Impact of Working Capital on Corporate Performance:

Indian Oil Corporation Limited

Prepared By:Ashish Kumar Singh (118/2015)

PGDM General 2015-17

Under Guidance of:Dr. Pankaj Varshney

Flow of Presentation

• About Indian Oil Corporation (IndianOil)

• Project Introduction

• Methodology

• Findings & Analysis– Liquidity Ranking Analysis (using Motaals test)

– Working Capital Performance Analysis (using Ratio analysis)

– Liquidity and Profitability Analysis (using Simple & Multiple Regression)

– Working Capital Management and ROCE Analysis (using Peer comparison)

– Working Capital Leverage Analysis

• Conclusion

• Suggestions

• Limitations of the Study

• References

About IndianOil

• Indian Oil Corporation (IndianOil) is India's largest commercial

enterprise.

• IndianOil is ranked 119th among the world's largest corporates

(and first among Indian enterprises) in the Fortune ‘Global 500’

listing for the year 2015.

• It accounts for

– nearly half of India's petroleum products market share.

– 35% national refining capacity (together with its subsidiary Chennai

Petroleum Corporation Ltd., or CPCL)

– 71% downstream sector pipelines through capacity.

– network of over 43,000 customer touch-points.

Operating Structure

Dow

nst

ream

and P

etro

chem

ical

Oper

atio

ns

Refining

Pipeline Transportation

Fuel Marketing

Research and Development

Petrochemicals

Also diversified into E&P, Gas, Wind, Solar, Nuclear Power and Biofuels.

Physical Performance

68.51

75.55 75.1673.07

75.68

FY 11 FY 12 FY 13 FY 14 FY 15

Pipeline Throughput

(in MMT)

52.96

55.62

54.65

53.1353.59

FY 11 FY 12 FY 13 FY 14 FY 15

Refinery Throughput

(in MMT)

71.370 72.490

Source: IOCL Annual Report 2014-15

65.314 68.103 68.617 67.136 68.467

0.0710.071

0.08 0.085 0.1

1.6381.723

1.83 1.935 1.805

0.909 1.473 1.963 1.991 2.39

FY 11 FY 12 FY 13 FY 14 FY 15

Total Domestic Sales(in MMT)

Petroleum Products Explosives Gas Petrochemicals

67.932 71.147 72.762

Financial Performance

7,445

3,9555,005

7,019

5,273

FY 11 FY 12 FY 13 FY 14 FY 15

Profit After Tax

(₹ in crore)

303,695373,926

414,909457,571 450,756

FY 11 FY 12 FY 13 FY 14 FY 15

Turnover(inclusive of Excise Duty & Sales of Services)

(₹ in crore)

30.67

16.2920.61

28.91

21.72

FY 11 FY 12 FY 13 FY 14 FY 15

Earning Per Share

(in ₹)

55,332 57,877 61,124 65,992 67,970

FY 11 FY 12 FY 13 FY 14 FY 15

Net Worth

(₹ in crore)

Source: IOCL Annual Report 2014-15

Oil & Gas Industry in India –An Overview

Upstream (Exploration & Production)

Indian Oil Corporation Ltd. (IOCL)

Oil & Natural Gas Corporation Ltd. (ONGC)

Oil India Ltd. (OIL)

Reliance, Cairn India, HOEC, Premier Oil etc.

Downstream (Refining, Marketing and Pipelines)

Indian Oil Corporation Ltd. (IOCL)

Hindustan Petroleum Corporation Ltd. (HPCL)

Bharat Petroleum Corporation Ltd. (BPCL)

Mangalore Refinery & Petrochemicals Ltd. (MRPL)

Reliance Industries Ltd. (RIL), Essar Oil Ltd., Shell

Gas (Transportation and Distribution)

Indian Oil Corporation Ltd. (IOCL)

GAIL (India) Ltd.

Gujarat State Petroleum Corporation (GSPC)

Reliance Industries Ltd. (RIL)

Indraprastha Gas Ltd. (IGL)

Growing Oil Demand

134 138 141147

157 158165

FY 9 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15

Consumption

(in MMT)

Consumption of Petroleum products grew at CAGR of 3.44% in the last five years

Source: Petroleum Planning and Analysis Cell, Ministry of Petroleum & Natural Gas, Govt. of India

Project Introduction

• Primary Objective: Assess efficiency of WCM & its impact on

firms’ performance.

• The following specific objectives were sought to be achieved:

1. Determining the liquidity position of the company.

2. Evaluating the efficiency of liquidity management.

3. Determining relationship between liquidity and profitability.

4. Finding the degree of association between ratios relating to WCM

and profitability for IOCL and comparing the same with the peers.

5. Determining the Working Capital Leverage (WCL) position.

Methodology

1. Composition of WC: Analysis of INV/CA, DB/CA, C&B/CA,

L&A/CA.

2. Liquidity Position: Motaals liquidity ranking test.

3. Efficiency of WCM: Using Ratio analysis.

4. Liquidity & Profitability Relationship: Using simple as well as

multiple regression.

5. Peer Comparison: Using Correlation to determine degrees of

associations between ratios relating to Working Capital

management and Profitability.

6. Working Cap. Leverage: to determine sensitivity of ROCE with

change in level of Current Assets.

Working Capital Composition

Motaals Liquidity Ranking Test

Liquidity Ratio analysis

Simple Rank Correlation

Simple Rank Correlation

• The rank correlation between CATA and ROCE is computed by applying the formula;

here, d = difference in rank and n = number of pairs of observation

• Putting the respective values of d and n in rank correlation formula above we obtain rRank= 0.78 which indicates that there is a high positive correlation between liquidity and profitability of the company.

Multicollinearity Test

Multicollinearity Test

• Multicollinearity conditions:

– If the VIF value lies between 1-10, then there is no

multicollinearity.

– If the VIF <1 or >10, then there is multicollinearity.

• Multicollinearity Result:

As the VIF(Variation Inflation Factor) value for all variables are in

between 1-10, hence it can be concluded that there is no

multicollinearity system between the independent variables.

Linear Multiple Regression

Linear Multiple Regression

• The multiple correlation coefficient of ROCE on CR, QR, CATA,

WBTR, ITR and DTR is 0.953 which reveals that the

profitability of the firm was highly influenced by those

explanatory variables.

• The value of R2 indicates that the explanatory variables taken

together contributed about 90.9% of the variations in the

profitability of the company.

• It indicates that the investment in current assets is such that

increase in liquidity leads to an increase in profitability and vice-

versa.

Degree of Association: WCM & Profitability

Degree of Association: WCM & Profitability

• The study of associations between the profitability and the

selected key ratios relating to the working capital management of

the selected companies reveals that out of the eight ratios

– CR and CATAR for IOCL,

– WCTR and CTR for HPCL,

– CATAR and CASR for BPCL and

– CR, QR, WCTR, CASR and CTR for RIL

have the significant influences on the overall profitability of the

concerned companies under study.

Working Capital Leverage Analysis

Working Capital Leverage Analysis

Working Capital Leverage Analysis

• The sensitivity of ROCE due to change in the level of investment

in current assets

– For IOCL

• Maximum (i.e. 0.6671) in 2006-07

• Minimum (i.e. 0.458) in 2010-11

– For BPCL

• Maximum (i.e. 0.6621) in 2006-07

• Minimum (i.e. 0.5017) in 2014-15

– For HPCL

• Maximum (i.e. 0.5622) in 2006-07

• Minimum (i.e. 0.4273) in 2010-11

– For RIL

• Maximum (i.e. 0.4361) in 2012-13

• Minimum (i.e. 0.2744) in 2008-09

Conclusion

• There is a significant relationship between profitability and

working capital management.

• Inventory constituted highest amount of gross working capital

• Loans & advances has shown consistent growth to become the

2nd highest contributor to working capital.

• Liquidity position of the company has improved considerably

over the last 10 years.

Conclusion

• Company has been able to keep a stable liquidity position over

the period of 10 years with focus on its credit collection policy.

• Profitability of the various firms is highly influenced by different

liquidity ratios.

• Increase in the ROCE is less than the proportion to increase in

the level of investment in current assets during the study period.

Suggestions

• Company needs to reconsider its working capital policy to increase CR.

• Company has to work on its absolute liquid assets.

• The management needs to follow the current credit collection policy.

• Company needs to take necessary actions to improve the WCTR which has shown a negative trend for the past few years.

• Increase its WCL in order to improve ROCE with investment in CA.

Limitations of the Study

• The study has been conducted over a very limited period of time.

• The study is based on secondary data.

• The study is based on standalone financial statements of the selected company, which may leave some grounds of error.

• The recent financial data was not been shared.

References

1. Sarkar, Chitta Ranjan and Sarkar, Aniruddha (2013): Impact of Working Capital Management onCorporate Performance: An Empirical Analysis of Selected Public Sector Oil & Gas Companiesin India. International Journal of Financial Management, April, 2, Volume 3.

2. Thappa, Sankar (2014): Working Capital Management in Indian Oil & Gas industry – A case study of Reliance Industries Ltd. Academica Science Journal Economica Series, No. 2(5).

3. Joshi, Lalit Kumar and Ghosh, Sudipta (2012): Working Capital Management of Cipla Limited: An Empirical Study. International Journal of Marketing, Financial Services & Management Research (IRJC), August, Vol. 1, Issue 8.

4. Annual Reports: IOCL, BPCL, HPCL and RIL.

5. Berk, DeMarzo and Harford: Fundamentals of Corporate Finance 2nd edition.

6. Brealey, Myers and Allen: Principles of Corporate Finance 10th edition.

7. Websites: i) www.iocl.com

ii) www.hindustanpetroleum.com

iii) www.ril.com

iv) www.moneycontrol.com

v) www.investopedia.com

Thank You