAPTER 2RESEARCH METHODOLOGYObjective of the Study The study is conducted with reference to IOCL. The main objective of the study is to have an idea of the practical application of Capital Budgeting, Capital Structure and Ratio Analysis whose theoretical aspects are known.

The study is conducted with the following objectives: To understand the various financial implications involved in the pipelines projects. To canvas the steps involved in the tendering process. To understand the steps involved in evaluating the estimates. To gain knowledge involved in the preparation of Detailed Feasibility Report (DFR). To get equipped with the workable knowledge of MS Excel To bridge the gap between the theoretical aspects and practical implementation in Pipelines Division To understand the working of finance department To get experience & exposure for the corporate life To comprehensively calculate all the financial ratios after analysing Balance sheet and P/L account and interpret the results. To suggest on the basis of findings, improvements in the management of sensitive factors and financial ratios.

Scope of the Study Study the Augmentation of Barauni-Kanpur Pipeline and understand the various financial implications involved in the pipeline project. Understand the financial feasibility of the project Calculate the various Financial Ratios and evaluate the financial condition of the company as a whole.

Methodology Type of Research Analytical Research, i.e., to use facts or information already available, & analyze these to make a critical evaluation (Detailed Feasibility Report) Fundamental or Basic Research, i.e., finding information that has a broad base of applications & thus adds to the already existing organized body of scientific knowledge (Budgeting). Research DesignThe research conducted here is of Exploratory and Descriptive in nature which structures and identifies new problems. The objective of exploratory research and descriptive research is to gather preliminary information. Sources of Data CollectionPrimary DataThe method which involves, collection of data for the given subject, is directly from the real world which is collected by the researcher himself. The data were collected through: Discussions among the concerned executives of the corporate. Interaction with the key employees of the organization.Secondary DataThe data which is collected by others is to be re-used by the researcher. Analysis prepared from collection of various required information from: Internal Reports (Annual), Performance Report of Indian Oil Corporation-Pipeline Division, financial statements of the company (i.e. Balance sheet, P&L, Revenue budgets etc.) Study of the Detailed Feasibility Reports (DFR) of other projects which have been already completed and the various manuals of the division.

Limitations Time constraint: The duration of the project limited the in-depth understanding of every aspect involved in the Capital Budgeting decision making of the organization

Limited scope: The project was carried out within the scope of the company. The predetermined guidelines given by the corporate office should be strictly adhered to. The efficacy of the methods followed is still debated in the academic arena.

Technicality: The proposals put forward by the technical department of the Pipelines are generally very technical and takes effort for non-technical background students to interpret certain terminologies. The issue was mainly faced during the bifurcation of cost estimates.

CHAPTER 3FINDINGS & ANALYSIS

Project ProposalFinancial Analysis of Indian Oil Corporation Limited and DFR on Proposal for Investment Approval of Branch Pipeline from Barauni-Kanpur Pipeline to Motihari and Baitalpur for leveraging the transportation tariff.

Brief Description of the Proposal

Financial (Ratio) Analysis Financial analysis refers to an assessment of the viability, stability and profitability of a business, sub-business or project. Professionals who prepare reports using ratios that make use of information taken from financial statements and other reports perform it. These reports are usually presented to top management as one of their bases in making business decisions. Based on these reports, management may: Continue or discontinue its main operation or part of its business; Make or purchase certain materials in the manufacture of its product; Acquire or rent/lease certain machineries and equipments in the production of its goods; Other decisions that allow management to make an informed selection on various alternatives in the conduct of its business. Financial analysts often asses the firms on: Profitability- its ability to earn income and sustain growth in both short-term and long-term. Solvency- its ability to pay its obligation to creditors and other third parties in the long term; Liquidity- its ability to maintain positive cash flow, while satisfying immediate obligations;Solvency & Liquidity are based on the companys balance sheet, which indicates the financial condition of a business at given point of time. The weighted average cost of capital (WACC)- is the rate that a company is expected to pay to finance its assets. WACC is the minimum return that a company must earn on their existing asset base to satisfy its creditors, owners, and other providers of capital.

Leverage- Any ratio used to calculate financial leverage of a company to get an idea of the companys methods of financing or to measure its ability to meet financial obligations. It also gives an idea of how changes in output will affect operating income.

DU PONT- analysis shows that the profitability depends not only on the profit margin but also on how efficiently the firm has used its assets to generate sales.

Debt financing and Growth- It is the maximum growth rate that can be achieved with no external financing while taking into consideration the debt equity ratio.

Market test ratios- It relates the firms stock price to its earnings and book value per share.

DFR on Proposal for Investment Approval of Branch Pipeline from BKPL to Motihari and Baitalpur for leveraging the transportation tariff

With a view to give leverage in optimizing transportation tariff for Product positioning at Raxaul and Baitalpur, it is proposed to lay a 275 km branch pipeline on Barauni-Kanpur Pipeline (BKPL) at Patna to Motihari and Baitalpur. Presently, supplies to Raxaul, Baitalpur and Nepal (partially through Raxaul) are being effected by rail mostly from Barauni Refinery. IOCL has to pay substantial amount to Railway for product movement to IOCLs depots at Raxaul and Baitalpur. Raxaul and Baitalpur are major demand centres of Motor Spirit (MS) and High Spirit Diesel (HSD) and the demand is predicted to increase in the coming years. Resitement of Raxaul Depot to Motihari and Patna depot to a suitable location in and around Patna is to be carried out. For this purpose, a suitable land at Naubatpur on the outskirts of Patna has been identified for the resitement of the existing Patna Depot. Early implementation of this pipeline is very critical for retaining IOCLs market share in this region as well as Nepals market as other OMCs may consider extending their pipeline to Raxaul and target Nepal market.

Pipeline Route

The proposed Pipeline would originate from Naubatpur, where resitement of Patna Transfer of Product (ToP) is proposed. From Naubatpur, the Pipeline would move broadly in the North/North-West Direction, crossing Rivers Son, Ghagara & Ganga and keeping west of Chapra Town, would reach Siwan. A T-Point cum-scraper station is to be installed near Siwan. From Siwan T-Point, one branch of the pipeline would move in the North-East direction, crossing river Gandak and reach Motihari. Another branch from Siwan T-Point would move in the North-West direction to reach the existing depot at Baitalpur near Deoria (Uttar Pradesh). The pipeline would be laid almost in independent Right Of Way (ROW), which would be acquired. The proposed route traverses through the Gangetic Flood Plains hence no high elevations are expected. The terrain along the pipeline route is mostly flat and plain. No rocky terrain is envisaged along the proposed pipeline route.

Process DescriptionThe branch pipeline would receive High Spirit Diesel (HSD) through 20 Barauni-Patna (Naubatpur) section under heart-cut operation at Naubatpur, whereas Motor Spirit (MS) and Superior Kerosene Oil (SKO) through 12 dia Barauni-Patna (Naubatpur) section under blocked out operation at Naubatpur.Patna pump station would receive products ex Barauni both from 20 and 12 Barauni Patna pipeline section of BKPL. 20 pipeline would be used for pumping of HSD as is being done presently. 12 Pipeline would be used for MS/SKO/HSD. During receipt of products from 20 pipeline at Patna, bypassing to branch line may be heart-cut mode or full-cut mode. However, during bypassing of products to branch line received through 12 pipeline at Patna would necessarily be in full-cut mode. During this operation, pumping to Patna-Mughalsarai section might be continued with products from 20 pipeline at Patna. Simultaneous pumping from Barauni in both 20 and 12.75 pipeline of same or different products would be done.

The salient features of the branch pipeline are as under: Pipeline size optimization : The minimum pipe sizes have been considered for the pipeline system, which can enable achieving a throughput of about 1.50 MMTPA considering three shift operation and blocked out delivery to Motihari and Baitalpur

Hydraulics and System Configuration :Based on the pipeline throughput requirements, hydraulic details have been worked out. Details are as under

Area Pipeline size and length

Naubatpur -> Siwan T-Point 10.75 OD X 0.219 WT, API 5L- X 70, 115 Km

Siwan T-Point -> Motihari 10.75 OD X 0.219 WT, API 5L- X 70, 80 Km

Siwan T-Point -> Baitalpur 10.75 OD X 0.219 WT, API 5L- X 70, 80 Km

System requirements :The proposal of the branch pipeline to Motihari and Baitalpur broadly involves the following activities: Installation of dedicated pumping facilities, with 2+1 Engine Driven MLPUs, at Naubatpur Installation of T-Point facilities, along with one scraper launcher at Siwan Laying of 10.75 OD, 275 km pipeline from Naubatpur to Siwan, Siwan to Motihari and Siwan to Baitalpur

Flow Parameters for the Pipeline Different products in varying quantities as per requirement for local demand & export, would be required to be delivered at Motihari and Baitalpur, which would be the delivery stations in this branch pipeline system. Siwan would become a T-Point in system where the branch pipeline to Motihari and Baitalpur would originate. The normal operation of Siwan T-Point would be as under : Full flow ex-Patna towards Motihari Full flow ex-Patna towards Baitalpur Heart cut operation to both Motihari and Baitalpur

The pipeline would transport MS, HSD and SKO. The typical pumping sequence would be as under HSD - SKO MS SKO HSD SKO The total line fill of the branch pipeline from Patna (Naubatpur ) to Motihari and Baitalpur would be about 14,900 KL

Completion ScheduleThe project is estimated to be completed in a period of 24 months after the receipt of all statutory clearances. Suitable action will be taken for obtaining MOE&F and other statutory clearances for the proposed pipeline system from the concerned authorities, as applicable.

Need and Justification of the ProposalDepot Demands Vs Proposed Pipeline ThroughputsActual ConsumptionThe actual throughput (consumption) of Petroleum Products for Raxaul and Baitalpur fed areas for last 3 years is shown below

Year Raxaul (TKL) Baitalpur (TKL) Total (TKL)

2009-10 512 579 1,091

2010-11 605 631 1,236

2011-12 718 781 1,499

Future Projected Consumption (in TMTPA)The future throughput projections for marketing depots at Raxaul (Motihari) and Baitalpur has been worked out and is shown below

Motihari (Raxaul) Depot Year HSD MS SKO Total

2014-15 388 106 23 517

2016-17 405 117 23 545

2021-22 497 153 23 673

Baitalpur Depot Year HSD MS SKO Total

2014-15 448 109 84 641

2016-17 525 131 79 735

2021-22 605 178 83 866

Combined demand of Motihari and Baitalpur Depot Year HSD MS SKO Total

2014-15 836 215 107 1,158

2016-17 930 248 102 1,280

2021-22 1,102 331 106 1,539

Projected throughput of the Pipeline (in TMTPA)Though there is robust growth in the projected demand for Motihari and Baitalpur depots, the optimization study indicates that there would be product shortage ex-Barauni refinery to feed this pipeline and in the process, the demand of Motihari and Baitalpur depots would be required to be met from other sources only. Therefore, the projected throughput of the Branch Pipeline would be less than the demandThe throughput projections of this branch pipeline, as per optimization study is shown below Year Raxaul Baitalpur Total

2014-15 517 600 1,117

2016-17 545 736 1,281

2021-22 674 462 1,136

Despite proposed Pipeline connectivity for Motihari and Baitalpur depots, we can see from the above tables that the pipeline alone will not be able to meet the product demand requirement of these depots fully beyond 2016-17 as per optimization study and the balanced products are to be bridged from other sources through tank wagon. This is due to increased demands of Barauni fed locations and no corresponding increase in Barauni Production as well as no cushion/slack available at Barauni through Haldia-Barauni Pipeline

Assumptions for working out Demand ProjectionsThe long-term demand Projections are based on inputs from HO Planning Cell considering High Spirit Diesel (HSD) deregulation. Location-wise demand for 2014-15, 2016-17, 2021-22 have been arrived by applying state-wise Compound Annual Growth Rate (CAGR). The all-India CAGR for Products are as shown below Year HSD MS SKO

2014-15 4.6% 8.3% -1.5%

2016-17 5.2% 8.2% -0.9%

2021-22 4.5% 7.4% 0.0%

Estimation of Capital Cost

The complete branch pipeline system is estimated to cost Rs. 276 crore, including a foreign exchange component of Rs. 4.48 crore at March 2013 price level. The project cost for pipeline facilities has been estimated on the basis of the following Cost actually incurred in the past with appropriate escalation Establishing physical requirements, preliminary specifications and in-house cost data Experience of virtually identical projects elsewhere to establish physical requirements and cost Experience of slightly different projects adjusted approximately to establish physical requirements and budgetary quotations Experience of similar projects in value/terms adjusted for price difference by past experience and escalation dataThe summarised table of capital cost is shown below

S. NoItem DescriptionFERETotal

1.Survey & field engineering0225225

2. Land,ROW & Crop compensation025622562

3. Mainline Pipes 080438043

4. Mainline Materials13470204

5. Mainline Construction042124212

6. Pump station & terminal Civil Electrical Mechanical Instrumentation 0 029202074570341575820745703707758

Sub-total (Pump station & terminal)29268177109

7. Cathodic Protection22518540

8. Telecommunications 0796796

9. Telesupervisory (SCADA)0511511

SUB-TOTAL (A) 448 23754 24202

10. Contingencies @ 0%000

11. Project Management, engineering and insurance@5.711% 013821382

12. CSR@1%0242242

SUB-TOTAL (B)4482537825826

13. Interest during construction017741774

TOTAL4482715227600

The detailed basis of cost estimates have been shown as under :1. Survey and field engineering This cost includes the cost of surveys, sub-soil investigation & field engineering.

2. Land acquisition, ROW and crop compensation Land requirement for T-point at Siwan and RCPs etc. has been taken on the basis of permanent land acquisition. Right -of-way (R0W) compensation has been considered for the new route of the pipeline, which is approximately 275 km.3. Project management & engineering, insuranceThe proposed scheme is expected to be completed in a period of about 24 months after receipt of statutory clearances. The cost of project management &engineering is estimated on the basis of envisaged time schedule.4. Mainline pipes & materialsThe cost and coating has been considered as per the latest data available. The cost of mainline materials required such as casing pipe, coating and wrapping materials, valves etc. has been estimated on the basis of budgetary offers and cost actually incurred in recent past on similar items.5. Mainline ConstructionThe cost of mainline construction has been estimated on the basis of the cost incurred in similar project executed elsewhere, suitably adjusted to bring it to March 2013 price level6. Pump station and terminalThe cost under this head includes the cost of mechanical, civil, electrical and instrumentation & control facilities which mainly comprise mainline pumping units, mainline valves,sump pump & motor, scraper barrels, fire alarm & detection system, fire hydrant network & related facilities, Power-cum-Motor Control Center, PLC based control system, control buildings etc. including the erection and installation of requisite facilities.7. Cathodic protection This includes the cost of materials required for temporary and permanent cathodic protection, installation and commissioning of equipment/materials, CP Rectifier units, ground beds, cable etc. Estimates are based on budgetary offers and the rates from similar projects executed in the recent past

8. Telecommunication and Telesupervisory systemOFC based telecommunication system and a dedicated telesupervisory system has been envisaged for the proposed pipeline system. Cost estimates are based on budgetary offers/earlier purchase orders.9. Escalation No provision has been made for price escalation during the period of execution of the project

Estimation of Operating Cost The operating cost of the branch pipeline system includes the cost if power required for running the mainline pumping (Naubatpur) pump station of BKPL, utilities, consumables, salaries, & wages, administrative overheads, repair &maintenance etc. the operating cost for the design capacity of 1.5 MMTPA is estimated to be Rs 14.47 crore/year at March 2013 price level.

The summarised table of operating cost is shown belowS. NoItem DescriptionCostBasis

1. Fuel427Not Applicable

1.A Electricity199

2. Lube Oil4Not Applicable

3. Power(General) & Utilities12(5 Lakh for IPS + 5 Lakh for TS) + 2 Lakh for T Point

4. Manpower319(No. of IOC Employees:25

(NO. OF DGR EMPLOYEES (LPM):34

(@ Rs. 10 Lakh per IOC Employee)

(@ 2 Lakh per DGR Employee@8 km)

5. General Administration188(Rs. 6.75 Lakh per IOC Employee)

6. Repair & Maintenance Mainline Others 130168 (1%*12999)(2%*8416)

7. Chemicals0@6 PPM

8. Total1447

Source: IOCL Finance Department

The detailed basis of estimation is given as under :1. Fuel/power (Electricity) :The project envisages use of engine driven MLPUs at Patna (Naubatpur). The cost of the fuel (HSD) has been considered @ Rs.46,327 per MT for engines at Patna and electricity @ 5 per unit incremental power at Barauni.2. Utilities : Power : Power is also required for operation of the auxiliaries & control etc. and for illumination at the stations. Requirement of power at Siwan T-point is planned to be drawn from nearby BSEB supply point, whereas, for meeting power requirement at Motihari and Baitalpur, power would be extended from co-located marketing depots.

Water : There is no major requirement of water operation of the pipeline system. Water for fighting will be drawn from fire water network of the marketing depots at Motihari and Baitalpur.

Manpower : The cost towards salaries and wages shown against labour component in the operating cost is based on the estimated manpower requirement on the existing scales of pay and allowances.

Repair and maintenance : Repair and maintenance of the mainline has been considered @ 1% of the investment in the mainline. Similarly, repair and maintenance of the stations has been considered @ 2% of the investment on stations, telecommunication & telesupervisory system.

General administration expenses : The cost under this head covers management expenses including security services, insurance of facilities etc. being proposed in the branch pipeline system.Phasing of ExpenditureBased on the project schedule, the phasing of expenditure is as shown below : Year Rs. (in crore) 1st Year 2.40 2nd Year 121.40 3rd Year 152.2Calculation of Interest on Capital Cost

For the calculation of Interest on the Capital Cost incurred by IOCL for this project, a debt equity ratio of 1:1 has been considered. The amount of equity and debt for each year has been calculated as : [(Capital Cost with repayments of the same year) * Equity Amount of Equity for a year= + (Total Interest Capitalised for this year)] Equity + Debt [(Capital Cost with repayments of the same year) * Debt Amount of Debt for a year= + (Total Interest Capitalised for this year)] Equity + Debt The Interest was calculated for the first 4 years and then the repayment was made within the next 8 years. During the First 4 years, capital cost was incurred. And during the last 8 years, operating cost was incurred. The capital cost along with the interest is capitalised during the 8 years of repayment.

Analysis of Financial ViabilityThe general criterion for IOCL to evaluate Capital Investment proposals is to compute the Internal Rate of Return (IRR). In order to get a clearer picture of the financial viability, Modified Internal Rate of Return (MIRR) was also calculated. As the name implies, MIRR is a modification of the IRR and as such aims to resolve some problems with the IRR.The details of the various headings under IRR are :1) Corporate saving: These includes all savings done by the company . In this project the saving is done by the laying of a branch pipeline because of which the company saved on the previous transport charges which was incurred through railways. By laying down of the branch pipeline, we incur just 75% of the Notional Railway Freight.Calculated as: for 2014: Already given and its being multiplied by the throughput factor.2015: previous year saving *(next year saving /previous year saving)^1/22016 : done same as for 20142017-20: previous year saving *(next year saving /previous year saving)^1/52021: already provided multiplied by throughput factor for rest years same as 2021.( capacity of the pipeline gets saturated and hence, constant throughput has been considered beyond that).2)Operating cost excluded: Expenses associated with administering a business on a day to day basis. Operating costs include both fixed costs and variable costs. In this operating cost is taken as the monthly cost which is being charged for the throughput provided.Calculated as: throughput*1000*30/100003)Saving in loading charges: These are the savings which is being done as earlier charges had to be paid for loading done at barauni depot , but after the laying of pipeline this has been termed as saving. This includes the terminalling charges that had to be paid for sending through rail or road.Calculated by:Multiplying by(SKO,MS etc)quantity at both motihari and baitalpur with the terminalling charges of the products per MMT.( as provided). Together multiplying this with the throughput factor.4)Saving due to less transit loss: these are the savings done by assuming less loss during transit from pipeline as compared to other transport such as leakage and pilferage. Its given as(.25% to .05%)Calculated as: multiplying throughput of each product with rtp barauni quantity of that product.5)Manpower and GA cost: cost applicable with the workers used in project, together with other expenses.Calculated as: as seen from operating cost sheetManpower cost: 319(25*10 for IOC employee and 34*2 for DGR employee)GA cost: 188(6.75 *25=168 +Insurance charges /10=approx.20)6)Interest: Got from the interest and SLM sheet. By adding all four years interests.7)EBT: SAVINGS COST8)DEPRECIATION:For 1ST YEAR 35% ON capex excluding landAfter that 15% for each year.9)Taxable income: EBT -DEPRECIATION10)Profit after Tax: EBT-Income Tax11)Repayment of loan :in 1st year no repayment is done and for next 8 years (as given)loan repaid after loan repayment for all 4 years .

12)Capital investment :funds invested in a firm or enterprise for the purposes of furthering its business objectives. Capital investment may also refer to a firm's acquisition of capital assets or fixed assets such as manufacturing plants and machinery that is expected to be productive over many years.Calculated by: for 1st year: year 1 expense +year 2 expense /2For Year 2nd : year 3 expense13)Working capital: The sum of all of a company's current assets (assets that are convertible to cash within a year or less).Calculated as: Operating cost of previous year-current year/divided by no. of months.

14)Salvage value : The estimated value that an asset will realize upon its sale at the end of its useful life.In this project assets are depreciated at 30%.

ConclusionThe acceptance rule of projects using the IRR method is that the internal rate of return is higher than the opportunity cost of capital (k). k is also known as the required rate of return, or the cut-off or the hurdle rate. As per Indian Oil Corporation Limited (Corporate office), the hurdle rate (benchmark IRR) for capital intensive proposals are 13% for Refinery and Pipeline projects. The three major considerations of the company to determine the hurdle rate are: Rates are based on Debt: Equity ratio and may be applied for all the projects that are less than Rs. 250 Crores. Major projects with an amount more than than Rs. 250 Crore, specific hurdle rate would be derived based on funding pattern and anticipated borrowing cost. Hurdle rate for global projects are subjective as varies from country to country depending upon the country risk.As the IRR of the proposed project is 16.42 % which is higher than the hurdle rate we can suggest to go ahead with the branch pipeline as it proves to be financially feasible.Also, the MIRR of the proposed branch pipeline is 14.32% which is also more than the hurdle rate i.e. 13%, we can definitely go ahead with the project as it is financially feasible.

Analysis of Risk and Assessment

As specified earlier, Sensitivity analysis is a major tool which used to give an overview of the impact in the changes in the value of those variables, which form an essential part of the analysis. 3 major variables were considered in the project which has a major impact on the IRR of the project are :1) Sensitivity of the IRR on the changing of OPEX factor and Capex factor from 95% to 110%2) Sensitivity of the IRR on the changing of Opex factor and Throughput factor from 95% to 110%3) Sensitivity of the IRR on the changing of Throughput factor and Capex Factor from 95% to 110%

FINANCIAL ANALYSIS OF INDIAN OIL CORPORATION LIMITED

IMPORTANCE OF FINANCIAL ANALYSIS

A basic limitation of the traditional financial statements comprising the balance sheet and the profit and loss account is that they do not give all the information related to the financial operations of a firm. Nevertheless, they provide some extremely useful information to the extent that the balance sheet mirrors the financial position on a particular date in terms of the structure of assets, liabilities and owners equity, and so on and the profit and loss account shows the results of operations during a certain period of time in terms of the revenues obtained and the cost incurred during the year. Thus, the financial statements provide a summarized view of the financial position and operations of a firm. Therefore, much can be learnt about a firm from a careful examination of its financial statements as invaluable documents/performance reports. The analysis of financial statements is, thus, an important aid to financial analysis.The focus of the financial analysis is on key figures in the financial statements and the significant relationship that exists between them. The analysis of financial statements is a process of evaluating the relationship between component parts of financial statements to obtain a better understanding of the firms position and performance. The first task of the financial analyst is to select the information relevant to the decision under consideration from the total information contained in the financial statements. The second step is to arrange the information in a way to highlight significant relationships. The final step is the interpretation and drawing of inferences and conclusions. In brief, financial analysis is the process of selection, relation and evaluation.

Ratio Analysis:It is important when examining a set of financial statements and using ratio analysis to relate them to reference points or standards. These points of reference might be to: establish trends from past years, so providing a standard of comparison compare against other businesses in the same industry compare with standards assumed to be satisfactory by the interested party, e.g. a bank

Above all, it is important to understand the relationships between ratios: one ratio may give an indication of the state of the business but, before drawing conclusions, this needs to be supportedby other ratios. Ratios can highlight symptoms, but the cause will then need to be investigated. Another use of ratios is to estimate the likely future profit or balance sheet of a business. For example, it might be assumed that the same gross profit percentage as last year will also apply next year; thus, given an estimated increase in sales revenue, it is a simple matter to estimate gross profit. In a similar way, by making use of ratios, net profit (profit before tax) and the balance sheet can be forecast.

Ratio Analysis of IOCL

Particulars 2008-092009-102010-112011-122012-13

Liquidity ratio:

Current ratio0.960.920.871.011.03

Liquid ratio0.640.490.440.540.56

Cash ratio0.010.010.010.000.00

Defensive Interval Ratio72.6267.3963.8862.7658.37

Activity Ratio:

Inventory turnover ratio16.0013.2412.799.187.39

Debtors turnover ratio41.1842.4841.3142.6842.53

Creditors turnover ratio6.346.005.975.396.57

Assets turnover ratio2.742.282.202.382.37

Capital turnover ratio3.472.933.424.625.68

Leverage ratio:

Debt-equity ratio1.020.880.951.301.32

Total debt ratio0.640.610.660.770.77

Proprietary ratio0.360.390.340.230.23

Interest coverage ratio2.1010.244.413.051.88

Financial leverage ratio1.911.111.294.542.13

Profitability ratio:

Gross profit ratio0.040.080.050.050.04

Operating profit ratio0.030.060.040.040.03

Net profit ratio0.010.040.020.010.01

Return on capital employed0.150.100.180.200.25

Return on equity0.070.200.130.070.08

Return on Assets0.030.090.050.040.08

Earnings per share24.7442.1030.6716.2920.62

Dividend per share8.9315.1010.985.807.25

Dividend Payout Ratio0.360.360.360.360.35

Cash profit ratio0.020.050.040.020.02

Expense ratio1.161.061.080.981.00

Du Pont analysis

Earning Power0.020.080.050.020.02

Return on equity0.070.200.130.070.08

Debt- financing growth

Internal growth rate0.020.050.030.020.05

Sustainable growth rate0.040.110.080.040.05

Market test ratio

Dividend-yield ratio0.0390.0440.0280.0190.022

Earning-yield ratio0.1280.1420.0920.0620.073

Liquidity Ratios:The importance of adequate liquidity in the sense of the ability of a firm to meet current/short-term obligations when they become due for payment can hardly be overstressed. In fact, liquidity is the prerequisite for the very survival of a firm. The short-term creditors of the firm are interested in the short term solvency or liquidity of a firm. But liquidity implies, from the viewpoint of utilization of the funds of the firm that funds are idle or they earn very little. A proper balance between the two contradictory requirements, that is, liquidity and profitability, is required for efficient financial management. The Liquidity Ratios measure the ability of a firm to meet its short-term obligations and reflect the short term financial strength/solvency of a firm. The ratios which indicate the liquidity of a firm are:1. Current ratios2. Acid test/ quick ratios3. Cash ratios4. Defensive Interval ratiosCurrent Ratio: The current ratio is the ratio of total current assets to total current liabilities. It is calculated by dividing current assets to current liabilities.

The total current assets include those assets which are in the form of cash, near cash or convertible into cash within a period of 1 year. The term current assets also include prepaid expenses and short term investments, if any. The current liabilities include all types of liabilities which will mature for payment within a period of 1year e.g. bank overdraft, bills payable, trade creditors, outstanding expenses et.c. The current ratio throws light on the firms ability to pay its current liabilities out of its current assets.

IOCL Current Ratio Analysis:

YearCurrent Assets (A)Current Liabilities (B)Current Ratio (**) (G) = (A) / (B)

2008-0976767.3280330.040.96

2009-1081759.0589318.010.92

2010-11102565.9118348.010.87

2011-12121001.6119825.931.01

2012-13128298.6124133.671.03

Interpretation:Current Ratio of IOCL has been close to 1 most of the times for the last 3 years, indicating the inability of the IOCL to meet its short term obligations. Generally, a current ratio of 2:1 is considered to be the minimum required ratio for a firm to be declared liquid. So, from that point of view, IOCL is suffering from a serious liquidity crunch. Top Management needs to work upon this issue. So, The ratio signifies that IOCL is inadequately liquid from the point of view of its ability to always satisfy the claims of the short-term creditors. A slight decline in the value of the current assets will adversely affect the ability of IOCL to meet its obligations; therefore, from the viewpoint of the creditors, IOCL is a more risky venture.

Acid-Test/Quick Ratio:One defect of the Current Ratio is that it fails to convey any information on the composition of the current assets of a firm. A rupee of cash is considered equivalent to a rupee of inventory or receivables. But it is not so. A rupee of cash is more readily available to meet current obligations than a rupee of inventory. This impairs the usefulness of the current ratio. The acid-test ratio is a measure of liquidity designed to overcome this defect of the current ratio. It is often referred to as quick ratio because it is a measurement of a firms ability to convert its current assets quickly into cash on order to meet its current liabilities. Thus, it is a measure of quick or acid liquidity.The acid-test ratio is the ratio between quick current assets and current liabilities and is calculated by dividing the quick assets by current liabilities.

The term Quick assets refers to current assets which can be converted into cash immediately or at a short notice without diminution of value. Included in this category of current assets are cash and bank balance, short-term marketable securities and debtors/receivables. Thus, the current assets which are excluded are: prepaid expenses and inventory. The exclusion of inventory is based on the reasoning that it is not readily and easily convertible in to cash. Prepaid expenses by their very nature are not available to pay off current debts. They merely reduce the amount of cash required in one period because of payment in a prior period.IOCL Quick Ratio Analysis:YearCurrent Assets (A)Current Liabilities (B)Inventories (C)Prepaid Expenses (D)Liquid Assets (H) = (A) - (C) - (D)Quick Ratio (@) (I) = (H) / (B)

2008-0976767.3280330.0425149.6051617.720.64

2009-1081759.0589318.0136404.081262.7644092.210.49

2010-11102565.9118348.0149284.521483.7251797.70.44

2011-12121001.6119825.9355829.2065172.360.54

2012-13128298.6124133.6759314.39068984.210.56

Quick Ratio depicts the following trend:

Interpretation:The acid-test ratio measures the ability to service short-term liabilities of IOCL. Generally, an acid-test ratio of 1:1 is considered satisfactory as a firm can easily meet all current claims. But the Quick Ratio of IOCL has never been able to touch the target point of 1:1, indicating the liquidity crunch for the firm. So, like Current Ratio, Quick Ratio trend depicts the same thing that IOCL is suffering from liquidity and the management needs to take corrective actions immediately to retain the trust of their creditors.Cash Ratio:This ratio is known as Super Quick Ratio or Cash Ratio or Cash Reservoir Ratio. This ratio considers only the absolute liquidity available with the firm. The cash and bank balance are no doubt, the most liquid assets and the marketable securities are also considered as highly liquid asset. In order to have an idea of super liquidity, the cash + bank balance + marketable securities are compared with the current liabilities. The Cash Ratio is calculated as follows:

IOCL Cash Ratio Analysis:YearCash and Bank Balances (E)Cash Ratio (#) (J) = (E) / (B)

2008-09798.020.01

2009-101315.110.01

2010-111294.420.01

2011-12307.010.00

2012-13503.090.00

Interpretation:Generally, a cash ratio of .5:1 is considered satisfactory for a firm, but IOCL has never been able to achieve this critical value. Moreover, the difference between the critical value and the cash ratio values for IOCL is very large indicating the illiquidity of the firm. So, Cash ratio also depicts the same result that IOCL is not sound in meeting its short term obligations.

Defensive Interval Ratio:The ratios discussed till now throw light on the ability of the firm to pay its current liabilities. Apart from paying the current liabilities the liquidity position of a firm should also be examined from in relation to its ability to meet projected daily expenditure from operations.