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1.1 Introduction:
The foundation of Oil and Gas industry in India was laid by the Industrial policy
Resolution, 1954, when the government announced that petroleum would be the core sector
industry. In pursuance of the Industrial Policy Resolution, 1954, Government-owned
National Oil Companies ONGC (Oil & Natural Gas Commission), IOC (Indian Oil
Corporation), and OIL (Oil India Ltd.) were formed. ONGC was formed as a Directorate in
1955, and became a Commission in 1956. In 1958, Indian Refineries Ltd, a government
company was set up. The government in order to increase exploration activity, had approved
the New Exploration Licensing Policy (NELP) in March 1997 to ensure level playing field in
the upstream sector between private and public sector companies in all fiscal, financial and
contractual matters. This ensured there was no mandatory state participation through
ONGC/OIL nor there was any carried interest of the government. Oil and Gas Industry has a
vital role to play in India's energy security, if India has to sustain its high economic growth
rate.
The growing demand for crude oil and gas in the country and policy initiative of Government
of India towards increased E&P activity, have given a great impetus to the Indian E&P
industry raising hopes of increased exploration.
Oil and Natural Gas Corporation Limited (ONGC) and Oil India Ltd. (OIL), the two National
Oil Companies (NOCs) and private and joint-venture companies are engaged in the
exploration and production (E&P) of oil and natural gas in the country. During the year 2008-
09, crude oil production has been 33.51 million metric tonnes (MMT) with natural gas at
32.85 billion cubic metre (BCM).Natural gas production in 2009-10 is targeted to be about
52.116 BCM.
1.2 Global comparison:
India stands 6th in the global comparison for the production of Oil and Petroleum
which is around 7060000 barrels short of the global leader.
1
1 Saudi Arabia 10,780,000
2 Russia 9,810,000
3 United States 8,514,000
4 Iran 4,174,000
5 China 3,795,000
6 India 3,720,000
7 Canada 3,350,000
8 Mexico 3,186,000
Table 1.1
1.3 OPEC:
The Organization of the Petroleum Exporting Countries (OPEC) was created in 1960
to unify and protect the interests of oil-producing countries. OPEC is a cartel that aims to
manage the supply of oil in an effort to set the price of oil on the world market, in order to
avoid fluctuations that might affect the economies of both producing and purchasing
countries.
This unified front was created primarily in response to the efforts of Western oil
companies to drive oil prices down. The original members of OPEC included Iran, Iraq,
Kuwait, Saudi Arabia, and Venezuela. OPEC has since expanded to include seven more
countries (Algeria, Angola, Indonesia, Libya, Nigeria, Qatar, and United Arab Emirates)
making a total membership of 12 members are responsible for half of the world's oil exports.
2
Chart 1.1
According to current estimates, more than three-quarters of the world's proven oil
reserves are located in OPEC Member Countries, with the bulk of OPEC oil reserves in the
Middle East, amounting to 72% of the OPEC total.
1.4 Reserves:
According to the 2008 BP Statistical Energy Survey, the world had proved oil
reserves of 1237.875 billion barrels at the end of 2007, while consuming an average of
85219.7 thousand barrels a day of oil in 2007. OPEC members hold around 75% of world
crude oil reserves. The countries with the largest oil reserves are, in order, Saudi Arabia, Iran,
Iraq, Kuwait, United Arab Emirates (UAE), Venezuela, Russia, Libya, Kazakhstan and
Nigeria.
According to the 2008 BP Statistical Energy Survey, the world had proven natural gas
reserves of 177.35 trillion cubic metres and natural gas production of 2939.99 billion cubic
metres in 2007.
Although the world has 3,600 billion barrels of unconventional oil reserves, these
require significant energy and water to extract. Wood Mackenzie estimated the world's
unconventional oil reserves as comprising heavy oil (107 billion barrels), extra heavy oil
(457) and shale oil (2,800). The main sources are Canada, Venezuela, Madagascar and Texas.
3
According to the 2008 BP Statistical Energy Survey, the world had a 2007 refinery
capacity of 87913.34 thousand barrels a day.
Chart 1.2
According to current estimates, more than three-quarters of the world's proven oil
reserves are located in OPEC Member Countries, with the bulk of OPEC oil reserves in the
Middle East, amounting to 72% of the OPEC total.
1.5 Exploration and Development:
In June 2007, OPEC announced plans to invest US$ 130 billion in expanded
production between then and 2012. Excluding Iraq, production is forecast to increase from
35.7 million bpd to 39.7 million bpd in 2010. Between 2013 and 2020 OPEC plans to spend a
further US$ 500 billion provided bio fuels doesn't change economics. Saudi Arabia alone is
investing US$ 50 billion to increase crude production capacity from 10.5 million barrels a
day in 2007 to 12 million bpd in 2009 and 15 million bpd after 2025.
Oil companies are looking for oil all over the world
Middle East: 31%
Europe & Eurasia: 21.7%
North America: 16.5%
Africa: 12%
Asia Pacific: 9.8%
S. and Central America: 9%
4
1.6 Major Global Players:
Exxon Mobil Corporation
Petroleo Brasileiro S.A.
BP plc
Chevron Corp
China Petroleum & Chemicals Corporation
OAO Gazprom
Total SA
Rosneft OjSC
ENI SpA
Schlumberger LTD.
ConocoPhillips
2.1 Government Policies:
5
The government announced a New Exploration Licensing Policy in 1997, which
differed from the old one in the following respects.
1) Bidders were to compete on cost recovery – they could ask for up to 100 per cent –
and on their share of profit petroleum.
2) They were free to sell their share of the oil to anyone within the country.
3) Conditions regarding minimum expenditure, required partnership with government oil
companies, and signature, discovery and production bonuses were scrapped.
4) Tax provisions were defined, and their stability promised. There would be a 7-year
income tax holiday, exemption from customs duty on exploration and drilling
equipment, royalty was fixed at 10 per cent except for onshore crude which would
pay 12.5 per cent, 5 per cent royalty on discoveries in water deeper than 400 meters,
and development expenditure could be amortized over 10 years.
5) The licence could be assigned to third parties under conditions.
6) A Conciliation and Arbitration Act passed in 1996, based on the model set by United
Nations Commission on International Trade Law, would apply to disputes.
7) Bidders were required to give the Directorate of Hydrocarbons, which was set up in
1993, the results of their surveys; in case they abandoned the concession, the results
would become available to subsequent bidders
.
2.1.1 Policy of the Government on Disinvestment:
The National Common Minimum Programme, envisages that profit-making companies will
not generally be privatized. All privatizations will be considered on a transparent and
consultative case-by-case basis. The existing “navaratna” companies would be retained in the
public sector while these companies can raise resources from the capital market. It also
envisages that the public sector companies and nationalized banks will be encouraged to enter
the capital market to raise resources and offer new investment avenues to retail investors.
2.1.2 Government initiatives for FDI’s:
The government has taken many progressive measures to create a conducive policy and
regulatory framework for attracting investments.
6
Allowing 100 per cent foreign direct investment (FDI) in private refineries through
automatic route and 26 per cent in government-owned refineries.
A foreign company can setup a project office or an Indian company for undertaking
upstream operations in India.
Abolition of the administered pricing policy.
100 per cent FDI is also allowed in petroleum products, exploration, gas pipelines and
marketing/retail through the automatic route.
2.1.3 Investments and Acquisitions:
Public sector oil companies will spend US$ 11.33 billion in 2010 on expanding
supplies and building new transportation networks for oil and gas.
ONGC will invest US$ 696 million for increasing facilities at its oilfields in Assam
and Western Offshore to boost output. Moreover, it will spend US$ 5.62 billion on
capital expenditure in the next financial year.
State-run gas utility GAIL will invest over US$ 1.54 billion in laying gas pipelines
from Dabhol on the Maharashtra coast to Bengaluru, Kochi and Mangalore.
Reliance Industries has proposed to invest an additional US$ 1.5 billion in bringing to
production four gas discoveries adjoining its prolific gas fields in Krishna-Godavari
basin in the country's east coast
2.1.4 Taxation in Oil & Industry Sector:
India provides a customised tax regime for the upstream sector and non-resident service
providers in relation to Exploration & Production operations.
Income Tax
There is a special mechanism for taxation of income of companies which have entered into a
Production Sharing Contract (PSC) with the Government of India for undertaking exploration
and production activities.
As per these provisions, taxable profits of a tax payer, who has entered into a PSC
with the Government for participation in the business of prospecting, exploration or
production of mineral oil, to be determined in accordance with the special provisions
contained in the PSC
The provisions of the domestic tax law are deemed to be modified to that extent.
Special provision
7
Specific allowances in addition or in lieu of allowances under normal provisions as
specified in the PSC are permitted. The specific allowances relate to.
Expenditure incurred for exploration or drilling activities or services or assets used for
these activities.
Tax Holiday
One hundred percent tax holiday available in respect of profits earned from
production of mineral oils.
Tax holiday is available for seven consecutive years from the year of commencement
of commercial production.
2.2 Impact of Budget 2010 on Oil and Petroleum industry:
The Finance Minister has also increased the Minimum Alternate Tax to 18% from the earlier
15%. Oil exploration and production companies had sought an exemption from MAT. At
present, 15% MAT is applicable on booked profits (16.995% effective). No exemption has
been granted on profits earned from commercial production or refining of mineral oil which
are otherwise fully exempted from income tax for the period of seven years from the levy of
MAT.
2.3 Features of the industry:
The petroleum industry is one of the biggest industries in India. The oil industry is broadly
segmented into upstream and downstream sectors. The exploration and production
exploitation activities comprise the upstream sector, while refining, marketing and
distribution activities come under the downstream sector.
Drilling
Production
Refining
Transportation and Distribution
Research and Development
2.4 Refining in India:
To meet the growing demand of petroleum products, the refining capacity in the country has
gradually increased over the years by setting up of new refineries in the country as well as by
expanding the refining capacity of the existing refineries. As of April, 2009 there are a total
8
of 20 refineries in the country comprising 17 (seventeen) in the Public Sector and 3 (three) in
the Private Sector. The country is not only self sufficient in refining capacity for its domestic
consumption but also exports petroleum products substantially. The total refining capacity in
the country as on 1.10.2009 stands at 179.956 MMTPA. The company-wise location and
capacity of the refineries as on 1.10.2009 is given in Table below.
9
Table 2.1
New Refineries:
New grassroots refineries coming up during the XIth Five Year Plan is indicated in Table
Table 2.2
India is aiming to emerge as a refining hub even as global refining markets have tightened
with the closure of small refineries in North America and Europe mainly due to challenges in
investing in cleaner fuels and high compliance costs. The Government of India has been
providing tax incentives and fiscal incentives to new refineries. The new RPL refinery, for
example, benefited from its Special Economic Zone (SEZ) status. Meanwhile, India does
have several other competitive advantages such as its favourable location, lower construction
and operating costs etc. However, given the current economic crisis, some analysts feel that
export markets for all the products produced by the Indian refineries may be hard to find.
India’s Oil Production and Consumption:
10
Chart 2.1
Chart 2.2
India’s Refining Capacity Growth:
11
As on April 1, 2009, India has a total refining capacity of 178 MMTPA (including the
newly commissioned RIL refinery at Jamnagar)
18 out of the total 20 refineries in India belong to PSUs (with a capacity of a little
over 59%)
In the last few years, the Indian refinery sector has witnessed continuous capacity
additions and the trend will continue in near future also; Projected capacity by 2017 is
302 MMTPA
India’s Oil Exports:
Chart 2.3
India’s Oil Imports:
Chart 2.4
12
Mangalore Refinery and Petrochemicals Limited (MRPL), an organization with an asset base
of over 7,000 cr. It is a subsidiary of ONGC.
MRPL at twilight
3.1 Company Profile:
3.1.1 Ownership:
The ownership pattern of the company is as follows:
Oil and Natural Gas Corporation (ONGC) 72%
HPCL 16%
Equity with public and financial institutions 12%
3.1.2 Genesis of MRPL:
The seeds of this project were sown in the year 1987 when HPCL were looking for a partner
in their venture to start a refinery. Among the many bidders for the deal, Adithya Birla group
was selected.
3.1.3 History:
Before acquisition by ONGC in March 2003, MRPL was a joint venture Oil Refinery
promoted by M/s Hindustan Petroleum Corporation Limited (HPCL), a Public Sector
Company and M/s IRIL and associates (AV Birla Group). MRPL was set up in 1988 with the
initial processing capacity of 3.0 Million Metric tones per annum that was later expanded to
the present capacity of 9.69 Million Metric tones per annum. The Refinery was conceived to
maximize middle distillates, with capability to process light to heavy and sour to sweet Crude
13
with 24 to 46 API gravity. On 28th March 2003, ONGC acquire the total share holding of
A.V. Birla Group and further infused equity capital of Rs.600 cr thus making MRPL a
majority held subsidiary of ONGC. Subsequently, ONGC has required equity allotted to the
lenders pursuant to DRP raising ONGC's holding in MRPL to 71.62 percent. The
implementation of DRP in March 2003 within 4 weeks of acquiring equity in MRPL by
ONGC has changed the credit profile of the company. ICRA has assigned A1+ rating
(indicating highest safety) to the Short Term Borrowing programme of MRPL on a
standalone basis.
3.1.4 Location of MRPL:
The refinery is located in Dakshina Kannada district of Karnataka. It is at a distance
of 22 kms from Mangalore. The organization is spread over an area of about 1404 acres. The
refinery was set up with the view to meet the needs of Southern India. The choice of the
location was based in the proximity to seaport, the New Mangalore Port Trust. The port is at
a distance of 16 km from the site of the company. The port has a dedicated, totally
mechanized jetty for handling the products of MRPL.
3.2 Vision and Mission of the Company:
Vision:
To be a world class Refining and Petrochemicals Company, with a strong emphasis on
Productivity, Customer Satisfaction, Safety, Health and Environment Management
Corporate Social Responsibility and Care for Employees.
Mission:
Sustain leadership in energy conservation, efficiency, productivity and innovation.
Capitalise on emerging opportunities in the domestic and International market.
Strive to meet customers’ requirements to their satisfaction.
Maintain global standards in health, safety and environmental norms with a strong
commitment towards community welfare.
Continuing focus on employee welfare and employee relations.
Imbibe highest standards of business ethics and values.
Sustained enhancement in shareholders value.
14
3.3 Capacity of MRPL:
The work in the project started in the year 1992 and the first phase was commissioned 1996,
which had a processing capacity of 3 MMTPA (Million Metric Ton Per Annum). The work in
the second phase of the project started soon after the commissioning of the first phase. The
same was commissioned in the year 1999, and had a processing capacity of 6.96 MMTPA. It
was later increased to 9.96 MMTPA (Million Metric Ton per Unit) The total capacity of the
plant at present is increased to 11.82 MMTPA from 9.69 MMTPA considering the successful
utilization of design margins available in the units over a period of 4 years. MRPL which
meets roughly 8% of India's refining capacity has been successfully running the refinery at
115% to 130 % capacity utilization over the past 4 years.
3.4 Raw Material/CRUDE:
MRPL has the unique distinction of having processed 38 different types of crude’s, sourced
from west Africa, Saudi Arabia, Kuwait, Iraq, Iran, Sudan, Qatar, Abu Dhabi, Dubai, Yemen,
Kazakhstan, China, Vietnam, Malaysia, Indonesia, Brunei and India (Mumbai High).
Presently, two sweet crude’s Mumbai high and Nile Blend (Sudan) are being regularly
processed, in addition to two sour crude’s – Iran mix and Arab Mix. The raw material is
brought to the port through bulk oil containers. The cargo unloaded at the port is directly
pumped to the storage tanks of the company through a pipeline that is approximately 16 kms
in length. The raw material so stored is again pumped to the different units as per production
schedule. The finished products are also pumped to the respective storage tanks.
3.5 Manufacturing Facilities:
MRPL has the unique distinction in India of having two hydro crackers and two CCR
units, which produce high quality fuels.
1. Crude & Vacuum distillation unit:-
The atmospheric and vacuum distillation units and Naphtha splitter unit designed by EIL
are heat integrated to achieve high energy efficiency there by reducing fuel oil consumption
and in turn reducing air emissions.
15
2. Hydro cracker unit:
The hydro cracker unit in India and first in southern part of India produces high quality
sulphur – free diesel, Kerosene and ATF. The plant is designed for 100% conversion of
heavy low value gas oils to lighter and valuable products. Diesel from hydro cracker unit has
a high cetane number, which facilitates.
3. Visbreaker Unit:
Shell soaker Visbreaker technology under the license of ABB lummus of Holland has
been adopted to upgrade heavy vacuum residue to Naphtha and gas oil. This is the first unit in
India to have vacuum flash column, producing vacuum gas oil, which is used for
supplementing the feedstock to hydro cracker unit.
4. CCR Plat forming unit:
A state of the art unit, the continuous catalytic regeneration type plat forming unit (CCR)
produces lead–free, high octane motor spirit (petrol). Hydrogen produced as a by-product, is
used in the hydro cracker unit.
5. Merox :
LPG and Kerosene Merox units covert mercaptons to disulphide. Reformat with RON
110 is also exported for production of premium grade petrol and also for extraction of P-
xylene, a high value aromatic component used in the production of PTA and polyester.
6. Hydrogen:
The hydrogen plant designed by M/s. KTI, Holland produce hydrogen by steam
reforming of Naphtha Hydrogen purity of 99.9% is achieved through Pressure Swing
Adsorption (PSA) unit the technology for which is given by UOP.
7. Bitumen:
This unit employs the highly efficient Bitumen process given by M/s. Porner of Austria to
produce paving grade asphalt.
16
8. Power Plant:
Keeping in view the power situation in the district, MRPL as installed a 112.5 MW power
plant to meet its entire power requirements, through five turbo generator of 22.5MW each.
There are seven boilers of 140Mt/Hr capacity each.
9. Sulphur recovery unit:
The unit was licensed by KTI Italy and produces 99.9% purity sulphur using the most
modern and sophisticated selectox process. There are three sulphur units to meet and produce
the above said grade sulphur with a capacity of 100 tones for each of unit.
10. Reformer Splitter Unit:
In order to meet the stringent specification of benzene content in motor gasoline, reformer
splitter unit is installed. The unit employs simple distillation process to remove the benzene
from the motor gasoline to the specified levels.
11. Gas Oil Hydro Desulphuriser unit: (GOHDS)
This plant is designed to process high sulphur diesel stream from cdu-1 and cdu-2 to meet
the sulphur spec of diesel 25% sulphur) as stipulated by the government of India.
3.5.1 Product Profile of MRPL:
MRPL is manufacturing the following products by distillation of crude and other secondary
processing facilities:
1. Liquefied Petroleum Gas (LPG):-
The darling of House-wife’s for it’s cleanliness and effective use -(This is used as domestic
cooking gas) and also as auto fuel.
2. Naphtha:-
This is used in fertilizer and Petrochemical industries.
3. Motor Spirit:-
Generally known as petrol, it is in fuel for two wheelers and cars whose consumption has
gone up by leaps and bounds in the past few years MRPL is the only company to produce
unleaded petrol from day 1 of production.
17
4. Kerosene:-
Still the poor man’s electricity in remote places and a part being used as fuel.
5. Aviation Turbine Fuel (ATF):-
This particular product has to undergo\stringent laboratory tests before being dispatched. It is
used as fuel in domestic aircrafts and defence aircrafts.
6. High speed Diesel (HSD):-
This is used in all heavy vehicles, trucks, tankers, railways etc. MRPL has achieved less than
0.25% of sulphur levels in diesel as prescribed by the ministry of petroleum.
7. Fuel Oil:-
This is basically used in Furnace and boilers.
8. Bitumen:-
MRPL produces different grades of bitumen for use in laying roads, highways and airport
runways.
9. Sulphur:-
This is directly dispatched from the sulphur recovery unit by trucks. Before the products are
dispatched, they are subject to blending, sampling, testing and certification to meet the
specification. These products (except sulphur and bitumen) are sold to MSHPCL, who as per
the agreement, are the sole distributors. Sulphur, bitumen and Naphtha are directly marketed
by MRPL.
18
3%
4%
13%
11%
16%
53%
MS
OF
SKO/ATF
LPG
BITUMEN
HSD
Chart 3.1
3.5.2 Safety:
“Safety First “– is M.R.P.L Motto.
Lecturers and Seminars an industrial safety for MRPL staff, contractors and other
industries are regularly conducted.
One of the best equipped live five fighting ground is used for training all staff.
Mock fire drill and on-site emergency plan.
3.5.3 Operations:
The operations of the refinery are divided into the following blocks:
1. File and Safety department is well equipment to meet emergencies
2. Raw Water Pump House situated 45kms from away from the Refinery at Sarpady
supplies water required for the refinery from Nethravathi River.
3. Technical Service Division looks after design, construction, process engineering,
quality control, inspection, documentation, technical training and other related
activities.
4. Engineering and Maintenance Division look after the maintenance related to
Mechanical, Electrical, Instrument, and Civil engineering activities of the refinery.
5. Project Division is at present implementing the expansion of Refinery from 3 to 9
MMTPA (Million Metric Ton Per Annum)
6. Personnel and administration Division is responsible for recruitment, welfare,
transport, land, security, community development and other employee related to the
Refinery.
19
7. Finance AND Accounts Division takes care of finances and accounting requirement
of refinery.
8. Purchase Function looks after purchases and sales of product sulphur and bitumen.
9. Stores Function regulates the receipt and issue of material and disposal of scrap items.
10. Marketing Division keeps track of marketing of company products.
11. Secretarial Function looks after the shareholder services and other secretarial
activities.
12. Liaison Office at Delhi and Bangalore keeps liaison with various Government
agencies.
3.5.4 Production Layout:
Chart 3.2
3.5.5 Awards and milestones:
Received ISO: 9002 certification on December 1999 and was re-certified ISO
9001:2000 on January 2003.
20
Oil Conservation Award from Ministry of petroleum and Natural Gas on January 31,
2003.
The Company has been conferred with the “MINI RATNA” category-1 status in July
2007 by the Government of India.
Ranked 5th among India’s top 500 Companies in terms of total income in the Oil
Refining and Marketing sector for 2006- Dun & Bradstreet India.
MRPL won the prestigious Greentech Safety Gold Award for the year 2004-05 in
Petroleum-Refinery Sector for the outstanding contribution in safety record
maintained at work place.
Business Excellence Award for 2005 – Karnataka Chamber of Commerce.
Commendation Certificate for Large Scale Manufacturing Industry under Rajiv
Gandhi National Quality Award 2006.
MRPL’s performance on Energy Conservation continues to be excellent. For the
fourth year in succession, the Jawaharlal Nehru Centenary Energy Performance
Award was given to MRPL by the Ministry of Petroleum & Natural Gas (20th
September, 2007)
MRPL adjudged the winner in the ‘Most Safe Refinery in last three years’ and
runner up in ‘Refineries’ categories of OISD awards for the year 2008-09.
MRPL has won the Jawaharlal Nehru Centenary Award 2008-09 Joint 1st Prize in
specific Energy Consumption Performance amongst all Refineries in Public Sector.
MRPL secured the Superstar Achiever Award – 2008 for best export performance
from Kanara Chamber of Commerce and also State level Export award for the Year
2005-06 and 2006-07 from Govt. of Karnataka
ICRA has reaffirmed their Issuer rating of “Ir AAA” to MRPL for lowest credit risk.
CRISIL issued rating of “Cr AAA” to MRPL indicating highest safety continues.
3.6 McKenzie’s 7s Model:
These seven elements are distinguished in so called hard S’s and soft S’s. The hard elements
are feasible and easy to identify. They can be found in strategy statements, corporate plans,
organisational charts and other documentations.
21
The four soft S’s however, are hardly feasible. They are difficult to describe since
capabilities, values and elements of corporate culture are continuously developing and
changing. They are highly determined by the people at work in organisation. Therefore it is
much more difficult to plan or to influence the characteristics of the soft element. Although
the soft factors are below the surface, they can have a great impact of the strategies and
system of the organisation.
Chart 3.3
1. Strategy:
Strategy refers to set of decisions and an action and it includes mission objectives, goals, and
major action and policies. MRPL mission is “to produce petroleum products of world class
quality at internationally competitive cost. The quality policy of MRPL is to have a set of
satisfied internal customers, business associates, and society through excellence in quality
products and service and also to achieve safe working conditions and Eco friendly
environment through continuous improvement in the technology and man power skills. Its
strategy is to be committed to the state of the technology, environmental protection and safety
in its operations, social commitment and employee relations.
Another strategy of the company is to upgrade the quality specifications of the products
manufactured. It aims at the maximum use of the raw material and upgrades the crude oil into
value added products.
22
2. Style:
Style is one of the factor from which manager of the organisation can bring
organisation change. The McKenzie framework considers style as more than the “style” of
top management. The management of MRPL, is closely associated with team building,
interpersonal interactions and human skills as the management style at MRPL is domestic in
nature. IT encourages the employees to participate in decision making. The authority and
responsibility of each employee is clearly defined at MRPL.
Efficient employees are recognised and their performance is praised in the form of
quick promotion and attractive incentives. Regarding the style of productions, MRPL has
adapted the policy of TQL, which refers to providing training on various areas such as total
productivity management, total quality management, etc. In MRPL managers spend more
time interacting with various employees in various departments, it can be said to be
democratic wherein the employee are given full freedom to express what they think and
sometime the discussion of the employee with employee are also taken into consideration
while making important decisions.
3. Structure:
Structure describes the hierarchy of authority and accountability in an organisation.
These relations are frequently diagrammed in organisational charts. Most organisations use
same mix of structure pyramidal matrix to accomplish their goals. A structure is a formalising
of relationship roles and responsibility in order to recognise and perform work.
23
Chart 3.4
MRPL has a well built organization structure. Since its activities has grown by
expanding their overall scope of operations through further penetrating existing markets by
introducing similar products in to additional markets it has adopted a functional organization
structure.
The functional structure at MRPL, establishes a formal, lateral channel of
communication that existing hierarchical channel of authority and responsibility. It provides
clearly marked carrier path for their services and it also facilitates the developments of skills
who are working in organization.
24
4. Staff:
People are main asset of the organization. Organization performance mainly depends
upon individual’s performance who are working in the organization. So staffing plays
important role by right person in right job. Staffing is the process of acquiring human
resources for the organization and assuring that they have the potential to contribute to the
achievement of the organizations goals.
The work force at MRPL is very skilled, 97% of the workforce is qualified with minimum
qualification being graduation on the administration side and diploma on the technical side.
The personnel and administration department is responsible for recruiting people for
MRPL. The most eligible candidate is selected and they are trained for a month and
promotion of the employees is based on the performance appraisal undertaken. The
employees of MRPL are paid high salary and MRPL has provided hospital facility, shopping
centres, schools, departmental stores and employees club facility to its employees.
5. Systems:
System means all the rules, regulations and procedures both formal and informal that
compliment the organisation structure. The flow of activities involved in the daily operation
of a business including its core process and its support systems. In MRPL there is a formal
flow of communication in two ways i.e. top level to bottom level and bottom to top. Each
division has its own reporting system which integrates entire organisation into corporate
office. MRPL has proper set of procedure for selecting right candidates to the organisation.
6. Skill:
The MRPL possesses labour force with various skills. The company encourages and
provides training for the developments of skills, depending on the employees at operating
level and management level.
The employees at management level, posses skill for company administration, leadership,
motivation etc. They are also trained under various aspects like skill development,
behavioural department, fire and safety training.
At the operating level the employees possess various skills in relation of their jobs as well as
other aspects like self-development, first aid training fire and safety training, work culture
etc. All the employees are properly trained in order to improve their skills so as to help them
to contribute to maximum productivity.
25
7. Shared values:
Shared values the center case of the framework give raise to a certain spirit among
organizational members regarding “who we are and where we are headed” the spirit
permeating in the organization in term is reflected in the values, attitudes and philosophy it s
members the corporate values define the ideas and belief which guide the organizational
operation they lay down the foundation of the organization management philosophy and give
raise to particular culture.
MRPL gives prime importance to safety aspects in all the activities, it trains and
motivates personnel at all levels continuous so to culture which can be achieved by building
and nurturing work culture which focuses on work ethic commitment in the surroundings
through continuous reactive pollution control measures. Vigorous forestation programmers
have been created in around MRPL. Measures also have been taken to protect the existing
flora and fauna any basic interference
3.7 SWOT Analysis:
Strengths:
1) Competitive edge over other Refineries:
MRPL’s competitive edge due to following reasons.
a) It is the only Refinery where more than 99% recovery of Sulphur is achieved
which makes its products high quality and eco friendly.
b) It can refine 40 different varieties of eco friendly.
c) The large capacities with filled economics of large scale production in the ling run.
d) It has highly skilled and energetic work force.
e) It has many processing units unlike others Refineries in India.
f) It has state of art technology which requires less man power and human
interference.
g) Now being a subsidiary company of ONGC it has got more financial assistance and
a wide market
26
2) Comparison with other Refineries:
a) Performance comparison
MRPL Other refineries
Gasoline yield on crude 18% 8%
Gas oil + jet fuel yield 58% 49%
Table 3.1
b) Cost comparison
Company name Capacity Project cost Cost per MT
1)MRPL 9MMT 6,902Crs 6,770
2)Reliance 27MMT 18,200Crs 6,741
3)Essar 9MMT 8,000Crs 8,800
Table 3.2
c) Production capacities
Units Quality per
1. Crude units 96,90,000 MT
2. Hydro Cracker 2400,000 MT
3. CCR Platform 9,50,000 MT
4. Visbreaker 23,00,000 MT
5. Hydrogen unit 9,00,00,000 SCFD
6. Bitumen unit 2,00,000 MT
7. distillate HDS 30,000 Barrels
8. sulphur unit. 1,10,000 MT
Table 3.3
3) Support Utilities.
27
a) Power Plant :
MRPL has a power plant which generates 112.5 MW using Turbo generators and
steam turbines. It is the heart of the refinery which supplies required power and steam
to the complex for an industry like MRPL uninterrupted power supply is a must to
achieve production targets. A steady supply of power also ensures long life of the plant
as well as safety of the complex.
b) Flare System :
MRPL has flare system which are used for safe disposal of inflammable gasses and
toxic vapour which are produced during startup, shutdown and normal operations. As
well as during emergency like cooling water failures, power failures.
Weakness:
1) The main weakness of MRPL is its financial performance which has been negative
because of higher interest rates and accumulated depreciation.
2) The marketing of main products like Petrol, Diesel, Kerosene, LPG, which are done
by HPCL, has not been able to increase its market share. This has adversely affected
MRPL because of lower domestic sales the plant was being under utilized.
Opportunities :
1) MRPL has plans to invest Rs. 600 Cr upgrading its technology to achieve Bharath III
and Euro III norms
2) Plans to invest Rs. 41.24 Lakhs. In R&D Projects for current year.
3) Setting up of retail outlets for direct marketing.
Threats :
The treats faced by MRPL are as follows:
1) Volatility in International prices of Crude Oil.
2) Government Decisions in the context to privatize HPCL.
3) MRPL would be facing competition form Reliance in the long run
4.1 Introduction:
28
Working capital management is concerned with managing of the current assets, the current
liabilities, and the inter-relationship that exist between them. The working capital
management is a significant part of business decision. It is a major concern to the financial
manager in an accomplishment of value maximization depends essentially on the working
capital decisions.
4.2 Scope of the Study:
This study is based on the working capital management at M.R.P.L. The scope of study
limited to Mangalore Refinery and Petrochemicals Ltd. (MRPL) with reference period from
2005 to 2009.
4.3 Objective of Study:
To compare various managerial aspects of various oil companies with that of MRPL
To evaluate and analyse the operating cycle of MRPL.
To assess the Overall efficiency of working capital of MRPL.
To critically analyze the inventory management of MRPL.
To evaluate the Cash Management at MRPL.
To critically analyze the Receivables Management and their collection at MRPL.
To find future trend of Working Capital.
4.4 Methodology:
A. Type of Study: The study carried out here is basically analytical in nature. This
type of study relies on data which is already available.
B. Type of Data used: The methodology involved for data collection was mainly
through secondary data and was obtained from the company’s financial statements
(from 2005 onwards) and the company’s website (http://www.mrpl.co.in). The
Balance Sheets and the Profit & Loss Accounts for the last 5 years was the source
based on which forecasting was done which was from the company’s archives.
Extreme care was taken in collecting the data from the financial statements and only
relevant data was taken for the analysis based on .
C. Sources of Data: The source of data has been company’s Balance Sheet and Profit
and Loss Accounts over a period of past 5 years.
29
D. Tools used for Data Collection: The data has been collected mainly from the
company’s Balance Sheet and Profit & Loss Account for the past 5 years. Interview
schedule was taken to understand how the Finance Department is working and what
are the various policies followed in the Organisation.
E. Tools and techniques used for analysis: Various tools and techniques have been
used to fulfil the aforesaid objectives. A thorough study of the Organisation has been
along with in depth study of the functioning of Finance and Accounts Department of
MRPL. Further for the analysis of Working Capital Management, study of working
Capital cycle / Operating cycle has been made along with Operating cycle of MRPL.
Thereafter analysis of working capital has been done by taking into consideration
past 5 years Current Assets and current Liabilities.
After this component wise analysis has been done, to have in depth view of working
capital requirements and its trend. To find out the efficiency of Working Capital
management, Ratio analysis tool has been used for the evaluation of inventory, Cash
Management and Receivables Management at MRPL. Trend Projection of Working Capital
Requirements has also been done to assess the future requirements of Working Capital. This
has been done till 2015.
5.1 Industry Structure:
Industry Structure is being identified on the basis of following parameters:
30
5.1.1 No. of Players:
There are 17 players in this Industry:
B P C L
Bharat Oman
Bharat Petro JPD
Black Gold Refineries
C P C L
Essar Oil
H P C L
HPCL-Mittal
I O C L
M R P L
Numaligarh Refineries
Raj Lubricants
Raj Petroleum Products
Reliance Inds.
Sah Petroleums
Southern Refineries
Valvoline Cummin
5.1.2 Total Market Size:
The total market size of all the companies in this Industry is being calculated on the basis of
the sales of these companies:
Company Market Share
BPCL 16.24%
HPCL 15.22%
IOCL 37.13%
31
MRPL 4.64%
Reliance 17.19%
Table 5.1
Chart 5.1
It can be seen clearly that the market share of the IOCL is the maximum in the industry
followed by BPCL, HPCL and Reliance. And this is being analysed on the basis of the sales
of the respective companies.
5.1.3 Nature Of Competition:
The nature of competition found here is Oligopolistic Competition this because of the limited
players in this Industry.
5.2 Ratio analysis- 5 Companies:
Here statistics/data presented in the different financial statements do not reveal the true
picture of a financial position of a firm. Properly analyzed and interpreted financial
statements can provide valuable insights into a firm’s performance. To extract the
information from the financial statements, a number of tools are used to analyze such
statements. The most popular tool is the Ratio Analysis.
The following ratios are calculated and interpretations are made based on the results:
Technology orientation
32
16.24%
15.22%
37.13%
4.64%
17.19%
market share
BPCLHPCLIOCLMRPLReliance
In house R & D
Technology imports
Foreign exposure
Export intensity
Import intensity
Productivity
Capital productivity
Labour productivity
Marketing Intensity
Performance
Growth analysis
Profitability trend
Return on Sales
Working Capital ratio
Financial ratios
Debt Equity ratio
Tax Burden Ratio
Current Ratio
Return on Assets
Return on Equity
5.2.1 Technology intensity/orientation:
a) In-House R&D:
33
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
0.05
0.1
0.15
0.2
0.25
0.3
HPCL BPCL IOCL RELIANCE MRPL
Chart 5.2
It is seen that Reliance has been expending a lot in the Research and Development, where as
all other companies have been very low in this regard. Especially HPCL and MRPL have
expended nearly nothing for the R&D processes. Reliance is known to be doing exploratory
works in the Krishna Godavari basin and that justifies the high research and development
expenditure.
b) Technological imports%:
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
HPCL BPCL IOCL RELIANCE MRPL
Chart 5.3
Reliance and HPCL have been major importers of the technological advancements in the
globe where as BPCL and MRPL have imported almost nothing in the years in consideration.
IOCL has been a minor importer all through the years.
34
HPCL has collaborated with several academic / research institutions to come up with
innovative results enhancing the production capacity and other industrial parameters. The
details of the projects (particularly the partners in collaboration) are given below:
The Energy and Resource Institute (TERI)
Gandhi Institute of Technology and Management (GITAM),
Central Institute for Mining and Fuel Research .
Research Triangle Institute (RTI), USA:
As HPCL is also getting in to the field of non-conventional energy, it is seen to have made
lots of technological imports in the years in consideration.
5.2.2 Foreign/International Exposure:
a) Export intensity:
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
10
20
30
40
50
60
70
HPCL BPCL IOCL RELIANCE MRPL
Chart 5.4
Reliance and MRPL have been major export intense companies where as it may be
seen that all other three companies ,i.e., have relied more on serving the domestic
needs of the country. In 2009, it is seen that Reliance has exported a lot and a
significant phenomenon is seen, HPCL, BPCL, and IOCL have shown the same
export intensity in all the years in consideration.
b) Import intensity:
35
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
10
20
30
40
50
60
70
80
90
HPCL BPCL IOCL RELIANCE MRPL
Chart 5.5
Reliance and MRPL have been very intense in terms of imports, shown by the high
percentages in all years. It is worth notice that these two companies were export intense too,
but the export intensity was lesser than the import intensity. The other three companies also
have shown similar trends but to a lower extent, i.e., they also are more intense towards
imports than exports.
The import of crude oil is the reason for high levels of production by all these companies.
Reliance and MRPL make all their exports by processing this crude oil itself, which justifies
the high level of imports.
5.2.3 Marketing/advertising intensity:
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
0.0002
0.0004
0.0006
0.0008
0.001
0.0012
0.0014
0.0016
0.0018
HPCL BPCL IOCL RELIANCE MRPL
Chart 5.6
36
HPCL, IOCL, and Reliance have reduced their marketing intensity consistently in all years
from 2005 to 2009. The other two companies, namely BPCL and MRPL have not shown any
interest in marketing or advertising in all years where their expenditures in this regard were
nil, as oil and petroleum are necessities to everyone. Reliance being a private player, has
spent a lot on marketing because of the fact that Reliance petrol pumps are very few in
number and it has to rely a lot on marketing for proper sales.
5.2.4 Productivity:
a) Capital productivity:
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
1
2
3
4
5
6
HPCL BPCL IOCL RELIANCE MRPL
Chart 5.7
MRPL is the company which has consistently shown an improvement in it’s capital
productivity. IOCL has shown consistency in it’s productivity, being nearly same for all
years. Reliance also showed consistency but has continually underperformed other
companies. HPCL and BPCL have shown constant reduction in their capital productivity in
all years. Reliance has employed a lot of capital and it is unable to generate sales
corresponding to it. The other companies are seen to be utilising their capital capacity
efficiently.
37
b) Labour productivity:
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
100
200
300
400
500
600
HPCL BPCL IOCL RELIANCE MRPL
Chart 5.8
MRPL has remained the highest performer in this regard even though a reduction in later
years of consideration. The second place is held by HPCL though it is very near to other
companies and well below MRPL. All other companies have been low yet consistent in their
performance in terms of labour productivity. MRPL is a small company and relies more on
labour, where as all other four companies are very much capital intensive and that is the
reason for them having a low labour productivity.
5.2.5 Growth:
The growth of the companies in the industry was analyzed on the basis of the
Sales Growth Rate.
Sales Growth Rate
Compounded annual growth rate (CAGR) was used to assess the growth of the company in
terms of its net sales. CAGR is computed as:
Sn = S0 (1 + r) n
Where,
Sn = Net Sales during Year n or the last year considered for analysis.
S0 = Net Sales during Year 0 or the starting year considered for analysis.
r = Compounded Annual Growth Rate.
n = Number of years the company is analyzed.
38
The compounded annual growth rate for the industry is computed to be 22.06%. It is
calculated based on the net sales of the industry for the period of 5 years, that is, from 2004 to
2009.
5.2.6
a) Profitability:
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
HPCL BPCL IOCL RELIANCE MRPL
Chart 5.9
MRPL has been the most profitable firm in the years 2005, 2008, and 2009. In 2006 and
2007, IOCL had outperformed MRPL. Both these companies have been very good
performers in profitability terms. The third place is of BPCL which has been better relatively.
HPCL stands fourth and the last place is taken by Reliance which had very low profits
because of high costs. These high costs are arising from the technological advancements that
Reliance has made.
b) Return on sales:
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
0.05
0.1
0.15
0.2
0.25
HPCL BPCL IOCL RELIANCE MRPL
Chart 5.10
39
Here it can be seen that Reliance has been a good performer in terms of returns on sales.
Whereas the other companies that is BPCL, IOCL and MRPL have been consistently
performing over the years, but HPCL has the least return on sales which is due to the reduced
PBDIT. Though Reliance had a very low profitability, its return on sales is very good, as the
operating profit is considered here. The profit after tax is low for it. Similar reasons can be
given for the other companies too. The profit before interest, taxes and depreciation is low
comparatively but the PAT is high for the other companies.
c) Working capital ratio:
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
HPCL BPCL IOCL RELIANCE MRPL
Chart 5.11
Reliance has shown a high working capital consistently all through the years when compared
to other companies, though it has reduced from what it was in 2005. This has happened due
to increase in current liabilities. IOCL has shown has been the second best in all years except
in 2009, where MRPL took the third position. HPCL and BPCL have maintained low ratios
in all the years in consideration.
40
c) Return On Equity:
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
HPCL BPCL IOCL RELIANCE MRPL
Chart 5.12
Reliance has the highest ROE in all years except 2006 and 2007 showing its superiority in
respect of other companies, though its market share is not good when compared to others.
Reliance is the second best performer in almost all the years except in 2007. IOCL stands
third in this regard followed by BPCL. HPCL stands last in terms of ROE.HPCL shows such
low ROE because it’s PAT is reducing year after year due to increase in debt of the company,
and increased interest expenditure. Reliance has a high debt capacity which is unutilised as of
now, where as HPCL has a low ROE due to the high level of debts that it has taken for its
new venture into non conventional energy.
5.2.7 Financial Ratios:
a) Debt-Equity Ratio:
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
0.5
1
1.5
2
2.5
HPCL BPCL IOCL RELIANCE MRPL
Chart 5.13
41
HPCL is seen to have increasing its debt year after year, and from 2007 it has been the
company with the highest debt among all companies in consideration. The reason for this is
the advancement of the company into the exploration of new sources of energy. BPCL is seen
to have followed HPCL in this regard by having the second highest increase in debt-equity
ratio. IOCL has shown slight increase in its debt in the years, and so is the case with Reliance
too. MRPL, though being a small player in the market, has remarkably been able to reduce its
debt equity ratio in the years in consideration, because of the high profitability that it has
been making in all years.
b) Current Ratio:
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
HPCL BPCL IOCL RELIANCE MRPL
Chart 5.14
All companies have been successful in managing their Liquidity position very well. Reliance
has consistently out shown other companies in all years except 2009 where MRPL out
performed it.
c) Tax Burden Ratio:
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
HPCL BPCL IOCL RELIANCE MRPL
Chart 5.15
42
Tax burden ratio for all companies is nearly the same in all years. The reason for this
similarity is the Tax-Rate and sales revenue. The companies’ Debt causes interest payment
which reduces the tax liability of the company. in 2006, HPCL showed very high Tax burden,
because the interest payment in 2005 was very low. This had increased the taxable income
and hence the tax burden. All other companies remain in the same range because of the same
range of debt and interest payments. The tax burden of MRPL is seen to be increasing as it
has reduced its debt, hence lowering its tax shield.
d) Fixed Asset Turnover:
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
1
2
3
4
5
6
7
HPCL BPCL IOCL RELIANCE MRPL
Chart 5.16
This ratio tells us how well the company is able to utilise its fixed assets in generating sales.
Higher the turnover the better it is for the companies. With this in mind, it can be inferred that
all companies are performing except for the Reliance. HPCL has consistently performed
better than all other companies in consideration. Followed by BPCL, IOCL and MRPL have
shown constant increase in fixed asset turnover in all years.
43
e) Debtors Turnover Ratio:
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
10
20
30
40
50
60
70
HPCL BPCL IOCL RELIANCE MRPL
Chart 5.17
This ratio tells shows us that HPCL is able to collect its money from credit sales at a faster
rate than any other companies. This adds to the liquidity of the company. There is significant
difference shown in HPCL’s Debtors turnover and that of other companies. Reliance follows
it but is yet very far from HPCL. All other companies show a very low Debtors turnover.
This vast difference shows the credit bargaining position of HPCL is much better than that of
other companies.
f) Inventory Turnover Ratio:
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
2
4
6
8
10
12
14
16
HPCL BPCL IOCL RELIANCE MRPL
Chart 5.18
44
Reliance has been the lowest performer in terms of inventory turnover showing high levels of
stock maintenance in the company. IOCL is the second lowest player among the companies
in consideration. It can be seen that MRPL and BPCL have been the two companies who
showed the highest turnover. HPCL has shown a very consistent turnover which is nearly
same in all years. It is good for the company which has high inventory turnover ratio because
it reduces the cost involved in holding the stock. If the inventory turnover ratio is high, then
company earns revenue from the sale of goods which it can use to pay the credit purchases at
a faster rate and ultimately results in profits due to high turnover. This mainly depends on the
production cycle. Lower the production cycle better is the ratio.
g) Interest Coverage Ratio:
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
5
10
15
20
25
30
HPCL BPCL IOCL RELIANCE MRPL
Chart 5.19
Reliance has shown high levels of Interest Coverage in all years consistently. It has been
followed by MRPL which has not been high in all years but yet they were better than other
companies. HPCL had a very high Interest coverage in 2005, but after that their capacity to
pay their obligations had reduced a lot. BPCL and IOCL were good in 2005, but are
constantly decreasing in the following years. Interest coverage ratio should be higher because
it shows how many times it is able to pay the interest incurred from the loans taken.
Interest expenses affect a company's profitability, so the cost-benefit analysis dictates that
borrowing money to fund a company's assets has to have a positive effect. An ample interest
coverage ratio would be an indicator of this circumstance, as well as indicating substantial
45
additional debt capacity. So if the company goes for higher debt, then at the same time it
should have higher interest coverage ratio.
5.3 Porter’s five forces Analysis:
Threat of New Entrants: A major entry barrier into oil refining and gas is lack of
competition in major markets for refined products. Government dominance of user
industries and the losses it forces them to make limit their capacity to pay
internationally comparable prices. Barriers can vary depending on the area of the
market in which the company is situated. Other areas of the oil business require
highly specialized workers to operate the equipment and to make key drilling
decisions. Companies in industries such as these have higher barriers to
entry than ones that are simply offering drilling services or support services.
Bargaining Power of Suppliers: Even though there are many oil companies in
the world only few companies have become successful. The large amounts of capital
investment tend to weed out a lot of the suppliers of rigs, pipeline, refining, etc. These
companies have significant power over smaller drilling and support companies and
they do not have much competition between them.
Bargaining Power of Buyers: The balance of power is shifting toward buyers.
There is no much difference between one company’s oil or drilling services and of
course oil is a necessary commodity. This leads buyers to seek lower prices and better
contract terms.
Availability of Substitutes: Substitutes for the oil industry in general include
alternative fuels such as coal, gas, solar power, wind power, hydroelectricity and even
nuclear energy. Solar energy, and other non-renewable sources offer strong
competition in a long run because of renewability and pollution matters.
46
Competitive Rivalry: Slow industry growth rates and high exit barriers are a
particularly troublesome situation facing some firms. Strong players, marginal
product differentiation, high exit barriers in the form of significant capital investment
has led to stiff competition in the industry Besides the scrap value of the equipment, a
refinery that does not operate has no value-adding capability.
5.4 Ratio Analysis - MRPL:
5.4.1 Turnover Ratios:
a) Debtors Turnover Ratio:
Mar-09 Mar-08 Mar-07 Mar 06 Mar-050
2
4
6
8
10
12
14
16
18
20
Debtors Turnover
Debtors Turnover
Chart 5.20
MRPL does all sales in credit basis. If you observe the data, debtors turnover ratio is
increasing over the years. It is good for the company because it is able to collect its money at
a faster rate. This ratio shows the liquidity status of the company. Higher ratio indicates that
they are able to get as many times their money from the credit sales.
b) Average Collection Period:
Mar-09 Mar-08 Mar-07 Mar 06 Mar-050
10
20
30
40
50
60
70
80
90
Average Collection Period
Average Collection Period
Chart 5.21
47
This is the inverse of Debtors turnover ratio. Lower the Avg. Collection period better is for
the company. MRPL has benchmarked the collection period to 21 days. Now if we see the
data it is showing a decreasing trend over the years. And in the year 2009 it is able to collect
within the benchmarked time period.
5.4.2 Earnings Ratios:
a) ROE:
Mar-09 Mar-08 Mar-07 Mar 06 Mar-050
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
ROE
ROE
Chart 5.22
ROE has reduced from the year 2005 and it increased in the year 2007 and 2008 but again it
decreased in the year 2009. This is mainly because of the reduction in the profit from Rs.
1272cr. in the year 2008 to Rs. 1192 cr, in the year 2009. Since the profits decreased and the
company invested more in reserves and surplus the ROE reduced over the years. Higher the
ROE it is good for the company and the shareholders will invest in those companies where
the Roe is high. If the Roe is high then the company can go for leverage because it is able to
get higher returns from equity.
b) ROCE:
Mar-09 Mar-08 Mar-07 Mar 06 Mar-050
0.05
0.1
0.15
0.2
0.25
0.3
0.35
ROCE
ROCE
Chart 5.23
48
This ratio shows the return on long term funds employed in business in pre tax terms. The
ratio is changing slightly over the years except for the year 2006 where it reduced more. The
reason for this is the operating profit decreased from Rs. 2068 cr. in the year 2005 to Rs.
1160 cr. in the year 2006. But after 2006 it has shown a good sign as the ratio has increased
and only in 2009 there is slight decrease in the ratio because of increase in total funds and
there was no proportionate increase in the operating profit.
6.1 Overview:
49
The study has been carried out while keeping in point the objectives of understanding
the dynamics of Organisation, to critically analyze the Finance and accounts department of
Mangalore Refinery and Petrochemicals Ltd. The scope of study was limited to Mangalore
division of the organisation where all the data is collected from various plants and then
compiled together.
6.1.1 An Introduction to Working Capital Management:
Working Capital Management is a significant facet of financial Management. It is
basically the management of Current Assets and Current Liabilities of a firm. This includes
short term finance, negotiating favourite credit terms, controlling the movement of cash,
administering accounts receivables and monitoring the investments in inventories. All this
consume a great deal of time of finance managers.
The basic goal of Working Capital Management is to manage Current Assets and Current
Liabilities in such a way that a satisfactory level of working Capital is maintained i.e. neither
inadequate nor excessive.
6.2 Concept of Working Capital:
There are two concepts of working capital – Gross and Net
Gross Working Capital refers to the firms investments in Current Assets (current
assets are the assets which can be converted into cash within an accounting year or
within an operating cycle) and include cash short term securities, debtors and stock.
Net working capital can be defined in two different ways:
a. It is the excess of current assets over current liabilities.
b. It is that portion of a firm’s current assets which is financed by long-term
funds.
Net working capital can be positive or negative. A positive working capital arises
when current assets exceed current liabilities. A negative working capital arises when
current liabilities are in excess of current assets.
The Gross working capital concept focuses on two aspects of current assets
management:
a. How to optimize investment in current assets?
b. How should current assets be financed?
50
6.2.1 Need for Working Capital:
The need for working capital arises due to the time gap between production and
realisation of cash from sales. There is time gap between purchase of raw materials and
production, sales and realization of cash. Hence, the working capital is needed for following
purposes:
i. For the purchase of raw materials, components and spares.
ii. To pay wages and salaries
iii. To incur day-to-day expenses and overhead costs.
iv. To meet the selling costs such as advertising, etc.
v. To meet inventories of raw materials, work-in-progress, and finished stock.
6.2.2 Policies and Practices of Working capital:
The company follows the policies of working capital management according to
Reserve Bank of India (RBI) instructions. As far as practices of Working capital are
concerned, the company gives a credit period of 21 days to its customers.
6.2.3 Estimation of Working Capital Requirement:
There are four major methods of calculating working capital requirement of s firm.
They are listed below:
Based on Current Assets Holding Period: In this method the working capital
requirement is determined on the basis of average holding period of current assets and
relating them to costs based on the company’s experience in the previous years. This
method is essentially based on operating cycle concept.
Based on Ratio of Sales: This method estimates working capital requirements as a
ratio of sales on the assumption that current assets change with sales.
Ratio of Fixed Investment: This method uses a simple technique of estimating
working capital requirements as a percentage of fixed investment. The working
capital is taken as a fixed percentage of fixed investments and the ratio is determined
on the basis of previous years.
Estimation of components of Working Capital Method: Since working capital
is the excess of current assets over current liabilities, an assessment of the working
capital requirements can be made by estimating the amounts of different constituents
51
of working capital. For example: Inventories, accounts receivables, cash accounts
payable, etc.
6.2.4 Working Capital Cycle / Operating Cycle:
Operating Cycle is the time duration required to convert sales after the conversion of
resources into inventories, into cash.
Working Capital is required because of the time gap between sales and their actual
realization in cash. The time gap is technically termed as “Operating Cycle” of the business.
The amount of working capital differs from time to time and frm business to business
depending upon the operating cycle in each case. The shorter the operating cycle, the quicker
the realization of sales and hence lesser the amount of working capital needed.
It has three stages:
1) Acquisition of Resources such as raw material, labour, and fuel etc.
2) Manufacture of product which includes conversion of raw materials into work-in-
progress, into finished goods.
3) Sale of Product and recovery of proceeds either for cash or on credit. Credit sales
create account receivable for collection.
There are two elements in the business cycle that absorb cash – inventory (stocks and
work-in-progress) and receivables (debtors owing you money). The main sources of cash are
Payables (your creditors) and Equity and Loans.
A Typical operating cycle of a Manufacturing firm, a on Manufacturing firm or a
Trading firm and a Service or Financial firm is given below:
Operating cycle of a Manufacturing Firm:
52
Chart 6.1
Each component of working capital (namely inventory, receivables and payables) has
two dimensions: TIME and MONEY. If you can get money to move faster around the cycle
(e.g. collect money due from debtors more quickly) or reduce the amount of money tied up
(e.g. reduce inventory levels relative to sales), the business will generate more cash or it will
need to borrow less money to fund working capital. As a consequence, you could reduce the
cost of bank interest or you will have additional free money available to support additional
sales growth or investment. Similarly, if you can negotiate improved terms with suppliers e.g.
get longer credit or an increased credit limit; you effectively create free finance to help fund
future sales.
6.2.5 Determinants of working capital:
1) General nature of business
Working capital requirements of the firm depend on the general nature of the
business. The small company requires less working capital, because of their limited
transaction. Big firm like public utilities require more of working capital because of
huge transactions.
2) Production Cycle
53
Production cycle is the time taken to convert raw material into finished goods. Longer
the production cycle higher the working capital required. Shorter the production cycle
lower the working capital required.
3) Business Cycle
The working capital requirements are higher when the boom conditions prevailing in
the economy and lower when economic activity is marked by decline.
4) Production Policy
If the company sales are on the seasonal basis, more working capital is required
during seasonal sales and less working capital during off seasons. If the company’s
sales are throughout the year a uniform working capital is required.
5) Credit Policy
i. Credit allowed to customers
Higher the credit allowed higher the need for the working capital. Lower the credit
allowed lower the need for working capital.
ii. Credit got from the suppliers
If the supplier gives more credit the working capital required is less. If the supplier
grants less credit the working capital required is high.
6) Growth Expansion
As the company grows, higher is the need for working capital.
7) Tax Level
Higher the tax liability higher is the need for the working capital, lower is the tax
liability lower is the need for the working capital.
8) Dividend Policy
54
The payment of the dividend consumes cash. Thus, if the company declares a
dividend, higher is the working capital required is that year.
9) Depreciation
Higher the depreciation there will be reduction in the disposable profit and the
dividends. Thus, the cash is preserved and lower working capital required.
10)Price Level Changes
Higher the prices, higher will be the need for the working capital. This is because
rising prices necessitates the use of more funds for maintaining an existing level of
activity.
11)Operating Efficiency
The management can contribute to a sound working capital position through operating
efficiencies. If the company efficiently operates its operation, then lower working
capital is required.
12)Profit Level
Higher the profit will lead to have more internal funds which in turn will reduce the
need for the working capital.
13)Change in Technology
Technological developments related to the production process have sharp impact on
the need for working capital.
6.3 Working Capital in MRPL:
55
Operating Cycle of MRPL:
Chart 6.2
6.3.1 Calculation of Operating Cycle of MRPL:
Definition of operating Cycle: Operating Cycle is the time duration required to convert
sales, after the conversion of resources into inventories into cash.
It has three stages:
Acquisition of resources
Manufacture of Product
Sale of the Product and recovery of proceeds
Operating Cycle = Raw Material / Inventory conversion period + Debtors conversion
period – Payables Deferral Period.
Raw Materials Conversion Period:
Raw MaterialConversionPeriod= Rawmaterial inventoryRawmaterial consumed duringt heday
∗360
Mar-09 Mar-08 Mar-07 Mar-06 Mar-05
RM inventory 882.9 2,020.40 1,011.76 1,208.60 958.31
56
Raw Materials which includes Crude
Storage
Cash
Sales
DebtorsCreditors
Finished Product
RMC 94.5553425 82.42203 74.26647 62.55186 44.54948
RMCP 9.33738885 24.51286 13.62338 19.32157 21.51114
Table 6.1
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
5
10
15
20
25
30
RMCP
RMCP
Chart 6.3
If we observe the data the Raw Material Consumption Period is decreasing over the years
except for the year 2008. It is been lowest in the year 2009 which is 9 days and this is good
for the company as the conversion period is low and therefore the cost involved is also less.
In the year 2008 the value of raw materials in inventory was Rs.2020 cr. which is almost
twice of Rs.1011 cr. which was in 2007. So when there was almost 100 % increase in value
of raw materials in the inventory there was only 10 % increase in the raw material
consumption per day. This resulted in higher raw material consumption period in the year
2008. Now if we consider the data of 2009 there is decrease in value of raw material in the
inventory and also there is increase in daily consumption which has increased from 82days in
2008 to 94 days in 2009.
Work-in-Progress Conversion Period:
Work−¿−progressConversionPeriod=Work−¿−ProgressinventoryCost ofProduction
∗360
Mar-09 Mar-08 Mar-07 Mar-06 Mar-05
WIP inventory 69.28 147.33 148.01 82.93 127.07
COP 97.9857 84.5094 76.02992 64.14721 46.26085
57
WIPCP 0.707043 1.743356 1.946734 1.292808 2.746815
Table 6.2
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
0.5
1
1.5
2
2.5
3
WIPCP
WIPCP
Chart 6.4
If we observe the data in the table we see that the work in progress holding days is decreasing
over the years. In the year 2009 it is less than 1 day which is good for the company. It is
mainly because of the latest technology it has implemented in refining mechanism. The cost
of production is increasing over the years because of various reasons like inflation, buying of
latest technology machines, etc. The value of work in progress inventory is fluctuating over
the years and it is less in year 2009 which is Rs. 69cr. which is good for the company as it is
not blocking its money in the intermediate stage.
Finished goods Conversion Period:
Finis hed GoodsConversion Period= Finis hedGoods InventoryCost of Goods Sold
∗360
Mar-09 Mar-08 Mar-07 Mar-06 Mar-05
FG inventory 858.3 1,377.11 1,271.63 537.79 787.64
COGS 100.337233 88.2823 79.51384 65.6206 48.41877
FGCP 8.55415259 15.59894 15.99256 8.195444 16.26725
Table 6.3
58
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
2
4
6
8
10
12
14
16
18
FGCP
FGCP
Chart 6.5
If we observe the data the finished goods conversion period is fluctuating over the years. It is
lowest in the year 2006 and highest in the year 2007. Here the cost of goods sold is increasing
over the years because of various external factors. The value of finished goods inventory was
lowest in the year 2006 which was Rs. 537cr. and highest in the year 2008 Rs. 1377cr. In the
year 2009 it again reduced to Rs. 858 cr. which is better for the company. The reason behind
this is company needs different tanks to store different products like crude and which is of
different types based on sulphur content, then intermediate products and then finished goods.
Now if the value of finished goods inventory is less, then it can utilise those for storing
intermediate products and crude.
Debtors Conversion Period:
Debtors conversion Period=Debtors (Closing Debtors )
Cost of Sales∗360
Mar-09 Mar-08 Mar-07 Mar-06 Mar-05
Debtors 1,286.98 2,204.70 1,194.87 1,153.02 960.8
COS 100.643068 88.91932 80.28044 66.92638 49.25948
DCP 12.7878178 24.79439 14.8837 17.22818 19.50488
Table 6.4
59
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
5
10
15
20
25
30
DCP
DCP
Chart 6.6
If we observe the data debtors conversion period is showing a decreasing trend except for the
year 2008. The reason for this is the economic downturn and other external factors. This tells
us that how fast the company is able to get back the money from the credit sales. Here it is
good for the company because in the year 2009 it is able to get back the money which is
blocked within 12 days. Company usually follows a credit sales policy.
Payables Deferral Period:
Payables deferral Period=Creditors ( closing)Credit Purc hases
∗360
Mar-09 Mar-08 Mar-07 Mar-06 Mar-05
Creditors 2,970.25 4,556.59 2,804.48 2,131.73 2,222.61
credit purchases 92.13643 76.88668 71.49452 59.24063 41.92397
CDP 31.047517 59.26371 39.2265 35.98426 53.01525
Table 6.5
60
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
10
20
30
40
50
60
70
CDP
CDP
Chart 6.7
If we observe the data it is highest in the year 2008 and lowest in the year 2009. It is better
for the company if this period is less because then the people who give the raw materials on
credit will have belief in the company as it pays back the money at a given time duration.
Gross Operating cycle:
GrossOperating cycle=R+W +F+D
Mar-09 Mar-08 Mar-07 Mar-06 Mar-05
RMCP 9.33738885 24.51286 13.62338 19.32157 21.51114
WIPCP 0.707043 1.743356 1.946734 1.292808 2.746815
FGCP 8.55415259 15.59894 15.99256 8.195444 16.26725
DCP 12.7878178 24.79439 14.8837 17.22818 19.50488
GOC 31.3864028 66.64955 46.44637 46.038 60.03007Table 6.6
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
10
20
30
40
50
60
70
GOC
GOC
Chart 6.8
61
If we observe the data gross operating cycle reducing over the years except for year 2008
where it has seen an increase. Gross operating cycle is nothing but the time from the purchase
of the raw materials till the collection of money from credit sales. It is better for the company
if it is less because it can invest those cash in some other projects. If this cycle is less then the
company can buy raw materials and produce it and sell the goods and get back the money
from sales and pay for raw materials purchased at a faster rate and this result in the
profitability of the company.
Net Operating Cycle:
Net OperatingCycle=GrossOperatingCycle−Creditor Deferral Period
Mar-09 Mar-08 Mar-07 Mar-06 Mar-05
GOC 31.3864028 66.64955 46.44637 46.038 60.03007CDP 31.047517 59.26371 39.2265 35.98426 53.01525
NOC 0.339142 7.385838 7.21987 10.05375 7.014822Table 6.7
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
2
4
6
8
10
12
NOC
NOC
Chart 6.9
If we observe the data it is reducing over the years and it is least in the year 2009. Net
operating cycle is nothing but the time period between the collection of money from credit
sales and the payment for resources acquired by the firm. It shows how quickly the company
turns its inventories into sales and sales into cash which is then used to pay the suppliers for
the raw materials purchased It is better for the company if the net operating cycle is less. If it
62
is less then company is able to utilise its funds to the maximum and it get generate more
revenue at a faster rate. This is sometimes looked by the investors to find out the status of the
company’s conversion cycle. As a whole, a shorter CCC means greater liquidity, which
translates into less of a need to borrow, more opportunity to give price discounts with cash
purchases for raw materials, and an increased capacity to fund the expansion of the business
into new product lines and markets.
An increasing trend in Inventory conversion period could mean decreasing demand for a
Company’s products. Decreasing Debtors conversion period could indicate an increasingly
competitive product.
6.3.2 Analysis of Working Capital of MRPL:
Working Capital is the Excess of Current Assets over Current Liabilities.
Working Capital is computed as follows:
NetWorkingCapital=Current Assets−Current Liabilities
Working Capital is considered to be effectively circulated when it is having a faster turnover.
The table below shows the working Capital for the past five years.
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05
Total Current Assets 6,007.556,793.3
2 4,461.323,844.4
5 3,687.86
Total Current Liabilities 3,438.565,173.1
6 3,131.002,537.1
0 2,649.01
Working Capital 2,568.991,620.1
6 1,330.321,307.3
5 1,038.85Table 6.8
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0.00
500.00
1,000.00
1,500.00
2,000.00
2,500.00
3,000.00
Working Capital
Working Capital
Chart 6.10
63
If we observe the above data we see that the working capital is continuously increasing over
the years. This is mainly due to the increase in the cash and bank and loans and advances.
6.3.3 Component Wise Analysis of Working Capital:
Particulars Mar 09 Mar 08 Mar 07 Mar 06 Mar 05Inventories 31.61% 53.46% 56.10% 49.17% 51.83%Sundry Debtors 21.42% 32.45% 26.78% 29.99% 26.05%Cash and Bank 29.48% 5.98% 2.97% 0.13% 0.24%Loans and Advances 17.47% 8.09% 14.12% 20.69% 21.86%
100% 100% 100% 100% 100%Table 6.9
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
20
40
60
80
100
120
Loans and AdvancesCash and BankSundry DebtorsInventories
Chart 6.11
If we observe the above chart we see that inventories has been the major portion in the
working capital in all the years. In the year 2009, percentage of cash and bank has also
increased in a big amount. But if we see from the other side the percentage of inventories is
reducing and there is increase in the percentage of cash and bank balances. This helps the
company to meet its short term obligations.
6.3.4 The overall efficiency of working Capital Management:
The financial position and performance of the company as revealed by its working capital
management can be analysed, and evaluated by making use of financial ratios. Financial
Ratios helps in analysis and interpretation of the company’s working capital position and also
in determining whether there has been an improvement or deterioration in the financial
condition of the firm over a period of time.
64
In this study the following financial ratios have been computed to study the working capital
conditions of MRPL.
Current Ratio:
Mar-09 Mar-08 Mar-07 Mar 06 Mar-050
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
Current Ratio
Current Ratio
Chart 6.12
Current Ratio is higher in the year 2009 compared to the other years. Ideal current ratio is
1.33:1. Here the company is able to meet its short term obligations as it is able to maintain the
current ratio above 1.33 but having higher current ratio indicates company is having high
current assets which is idle and involves higher opportunity cost.
Quick Ratio:
Mar-09 Mar-08 Mar-07 Mar 06 Mar-050
0.2
0.4
0.6
0.8
1
1.2
1.4
Quick ratio
Quick ratio
Chart 6.13
Quick Ratio gives a better picture about the liquidity status of the company as all current
assets cannot be converted to cash very fast such as the inventories. The thumb rule is quick
65
ratio should be 1:1. Here we observe that in the year 2009 the quick ratio is higher compared
to all the other years considered. It is because the current liabilities have reduced from
Rs.5173cr. in the year 2008 to Rs. 3438 cr. in the year 2009. Also the inventories have also
reduced from Rs. 3632cr. in the year 2008 to Rs. 1899 cr. which resulted in the increase in
quick ratio.
6.4 Inventory management at MRPL:
The term Inventory refers to the stockpile of the products of a firm is offering for a sale and
the components that make up the product. In other words. Inventory is composed of assets
that will be sold in future in the nominal course of business operations. The assets which firm
store as inventory in anticipation of need are:
i) Raw Material
ii) Work-in-Progress
iii) Finished Goods
6.4.1 Objectives
The aim of Inventory Management is to avoid excessive and inadequate levels of inventories
and to maintain sufficient inventory for the smooth production and sales operations. Efforts
should be made to place the order at the right time with the right source to acquire the right
quantity at the right price and quality. An effective Inventory Management should:
1) Ensure a continuous supply of raw materials to facilitate uninterrupted production.
2) Maintain sufficient stocks of raw materials in periods of short supply and anticipate
price changes.
3) Maintain sufficient finished goods inventory for smooth sales operation and efficient
customer service.
4) Minimize the carrying cost.
5) Control investment in inventories and keep it at an optimum level.
6.4.2 Evaluation of Inventory Management at MRPL:
For the purpose of evaluation of how the working capital is managed at MRPL, I have
calculated three ratios all taking into consideration the inventory. The ratios calculated are as
follows:
66
1. Inventory to Net Working Capital Ratio
2. Inventory to Current assets Ratio
3. Inventory / Stock Turnover Ratio
Inventory to Net Working Capital Ratio: This ratio has been calculated to find how much
does the inventory occupies the part of working capital or in other terms how much has
been invested as a part of working capital.
Inventory ¿NWC Ratio= InventoryNetWorkingCapital
∗100
Mar-09 Mar-08 Mar-07 Mar-06 Mar-05Inventory 1,899.40 3,632.33 2,503.21 1,890.70 1,911.62NWC 2,568.99 1,620.16 1,330.32 1,307.35 1,038.85Ratio 73.9% 224% 188% 144% 184%
Table 6.10
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
0.5
1
1.5
2
2.5
Inventory to NWC
Inventory to NWC
Chart 6.14
If we observe the above data we find that the ratio is varying over the years. It was highest in
the year 2008 and lowest in the year 2009. This reducing trend in the ratio is better for the
company. The company is reducing its investment in inventories and increasing its cash and
bank balances. The increase in cash balances makes it easier for the company to meet its
short term obligations. The company has increased its cash balances at a higher rate from Rs.
9 cr. to Rs. 1770 cr.
Inventory to Current Assets Ratio: This ratio has been calculated to find the in-depth
analysis of working Capital Management there at MRPL. Current assets itself is a part of
67
Working Capital and the ratio of inventory to Current Assets will bring out the minute
details.
Inventory ¿Current Assets Ratio= InventoryCurrent Assets
∗100
Mar-09 Mar-08 Mar-07 Mar-06 Mar-05Inventory 1,899.40 3,632.33 2,503.21 1,890.70 1,911.62Current Assets 6,007.55 6,793.32 4,461.32 3,844.45 3,687.86Ratio 31.6% 53.4% 56.1% 49.18% 51.83%
Table 6.11
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
0.1
0.2
0.3
0.4
0.5
0.6
Inventory to Current Assets
Inventory to Current Assets
Chart 6.15
If we observe the data, we see that it is decreasing over the years except for the year 2007
where it has seen an increase. It is lowest in the year 2009 which is better for the company.
The reason behind this is it is investing less on inventories out of the total current assets it is
holding. It has reduced investment in inventories and increased its cash balances because it
can meet its short term obligations like payment for the credit purchases it has made.
Inventory / Stock Turnover Ratio: Also called as Inventory Turnover Ratio. This ratio
denotes the speed at which inventory will be converted into sales or receivables through
sales. This ratio reveals how many times finished stock is turned over during a given
accounting period. It therefore, explains whether investment in inventories is within
proper limits or not.
Inventory turnover Ratio= COGSAverage Inventory
68
Table 6.12
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
2
4
6
8
10
12
14
Inventory turnover Ratio (times)
Inventory turnover Ratio (times)
Chart 6.16
If we observe the data, it is higher in the year 2009 which is better for the company. The
reason behind this is company is able is convert the inventories into finished goods so that it
can increase its sales and reduce the shortage of finished products. However if it has very
high ratio then also it is not favourable to the company because there may be shortage in
inventory when the sales rate is very high. Having a very less ratio is not good for the
company because inventory is kept idle and this inturn reduces the liquidity of the company.
6.4.3 Crude oil:
Crude is the major raw material in M.R.P.L. Crude imported are stored in the customs
bonded warehouse tanks. Depending upon the requirement it is transferred for home
consumption through pipeline directly from NMPT. The crude stored is measured as Metric
Tons.
Different crude processed by MRPL is as follows:
High sulphur Low sulphur
Iran mix Quaibae
Suez blend Escravous
Dubai blend Labuan
69
Mar-09 Mar-08 Mar-07 Mar-06 Mar-05Cost of goods sold 36623.09 32223.04 29022.55 23951.52 17672.85Avg Inventory 2765.865 3067.77 2196.955 1901.16 1550.485Ratio (times) 13.2411 10.50373 13.21035 12.59837 11.39827
Kuwaiti Minilight
Lavan blend Bombay High
Upper zakum Nile
Arab mix
Ordering quantity of crude:
In M.R.P.L., it is done under Linear Programming Model (L.P.P.) whereby each crude’s
different properties, prices, yield, crude availability, freight charges, unit constraints all are
fed into the Model and which gives maximum profits and rank them according to the profits
they earn or yield.
This system is known as “Pecking Order”. These are of 2 types, i.e., one is monthly pecking
order, and the other is yearly pecking order. The yearly pecking orders are done for those
crude, where availability of crude is abundant like Iran mix, Saudi, Kuwait etc. which are
arrived in huge. They are fixed. It is done in terms of contract basis.
The other is monthly pecking order. It is done for those that are available in cheap, whereby
the other companies reject the crude may be given for lesser price. It is done on spot basis.
So accordingly crude is purchased in the market. After choosing which crude to be
purchased, question arises what is the quantity to be purchased. Quantity ordered is mainly
affected by 2 factors in MRPL they are as follows:
International crude – There are 2 matters relating to international crude, one is vessel
size and the other jetty constraints for unloading. Larger is the vessel then it is
economical. Thus there should be a balance. Therefore one parcel should be 80-95
TMT.
Indian crude – As it holds less quantity, i.e., smaller ship, it should hold 35-50 TMT
Placing of an order:
Marketing companies like HPCL; BPCL and IOCL, place a proportionate order for finished
goods of M.R.P.L. There will some percentages (%) of finished goods those are pre-
determined in throughput of crude. If the existing throughput crude does not hold the
percentage of finished products, then the order is placed two months earlier this is because
procurement of stock takes a long process or it is less predictable.
70
The placing of proportionate order for finished products to M.R.P.L. by marketing companies
through Petroleum Planning cell. They will do it under past or present scenario. The excess is
proportionately distributed among different refineries including M.R.P.L.
Forecasting:
Forecasting is done by taking into consideration the order placed before in hand by marketing
companies like HPCL, BPCL and IOCL. As some proportionate of finished products are pre-
determined in crude oil accordingly if there is any deficit in crude with regard to finished
product then there is a requirement of crude. Then scheduling for whole month is done taking
into consideration of the above with respect to its throughput.
Average time taken for obtaining a fresh delivery:
Crude is brought in two ways into the refinery:
Term basis – purchased annually
Spot basis – purchased according to requirement and availability of crude.
E.g.: Crude from Western African = 45 days
Crude from Middle East = 15 days
6.5 Cash Management at MRPL:
Cash is an important component of Working Capital, although the concept of Cash
Management is not new. It has assumed greater importance in the modern business world due
to important changes in the conduct of business and ever increasing difficulties and cost of
borrowings and the same applies to MRPL.
Chart 6.17
71
6.5.1 Managing of Collections and Disbursement:
Funds flow is undertaken between collections, cash, disbursements. Information flow
is undertaken between collections control through information reporting and disbursements.
M/S Mangalore Refinery and Petro Chemicals Limited do not maintain excess money.
So, it can’t be able to invest in marketable securities. So, there is no chance of surplus funds
investment in different options.
If company is facing deficit in Working Capital, they follow some actions to avoid that. They
are:
1) Advance from Customers
2) Short-Term Loan
3) Temporary Overdraft
4) Reduction in Stock Holding.
5) Unsecured Loan from Directors, etc.
Collection Techniques:
The firm’s objective is not only to stimulate customers to pay their accounts as promptly
as possible but also to convert their payments into a spendable form as quickly as possible.
Some important techniques used by M/S Mangalore Refinery and Petro Chemicals Limited to
minimize collection float are:
1) Concentration Banking
It is used to reduce float by shortening the mail and clearing float components. Mail
float is reduced because regionally dispersed collection centers bring the collection point
closer to the point from which the cheques are sent. Clearing float should also be reduced,
since the Payee’s Regional Bank is likely to be in the same Federal Reserve district or the
same city as the bank on which the cheque is drawn; it may even the same bank. A reduction
is clearing float will, of course, make funds available to the firm more quickly.
2) Lock Boxes
Another method used to collections by Mangalore Refinery and Petro Chemicals
Limited is Lock Box System. Here instead of mailing payment to a collection center, the
Payer sends it to a post office box that is emptied by the firm’s bank. One or more times each
business day, the bank opens the payment envelopes, deposits the cheques in the firm’s
72
account an sends a deposit slip (or under certain arrangements, a computer tape) indicating
the payments received along with any enclosures, to the firm.
3) Direct Sends
Rather than depositing these cheques in its collection account, the firm arranges to present the
cheques to the bank on which they are drawn and receive immediate payment. The firm can
express merit or private express services to get the cheques into a bank in the same city or to
a sales office.
4) Wire Transfers
Firm also frequently use wire transfers to reduce collection float by quickly
transferring funds from one bank account to another. Wire transfers are telegraphic
communications that a book keeping entries remove funds from the payers bank and deposit
them into the payee’s bank. This can eliminate mail and clearing float and may provide
processing float reductions as well.
Disbursement Techniques:
The firm’s objective related to accounts payable is not only to pay its accounts as late as
possible but also to slow down the availability of funds to suppliers and employees once the
payment has been dispatched. Some important techniques followed by M/S Mangalore
Refinery and Petro Chemicals Limited are:
1) Controlled Disbursing
It involves the strategic use of mailing points and bank accounts to lengthen mail float
and clearing float, respectively when the date of post mark is considered the effective date of
payment by the supplier, the firm may be able to lengthen the mail time associated with
disbursements. This is due by paying payments in the mail at locations from which it is
known they will take a considerable amount of time to reach the supplier. This scheme is
developed by widespread availability of computers and data on check clearing time allows
firm to maximize clearing float on their payments.
2) Playing the Float
It is a method of consciously anticipating the resulting float or delay associated with
the payment process. Firm often play the float by writing cheques against funds not currently
in their checking accounts. They are able to do this because they know a delay will occur
between the receipt and the deposit of cheques by suppliers and the actual withdrawal of
funds from their checking accounts. It is likely that the firms bank account will not be drawn
73
by the amount of the payments for a few additional days. Although the effective use of this
practice could result in problems associated with balanced cheques any firm’s use float to
stretch but their accounts payable.
3) (a) Overdraft Systems and Zero Balance Accounts
Firm that aggressively manage cash disbursements will often arrange for some type of
overdraft system or a zero balance account. Under an overdraft system, if the firm’s checking
account balance is insufficient to cover all cheques presented against the account, the bank
will automatically lend the firm enough money to cover the amount of the overdraft. The
bank, of course, will charge the firm interest on the funds lent and will limit the amount of
overdraft coverage.
(b)Firm also use zero balance accounts
Checking accounts in which zero balances are maintained. Under this arrangement,
each day the bank will notify the firm of the total amount of cheques presented against the
account. The firm then transfers only that amount, typically from a master all. Once the
corresponding cheques have been paid, the account balance reverts to zero. The bank, of
course, must be compensated for this service.
M.R.P.L. has centralized cash management with regard to cash outflows and cash inflows at
its corporate office in Mumbai. Any excess collection at branches in Mangalore and
Bangalore will be transferred to corporate office and whenever shortfall arises in the branches
funds are transferred from the corporate office. Here cash refers to cash and cash equivalents.
Maximum limit is fixed based on the past experience and number of transactions in
the previous year. Further there is a restriction in the Income Tax for cash payment exceeding
Rs. 20,000. As far as possible all payments are made through bank and only in some
exceptional cases cash payments are being made. Payments such as travel advances to
employees, petty cash expenses, reimbursement of expenses are made through cash. In case
of pending vouchers with the cashier requires further funds and the required amount will be
drawn from the banks (Bank branches are situated in site). M.R.P.L. Mangalore has cash
holding of Rs. 50,000 and Mumbai corporate office holds Rs. 50,000. Any excess in the
office will be transferred to the bank and any shortfall cash will be withdrawn from bank.
Again Chief Resident Manager in Bangalore and Delhi office has an imprest balance of Rs.
15,000 to meet petty cash expenses. Petty cash imprest are with regard to following reasons:
Purchase – local purchase – Rs. 15,000/-; Fire and safety – petty repairs – Rs. 500/-;
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Materials – petty clearing charges – Rs. 500/-; G.M. (T/S) – petty expenses – Rs. 500/- ; P &
A (guest house – petty expenses – Rs. 5,000/-.
Corporate office Mumbai deals with major funds management. They deal with high
value transactions like receipt – sales from HPCL, borrow out of working Capital limits, Bills
Discounted, loans to NMPT, NMPT interest remittance of Phase II once in a quarter to
Mumbai corporate office and interest of Phase I is remitted to M.R.P.L., Mangalore. Crude
payments, loan repayments, interest on loans, interest, tax payment etc. They have to closely
monitor interest rates, i.e., C.C. accounts whereby daily cash flow requirement is dealt
through Opening Accounts in banks, withdrawal should be high when interest rates are low
and withdrawal should be low when interest rates are high.
One important aspect noticed in the Cash Management System is that, outstation party
used to send their DD by courier, which delayed realization to the extent of transit time. To
avoid this delay in transit time, currently many banks are offering excellent cash management
services whereby collection at various locations are pooled in customers account at one place
and disbursement can be made from there. Corporation Bank services MRPL this service.
This service in Corporation Bank is known as “CAPS” (Collection And Payment Service).
The company needs to explore the options of availing similar services from a bank that has
got wide network so that it will benefit both the customer and the company.
Based on MRPL’s request 2 banks from consortium of lenders have allocated Rs. 150
lakhs (Corporation Bank) and Rs. 25 lakhs (SBI) as CC limit to their Mangalore branch for
the utilization of MRPL Mangalore site office. Thus MRPL Mangalore gets total cash credit
limit of Rs. 175 lakhs. Payment to customs and Wharfage are done through SBI and all the
payment is done through Corporation Bank. Cash receipts are receipts from Mumbai, receipts
from NMPT, LC receipts and receipts from sales other than major receipts from sales viz.,
HPCL.
6.5.2 Evaluation of Cash Management:
For the purpose of evaluation of Working Capital Management, I have done a keen study on
the working capital by evaluation of the cash management at MRPL. For this purpose I have
calculated two ratios:
1. Cash and Bank Balances to Current Assets ratio
2. Sales to Cash and Bank Balances Ratio
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Cash and Bank Balances to Current Assets ratio: The ratio has been calculated to
find out that how much liquidity is there in Current Assets. Cash is the most liquid
assets as compared to others. Holding cash in huge amount is not advisable because of
the concept of “TIME VALUE OF MONEY”
Cash∧Bank Balances ¿Current Assets ratio=Cash∧Bank BalanceCurrentAssets
∗100
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05Cash and Bank 1,771.12 406.66 132.9 5.19 9.16Current Assets 6,007.5 6,793.3 4,461.3 3,844.4 3,687.8Current Assets to Cash and Bank Ratio 0.29 0.059 0.029 0.001 0.002
Table 6.13
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
Current Assets to Cash and Bank Ratio
Current Assets to Cash and Bank Ratio
Chart 6.18
If we observe the data we observe that over the years the ratio has been increasing. This is not
good for the company because this cash can be invested in some other projects as this can
increase company’s profits. They can also invest in new technologies so that company can
reduce the cost of production which in turn can increase profits.
Sales to Cash and Bank Balances Ratio: This ratio brings out that how much of
cash is being held out of the yearly sales at MRPL. This ratio clearly brings out that,
how the cash is being regulated as and when it is received.
Sales¿Cash∧Bank Balances Ratio= Yearly SalesCash∧Bank
∗100
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Mar-09 Mar-08 Mar-07 Mar-06 Mar-05 Net Sales 38,279.20 32,565.85 28,394.75 24,997.52 18,490.36 Cash and Bank 1,771.12 406.66 132.9 5.19 9.16Net sales to Cash and bank Ratio 21.61299 80.08127 213.655 4816.478 2018.598
Table 6.14
Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0
1000
2000
3000
4000
5000
6000
Net sales to Cash and bank Ratio
Net sales to Cash and bank Ratio
Chart 6.19
If we observe the data the ratio is decreasing over the years but the cash balance is showing a
increasing trend. This is good for the company as the sales depends on the market since the
prices keep varying. As the prices of the refined product is increasing over the years the sales
amount is also increasing which results in the increase in cash and bank balances. Cash and
balances also include the short term deposits in bank kept for 30 days.
6.6 Receivables Management:
Receivables Management is also known as Management of Trade Credit. The term
receivables are defined as debt owed to a concern by customers arising from sale of goods or
services in the ordinary course of business. It represents an extension of credit of customers
allowing them a reasonable period for the goods which they have received. The two basic
liquidity factors in receivables management concentrate on:
Prospect of collecting receivables when they become due and,
Prospect of shortening future receivables maturities.
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6.6.1 Objectives:
The main objectives of Receivable Management are:
1) To obtain the optimum volume of sales.
2) To control the cost of credit and keep it at the maximum.
3) To maintain the optimum level of investment in receivables.
4) To keep down the average collection period.
6.6.2 Credit Policy of the Company
Credit policy provides guidelines for determining whether to extend credit to a customer, and
how much credit to extend, the firm must establish credit standards to use in making these
decisions.
Appropriate sources of credit information and methods of credit analysis must be developed.
Each of these aspects of credit policy is important to the successful management of accounts
receivable.
Terms of payment followed by M/S Mangalore Refinery and Petro Chemicals Limited
New Customers – 100% Advance.
Export – Letter of Credit and criteria followed is pricing, quantity, volume of order, requisite.
So it offers limited credit.
6.6.3 Important Dimensions of Firms Credit Policy
1. Credit Standards
2. Credit Period
3. Cash Discount
4. Collection Effort.
1. Credit Standards:
The firm’s credit standards are the minimum criteria for the extension of credit to a customer.
MRPL consider the key variables while contemplating, relaxing or tightening its credit
standards, will give a general idea of the kinds of decisions involved.
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Key Variables
a. Sales Volume
Changing credit standards can be expected to change the volume of sales. If credit standards
are released, sales are expected to increase. If credit standards are tightened, sales are
expected to decrease. Generally, increases in sales affect profits positively, whereas decreases
in sales affect profits negatively.
b. Investment in Accounts Receivables
Carrying or maintaining accounts receivable involves a loss to the firm. This cost is
attributable to the forgone earnings opportunities resulting from the necessity to tie up funds
in accounts receivable. Therefore, the higher the firms investment in accounts receivable, the
greater the carrying costs and vice versa.
Cost of Marginal Investment in Accounts Receivable can be calculated as follows:
Average investment in Accounts Receivable =
Cost of annual Sales ÷ Turn of Accounts Receivable
Average investment in Accounts Receivable =
360 ÷ Average Collection Period
c. Bad Debt Expenses
The probability or risk of acquiring a Bad Debt increases as Credit Standards are released.
The increase in Bad Debts associated with relaxation of Credit Standards raises bad debts
expenses and impacts profits negatively. The opposite effects on Bad Debt Expenses and
profits result from a lightening of a Credit Standards.
The basic changes and effects on profits expected to result from the relaxation of credit
standards are tabulated as follows:
Direction of Change Effect on Profits
Sales Volume Increase Positive
Investment in Accounts
Receivable
Increase Negative
Bad Debts Expenses Increase Negative
If credit standards were lightened the opposite effects would be expected.
2. Credit Period:
The credit period refers to the length of time customers are allowed to pay for their
purchases.
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Credit period allowed by M/S Mangalore Refinery and Petro Chemicals Limited is
Export - 45 days
Local - 30 days
Lengthening of the credit period pushes sales up by inducting existing customers to purchase
more and attracting additional customers. This is however, accompanied by a larger
investment in debtors and a higher incidence of bad debt loss. Shortening of the credit period
would have opposite influence. It tends to lower sales, decreases investment in debtors, and
reduce the incidence of bad debt loss.
3. Cash Discount
Firms generally offer cash discounts to induce customers to make prompt payments. The
percentage discount and the period during which it is available are reflected in the credit
terms (Cash Discount offered by M/S Mangalore Refinery and Petro Chemicals Limited is
5%). When a firm initiates or increases a cash discount the following changes and effects on
profits can be expected.
4. Collection Period:
The collection programme of the firm, aimed at timely collection of receivables followed by
M/S Mangalore Refinery and Petro Chemicals Limited may consist of the following:
1. Maintaining the state of receivables
2. Telegraphic and telephonic advice to customers around the due date
3. Threat of legal action to overdue accounts
4. Legal action against overdue accounts
5. Dispatch of letters to customers whose due date is approaching
6.6.4 Control of Receivables:
Firms can control its receivables by:
Monitoring and controlling of accounts receivables.
The measures commonly employed for judging whether accounts receivables are in
control are:
i. Bad Debts losses
ii. Average Collection Period
iii. Ageing Schedule
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6.6.5 Receivables Management at MRPL:
Cash flow can be significantly enhanced if the amounts owing to a business are collected
faster. Every business needs to know who owes them money, how much is owed, how long it
is owing, for what it is owed. Slow payment has a crippling effect on business in particular on
small businesses who can least afford it. If you don’t manage debtors, they will begin to
manage your business as you will gradually lose control due to reduced cash flow and, of
course, you could experience an increased incidence of bad debt.
HPCL
M.R.P.L. major products are sold through HPCL. It sells products like High Speed Diesel,
Motor Spirit, LPG, and SKO.
HPCL is given 21 days of credit. In a very rare and exceptional case HPCL fails to pay the
amount due to M.R.P.L., within due date. If it is so, then they are liable to pay interest of 18%
(Interests rates are subject to variation with respect to products and periods).
IOCL
Recently, M.R.P.L. also started to sell its products directly to IOCL. Previously, the products
were sold through HPCL, through whom the products have been sold to IOCL. M.R.P.L
grants 3 days credit to IOCL in case of direct sales.
BPCL
M.R.P.L. do not sell its products to BPCL directly. MRPL sells its products to BPCL through
HPCL and invoice is raised on HPCL as “BPCL A/C HPCL”.
Exports:
M.R.P.L.’s products are exported. Except LPG and kerosene and all other products like
Naphtha, Motor Spirit, High Speed Diesel, Fuel Oil and ATF at international prices are
exported to Vitol Asia, B.P. Singapore, TRAFIGURA PTE Ltd., Marubeni International,
Itochu Petroleum, Sumitomo Corporation, Chevron Texaco, Projector U.K., B.B. Energy.
These are some of buyers amongst many. Among these most of the exports is done to Vitol
Asia.
First, M.R.P.L. floats a global tender for a particular product whereby it contains quantity,
date, price, payment, lay days, lay time and demurrage. Interested buyers will participate in
the tender and give their offer. The buyer stipulates some terms and conditions with regard to
the price, payment, lay days, lay times and demurrage while offer. Then M.R.P.L. will
analyse the offer and the best offer will be awarded with the tender.
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All the buyers deal with Letter of Credit except B.P. Singapore, they are provided with 30
days of direct payments and rest of the buyers’ deal with Letter Of Credit. Terms and
condition of the Letter Of Credit will differ from each of the buyers, product and price. It is
agreed at the time of payment and after co-ordinating with buyer. M.R.P.L. will analyse
Letter of Credit and seek any amendments if required. After confirmation of receipt of valid
Letter Of Credit, they give clearance for loading. M.R.P.L. discounts letter of credit in the
bank and the buyer pays it to respective banker.
6.7 Trend Projection of Working Capital of MRPL from 2010 to 2016.
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To have a clear view of Working Capital I have shown here the trend of Working Capital
over the period of 6 years. The projection has been done by taking into consideration the
trend of working capital from 2004 to 2009. The graph clearly shows the Working Capital
requirement of MRPL from 2010 to 2016.
Profit and Loss Account (Audited):
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Table 6.15
Profit and Loss Account (Projections)
84
Table 6.16
Balance Sheet (Audited):
85
Table 6.17
Balance Sheet (Projections)
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Table 6.18
Raw material conversion period, work in progress conversion period and the finished
goods conversion period is decreasing over the years.
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The firm is able to collect their money from customers within 30 days.
The working capital is increasing continuously over the years because of the increase
in the cash and bank balance
It has more percentage of inventories compared to other items of current assets in all
the years under consideration. But the percentage is reducing over the years, which is
a positive development for the company.
Increase in sales volume has created positive impact on Cash and bank balance.
The company follows a credit policy. Accordingly It provides a credit period of 30
days for local sales and 45 days for export sales as against the findings of 21 days
(average).
Cost of production and Cost of sales both are increasing over the years when
compared with the gross sales.
Company is having moderate profit, which enables them to reduce term loans over the
years.
Working capital requirements can be financed from internal as well as external
sources. The following banks provide Cash Credit facility to MRPL – Punjab
National Bank, SBI, UBI, Corporation Bank, Canara Bank, Bank of Baroda.
MRPL is being provided 30 days credit by suppliers, which also acts as the source of
working capital.
The present study ‘Analysis of working Capital Management at MRPL, is undertaken through the
ratio analysis. This gives an image of the quantitative aspect of the company’s financial aspect. Ratios
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are calculated from current year numbers and are then compared to previous years, and industry
standards
MRPL a major unit in refining industry has been generating continuous profits as compared to
previous year with current year. To summaries, working capital at a plant level, this mainly involves
forecasting and monitoring of various components, which is done systematically. Whereby major
portions of receivables are managed by central marketing organization for all plants level. Other
important components of working capital are bill payables and borrowings of funds monitored by
corporate level.
Inventory is monitored differently for raw materials, work in progress, finished goods and stores.
Monthly inventory report is sent to chairman through the finance department to corporate office, but
the major portion of debtor are dealt by central marketing organization.
The two main ratios we used for our analysis were the quick ratio or the acid test ratio and the current
ratio, both of which have been explained earlier. Post observing the ratios for the last five years it can
be observed that the ratio in nearly all cases is more than one which indicates that MRPL always has
enough money to meet up its obligations.
Doing internship in MRPL gave me a good exposure to the corporate world. It was a good
experience for me in MRPL Ltd. for eight weeks. Employees at MRPL , were very co-
operative and resourceful who helped me in getting the required data.
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Being in the organization for eight weeks, I came to know the following:
How the finance dept. actually works and how they are divided into various
categories.
Facilities provided by the company to the employees.
Nature in the factory premises
What is the exactly happening in MRPL i.e they import crude and refine it into
petroleum and same time they get many intermediate products while refining.
MRPL gives credit to customers and they use letter of credit as the means of security.
I came to know about the different modes by which the customers do their payments.
I came to know how exactly petrol and diesel is actually priced, i.e. the different
components involved in the price.
Finally I came to know the work culture of MRPL.
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