corporate finance in the petroleum industry

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Individual(Assignment(

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Bharat Petroleum Hindustan Petroleum

Indian Oil Corporation �

Name: Akta Gupta

GDGWI ID: 100100

Course: BBA Business Studies

Module: Corporate Finance

Module Code: ACF302

Module Leader: Mr. Ajay Kumar Yadav

Semester: V

Cohort: 2010-2013

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Akta

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Table of Contents Industry Literature......................................................................................................3

Company Literature

-Bharat Petroleum Corporation Limited ............................................................4

-Hindustan Petroleum Corporation Limited ......................................................5

-Indian Oil Corporation......................................................................................6

Financial Ratio Analysis

-Net Profit Ratio.................................................................................................8

-Asset Turnover Ratio......................................................................................10

-Price Earnings Ratio .......................................................................................12

-Current Ratio ..................................................................................................14

-Interest Coverage Ratio ..................................................................................16

Non-Financial Indicators ..........................................................................................18

Capital Structure

-Debt to Equity Ratio .......................................................................................21

-Proportion of debt to Proportion of equity .....................................................23

-Interest Coverage Ratio ..................................................................................23

-Weighted Average Cost of Capital .................................................................24

-Value of the firm.............................................................................................27

-Profitability of the Capital Structure ..............................................................28

Dividend Policy

-Dividend Percentage.......................................................................................32

-Dividend Payout Ratio....................................................................................33

-Dividend Yield ...............................................................................................35

Reflection ....................................................................................................................37

Bibliography ...............................................................................................................38

Appendix 1..................................................................................................................41

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Industry Literature The Indian economy is the 10th largest in the world today with the 3rd largest

purchasing power parity. As the Indian economy has experienced growth even when the international market experienced recession and debt crisis, this growth would accelerate over the years.

The oil and petroleum industry is among of the six main industries in India that are agriculture, textile, tourism, banking, energy and power and infrastructure. The oil and petroleum industry is the fourth largest producer of electricity and oil products, which contributes to the economy by generating wealth, building infrastructure and also by accounting for the 66% energy consumption in India. This industry plays a crucial role in the economy and many economic decisions are taken around this industry that is because it helps in accelerating the growth of the economy and development.

To understand the contribution of the oil and petroleum industry in India, we analyze three companies in this field, which are Bharat Petroleum Corporation Limited (BPCL), Hindustan Petroleum Corporation Limited (HPCL) and Indian Oil Corporation (IOC). !

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Company Literature Bharat Petroleum Corporation Limited (BPCL)

BPCL (BSE: 500547, NSE: BPCL) is an Indian oil and gas company that is controlled by the government now. It initially started as Burmah Oil refineries Ltd. as a joint venture between Shell Petroleum Company and Burmah Oil Company, UK in 1952 with an agreement with the government of India to start a refinery plant in Mahul, Mumbai. This started in 1957. Over the years, in 1976, when the Indian government nationalized the petroleum industry, it secured 100% equity in Burmah Oil Company and changed the name to Bharat Refineries Ltd. This in 1977 was changed to Bharat Petroleum Corporation Limited.

BPCL is a marketing and integrated refining company. It markets an assorted range of products in solvents, petrochemicals, aviation fuel, and LPG and specialty lubricants. It has the third largest retail network in the country offering 4,500 retail outlets, 1200 LPG distributors, and 950 dealers for kerosene and light diesel oil. It also offers 22 LPG bottling plants, 13 aviation service stations, 23 dispatch units and 67 companies operated depots.

Mr. R.K. Singh along with Mr. Ashok Sinha head the company as the Chairman and Managing Director at its registered office in Mumbai. In 2012, the company made a sales turnover of `166,038.80 crores.

Some of the other achievements along with its huge sales turnover are,

o It was the 1st Indian industrial unit that obtained the certification of ISO 9002 and ISO 4001.

o It is the only Indian refinery (among the 34 in the world) to attain a level 7 on the ISRS, International Safety Rating System.

o BPCL received the Green business Leaders award, 2009-2010. o BPCL was awarded the CSR award by NDTV. o BPCL secured the 289th top company in the Global 500 list by Fortune Global

500. o Attained the 1st position at the Petrotech-2010 exhibition for “Best Display in Raw

Space”.

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Hindustan Petroleum Corporation Limited (HPCL)

HPCL (BSE: 500104, NSE: HINDPETRO) is a public listed company founded in 1974. It is a state-owned natural gas and oil company that has its headquarters in Mumbai. Over the years, the company has grown from producing 5.5 MMT (1985) to 13 MMT (2012). It has a working force of about 11,226 members. When we analyze this on the financial front, it has grown from `2687 crore (1985) to `131,802 crore in 2009.

It has two major refineries with produce the wide variety of products sold by HPCL. One is in West Coast (Mumbai) with has a capacity of 6.5 MMT per annum, while the other is in East Coast (Vishakhapatnam) with a production capacity of 8.3 MMT per annum. It also holds a 16.95% equity share in Mangalore Refinery & Petrochemicals Ltd, which has capacity of 9 MMT per annum. It also has a largest Lube Refinery in India that produces base oils of international standards and has a capacity of 335 MMT, this accounts for over 40% of India’s lube base oil production.

HPCL is headed by Shri S. Roy Choudhury as the Chairman and MD and deals in products such as Motor Spirit (Petrol) and Heavy Stock Diesel (Diesel) in the oil industry. It also services the lubricant, LPG, Aviation Turbine fuel, Bitumen and Furnace oil market.

Some of the achievements that HPCL has to its credit are,

o Fortune Global 500 ranked it at the 311 positions. (2011). o It secured the 1002 position by the Forbes Global 2000 in 2009. o The Economic Times 2010 and Brand Finance have stated it as the top 10 most

valuable brands in India. o HPCL wins the “CIO 100” award for the fourth consecutive time. (2009) o HPCL received the Indira Gandhi Rajbhasha Puraskar (3rd Prize0 by the

Government of India, Ministry of Home Affairs in 2008. o It received the “SAIL HR Excellence Award” (Workforce above 5000) along with

a cash prize of 1 Lakh and a trophy. o Received the “Trusted Brand Gold Award 2009” in the petrol station category.

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Indian Oil Corporation (IOC) Indian Oil Corporation Limited, or IndianOil, (BSE: 530965, NSE: IOC) is an oil

and gas corporation which is an Indian state-owned corporation with its headquarters in New Delhi, India. It has acquired the position of the world’s 83rd largest public corporation. IndianOil and its subsidiaries account for a 49% share in the petroleum products market, 67% downstream sector pipelines capacity and 31% share in refining capacity in India. Financially, the company made a sales turnover of `4,09,957 crore ($85,550 million) with a profit of `3,955 crore ($825 million) for the year 2011-12.

IOC has its refineries spread out in Assam (Digboi, Guwahati and Bongaigaon refinery), Bihar (Barauni refinery), Gujarat (Gujarat refinery), West Bengal (Haldia Refinery), Uttar Pradesh (Mathura refinery), Haryana (Panipat refinery, Paradip Refinery) and a subsidiary refinery in Chennai.

IOC is headed by Mr. R.S.Butola as the Chairman and sells products and services that IOC provides are petrol, diesel, auto LPG, LPG, lubricants, aviation turbine fuel, kerosene, naphtha, bitumen, paraffin, etc. Some of the brands that IOC sells are Servo lubricants, Xtra Mile diesel, Xtra Premium petrol, Indane LPG cooking gas, Autogas LPG, and IndianOil Aviation.

Some of the awards that IOC was honored with are,

o Oil and Gas Supply Chain Excellence Award’ for the fifth consecutive year at the sixth Express, Logistics & Supply Chain Conclave (2012)

o Safety Innovation Awards 2012 at the ‘Safety Convention 2012’ by the The Institution of Engineers (India).

o 'Oil Industry Safety Directorate (OISD) Awards' for the year 2009-10 and 2010-11.

o Mathura Refinery recently won two prestigiuos awards, viz. First Prize in the category, ‘Steam Consumption upto 0.6 MT per MT of Crude Oil processed’ at the OGCF Awards and the Second prize in the category, ‘Specific Energy Consumption (Composite Energy factor more than 5)’ at the Jawaharlal Nehru Centenary Awards 2010-11.

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Financial Ratio Analysis Financial analysis (also referred to as financial statement analysis or accounting

analysis) refers to an assessment of the viability, stability and profitability of a business, sub-business or project. When looking at a specific company, the financial analyst will often focus on the income statement, balance sheet, and cash flow statement. Calculation of ratios to analyze the financial ratios is generally done from the historical data available and compares them to previous performance and competitor performance.

Some the objectives of financial analysis are,

o Assessing the results of the activity. o To analyze the internal reserves in an enterprise. o Achieve the increase in activity, while raising the quality of it. o Increase the productivity of labor. o Work efficiently represents means of fixed assets and inventories. o Reduce the cost of services and achieve the planned efficiency.

Some of the ratios that are analyzed for BPCL, HPCL and IOC are,

1. Net profit ratio 2. Asset turnover ratio 3. Price earnings ratio 4. Current ratio 5. Interest Coverage Ratio

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Net Profit Ratio Net profit ratio (also known as Profit Margin) is the ratio of net profit to net sales.

It is expressed as percentage. It reveals the remaining profit after all costs of production and administration has been deducted from sales, and income taxes recognized. It is considered a good measure to analyze the working capital of the firm but it is not an indicator of cash flows, since net profit incorporates a number of non-cash expenses, such as accrued expenses and depreciation.

Net profit ratio= (net profit/net sales)*100

A higher net profit ratio is considered beneficial as it suggests that the

company is more profitable and has a better control on its costs when compared to its competitors, but it might have little meaning in situations when a company recently took a long-term loan to increase its production capacity, the net profit will reduced. That does not mean, necessarily, that the company is less efficient than other competitors. But this also provides a clearer picture of the company than just the earnings. As an increase in earnings is profitable, but at the same time if the companies costs increase by a greater rate, then the net profit would have reduced, suggesting a weak control over the costs.

When we compare the three companies, i.e., Bharat Petroleum, Hindustan Petroleum and Indian Oil we can see that HPCL has the highest net profit ratio during all the three years. BPCL in 2008-2009 had a net profit ratio of 0.503%, which means that it has `0.00503 of net income for every rupee of sales. The net profit margin of BP has risen from 0.503% to 0.941% in 2009-2010 suggesting that it had a net income of `0.00941 for every rupee of sales. A similar rise was seen in the case of HPCL and IOC from 2008-2009 to 2009-2010 but the net profit ratio has fallen in 2010-2011 for both the firms. In 2008-2009 HPCL had a net profit ratio of 7.737%, suggesting a `0.0737 net income for every rupee of sales that rose to 9.503%, that is, `0.09503 of net income for every rupee of sales. IOC net profit also rose from 3.311% (0.03311 of net income for every rupee of sales) to 6.762%, which is `0.06762 of net income for every rupee of sales. This rise in net profit ratio could be because of the fall in interest paid by BPCL, HPCL and IOC on their borrowings that reduces the expenditure of the companies. The three companies have seen to change their borrowings in terms of cost of debt to a low cost borrowing from the previous rate.

BPCL in 2010-2011 had a net profit ratio of 1.334% in 2010-2011, which means it had a net profit of `0.01334 for every rupee of sales. When compared to the previous financial years, the net profit ratio of BPCL has seen a positive slope that may encourage investors. This rise in the net profit ratio during this year is due to the rise in the net sale of BPCL, which would have raised the net profit earned by BPCL, thus increasing the net profit ratio. A decline in net profit ratio can be seen in the next financial year for HPCL and IOC. The net profit fell from `0.09503 for every rupee of sales to `0.0854 for every rupee of sales in the case of HPCL while `0.06762 for every rupee of sales to `0.02839 for every rupee of sales for IOC.

This fall in the net profit ratio from HPCL and IOC could be due to the rise in expenditure for the companies such as purchase of products and crude oil for resale and the cost of raw materials consumed because of the rising inflation. This rise in cost was higher than the net sales the company achieved during the financial year that

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lowered the net profit ratio. Though this economic factor affected BPCL as well, but the sales of BPCL were much higher than the affect of the economy, which supported the rise in net profit ratio. Even after the net profit ratio of BPCL rose in the financial year 2011, while it fell for IOC and HPCL, the investors may still wish to invest in HPCL and IOC more than BPCL as its net profit is higher that of BPCL.

Table 1: Net Profit Ratio of BP, HP and IOC for 2009, 2010 and 2011

Bharat Petroleum Parameters 2008-2009 2009-2010 2010-2011 Net profit* 686.87 1164.81 2051.73 Net sales* 136557.12 123816.72 153644.97 Net profit ratio^ 0.503 0.941 1.334

Hindustan Petroleum Parameters 2008-2009 2009-2010 2010-2011 Net profit* 8797.00 9994.86 10996.53 Net sales* 113697.74 105177.93 128766.23 Net profit ratio^ 7.737 9.503 8.54

Indian Oil Corporation Parameters 2008-2009 2009-2010 2010-2011 Net profit* 8084.31 15777.58 8057.77 Net sales* 244166.56 233329.18 283850.01 Net profit ratio^ 3.311 6.762 2.839 * Value is in ` Crore(s). ^ Expressed as a percentage.

In the table above, it can be seen that the net sales of the three companies, fall in 2008-2009 to 2009-2010 and rise in 2009-2010 to 2010-2011. The fall and rise is seen to take place at the same time that is due to the economic changes that affected the oil market due to its volatility. The commodity prices continue to rise resulting in reduced demand from the international markets. The government has worked on reforms to tackle the situation but have not given substantial results. In 2020-11 these markets were in a better situation that in 2009-2010 due to the international debt crisis, which improved the net sales.

0.503! 0.941! 1.334!

7.737!

9.503!8.54!

3.311!

6.762!

2.839!

0!1!2!3!4!5!6!7!8!9!10!

Net!pro3it!ratio!of!BP!Net!pro3it!ratio!of!HP!Net!pro3it!ratio!of!IOC!

Net(Pro8it(Ratio(

((((2009(((((((((((((((((((((((((((((((((2010((((((((((((((((((((((((((((((((((((2011(

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Assets Turnover Ratio Asset turnover ratio measures the amount of sales that is generated for every

rupee’s worth of assets. It is calculated as, Asset Turnover Ratio= Sales ÷ Total Assets

The asset turnover ratio measures the efficiency of the firm in using its assets to generate sales or revenue Significantly, the higher the asset turnover ratio, better it is for the firm as it suggests a better operating performance. It should be noted that asset turnover ratio does not look at profits but revenues. This would vary depending on the industries, as their assets would widely vary. For the same, we consider three companies in the same industry when analyzing this ratio. A high asset turnover ratio implies that the company is intensively using its assets in an efficient manner while a declining asset turnover ratio shows that the company may be purchasing more assets than it can efficiently handle.

When analyzing the asset turnover ratio of BPCL, HPCL and IOC, a trend line can be seen where the asset turnover ratio initially falls and then rises. In the case of BPCL, it reflected an asset turnover ratio of 10.367 in 2008-2009,signifying that with `1 of assets, the company would generate sales of `10.367. These sales generated from every `1 of assets fell to `8.868 in 2009-2010 and again rose to `10.156 in 2010-2011. HPCL offered a higher asset turnover ratio than BPCL during the same financial years. In 2008-2009 its asset turnover ratio was 10.906 implying that with every `1 of asset, it could generate sales of `10.906. Similar to BPCL, its asset turnover ratio fell in 2009-2010 to 9.324, thus experiencing a fall in efficiency in this financial year that was compensated in the next year by an increase in the asset turnover to 10.430. IOC has reflected the lowest asset turnover ratio among the three companies of 6.02, i.e., it generates sales of `6.02 by using assets of `1 in 2008-2009. This value is competitively lower than BPCL and HPCL whose values are 10.367 and 10.906 respectively. Also, like BPCL and HPCL, IOC also showcases a fall in its asset turnover ratio in 2009-2010 by falling to 5.009 and similarly rising to 5.54. This reflects that the efficiency of the fixed assets had fallen for IOC during this period that suggests poor inventory management.

When analyzing the asset turnover ratio for BPCL, HPCL and IOC for the financial years 2009, 2010 and 2011, a trend of a fall, followed by a rise can be seen. Through this we can claim that the fall in asset turnover ratio could be because of the fall in sales revenue for the three companies that could be due to an international debt crisis that affected the global economy during this period resulting in reduced sales, thus reduced sales revenue. As the economy recovered, so did the sales revenue of the companies, which ultimately improved the asset turnover ratio, implying an improvement in the efficiency in the use of fixed assets by the company.

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Table 2: Asset Turnover Ratio of BP, HP and IOC for 2009, 2010 and 2011 Bharat Petroleum

Parameters 2008-2009 2009-2010 2010-2011 Sales revenue* 147336.82 133749.10 166038.80 Total Assets* 14212.67 15082.51 16348.31 Assets Turnover ratio 10.367 8.868 10.156

Hindustan Petroleum Parameters 2008-2009 2009-2010 2010-2011 Sales revenue* 121510.39 113163.38 138509.38 Total Assets* 11141.37 12136.87 13280.44 Assets Turnover ratio 10.906 9.324 10.430

Indian Oil Corporation Parameters 2008-2009 2009-2010 2010-2011 Sales revenue* 273957.44 262792.96 318939.22 Total Assets* 45504.36 52462.33 57575.21 Assets Turnover ratio 6.02 5.009 5.54

* Value is in `. Crore(s)

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10.367!

8.868!

10.156!

10.906!9.324!

10.430!

6.020!5.009!

5.540!

0.000!

2.000!

4.000!

6.000!

8.000!

10.000!

12.000!

2008=2009! 2009=2010! 2010=2011!

Assets!Turnover!ratio!of!BP!

Assets!Turnover!ratio!of!HP!

Assets!Turnover!ratio!of!IOC!

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Price-Earnings Ratio (P/E ratio) It is a valuation ratio of a company’s market share price compared to its earnings

per share. It is used to value the stock of the company.

The formula is expressed as,

Price-earnings ratio= market value of share÷ earnings per share

A high P/E ratio would suggest higher earnings on the stock of the company in future, due to which investors prefer buying stocks of companies whose P/E ratio is higher than the competitors.

In the case of BPCL, it can be seen that the company has a P/E ratio of 19.484 in 2008-2009 suggesting that an investor would be willing to pay `19.484 for `1 of current earnings. The P/E ratio fell to 11.629 in 2009-2010 demonstrating that investor would be agree to pay `11.629 for `1 of current earnings and later rose to P/E ratio of 12.599 in 2010-2011. This fall and rise in the P/E ratio shows the fluctuations in the confidence of the investors towards BPCL.

IOC has seen a fall and rise in the P/E ratio, like BPCL during the financial years. IOC had experienced a P/E ratio of 18.679 in 2008-09 showing that the investors would pay `18.679 for `1 of current earnings. This P/E ratio drastically fell to 6.366 in 2009-2010 demonstrating that loss in investor confidence towards the value of IOC shares and would agree to pay `6.366 for `1 of current earnings and later rose to P/E ratio of 9.712 in 2010-2011.

HPCL had a P/E ratio of 15.951 in 2008-2009 suggesting that an investor would be willing to pay `15.951 for `1 of current earnings. This P/E ratio fell to 8.136 in 2009-2010 implying that investors would agree to pay `8.136 for `1 of current earnings and further fell to P/E ratio of 7.076 in 2010-2011. This reflects the fall in investor confidence towards the returns they would receive from HPCL over the years.

It can be seen that the P/E ratio, fell in the year 2009-2010 for the three companies. This could be due to the market speculations resulting because of the downturn in the international market because of the debt crisis. This speculation resulted in the loss in investor confidence due to which the willingness to pay a high price fell down substantially.

When we compare the P/E ratio of the three companies for the three years, it can be seen that the P/E ratio of 2008-2009 is in the order 19.484 (BPCL) >18.679 (IOC) > 15.951 (HPCL). Due to this, if an investor had a choice to invest in any of the three companies, he would rationally choose to invest in BPCL because of the higher current earnings. The P/E ratio’s are in the order 11.629 (BPCL) >8.136 (HPCL) > 6.366 (IOC) during 2009-2010 and 12.599 (BPCL) >9.712 (IOC) > 7.076 (HPCL) during 2010-2011. It can be observed that the investors would preferably choose to invest in BP if they consider the criteria of P/E ratio, as it would provide more returns during the three years.

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Table 3: Price Earnings Ratio of BP, HP and IOC for 2009, 2010 and 2011

Bharat Petroleum Parameters 2008-2009 2009-2010 2010-2011 Market Value of Share* 396.7 494.6 539 Earnings per share* 20.36 42.53 42.78 Price Earnings Ratio 19.484 11.629 12.599

Hindustan Petroleum Parameters 2008-2009 2009-2010 2010-2011 Market Value of Share* 270.85 312.675 321.6 Earnings per share* 16.98 38.43 45.45 Price Earnings Ratio 15.951 8.136 7.076

Indian Oil Corporation Parameters 2008-2009 2009-2010 2010-2011 Market Value of Share* 226.95 268 297.875 Earnings per share* 12.15 42.10 30.67 Price Earnings Ratio 18.679 6.366 9.712 * Value is in `.

19.484!

11.629! 12.599!

15.951!

8.136!7.076!

18.679!

6.366!

9.712!

0!

5!

10!

15!

20!

25!

1! 2! 3!

Price!Earnings!Ratio!of!BP!Price!Earnings!Ratio!of!HP!Price!Earnings!Ratioof!IOC!

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Current Ratio Current ratio (Cash asset ratio or cash ratio or liquidity ratio) is a liquidity ratio,

which measures the ability of the firm to perform in the short term and pay-off its obligations. The formula for current ratio is,

Current ratio: currents assets÷ current liabilities

This ratio helps the company to have an idea of its ability to pay back its short-term liabilities that are debt, payables and other creditors whom the company may have to pay within the financial year with its short-term assets, such as cash, inventory and receivables and other assets which can be readily converted to cash. A higher current ratio is considered beneficial for the company as it represents that the company has a higher ability to pay off its obligations. It is advisable for the company to have a ratio of 2:1, as this displays the ability to pay off its obligations at the due point. A ratio below this does not suggest that the company may undergo bankruptcy, as it could still finance the company in the due course of time. It also provides a picture of the operating efficiency of the company. Having a high current ratio is also not advisable because then the finance of the company would be tied up in current assets that could have been reinvested elsewhere.

When we study the current ratio of BPCL, we can see that it has improved over the years. It was 1.126 in the financial year 2009 which suggests that BPCL has currents assets worth 1.126 while the value of its current liabilities is 1.0 which improved over the years to 1.32 in 2009-10 which means the company has 1.32 times assets than the value of its current liabilities and 1.335 times assets than the value of its current liabilities in 2010-11. A rise in current ratio shows an improvement in the position of the company and this would make the business more stable in the short term. It shows that the company is able to manage its inventories more efficiently in the short term.

Studying the current ratio of IOC, it can be seen that it has followed the same trend as BPCL and a rise in the current ratio from the year 2008-09 to 2009-10 can be observed. The current ratio rose from 0.968 to 1.285. This shows a positive change in the liquidity position of the company and suggests a better management of the assets. It was 0.968 in the financial year 2008-09 which suggests that IOC has currents assets 0.968 times the value of its current liabilities that improved over the next financial year to 1.285 suggesting that the company has 1.285 worth of current assets to pay-off its current liability of 1. In the year 2009, when we study the current ratio we can state that the company was unable to pay off its short-term obligations due to which it could face a financial crunch but the rise in the current ratio shows the improvement in efficiency of its current operations with achieving a more stable position than the previous year. This current ratio fell by a small ratio to 1.253, which is IOC has current assets worth `1.253 for `1 worth of current liabilities in 2010-11. Though the value fell, it is still a positive position as the current asset is higher than 1. The company has been using its current assets efficiently, due to which its current liabilities are lower than it. The inventories have risen constantly, with a relatively lower rise in current liabilities, which improved the position of the company. But the company would have to efficiently manage its current assets to prevent further fall.

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In the case of HPCL, a decline in the current ratio can be seen from 1.164 in 2008-09 to 1.027 in 2009-10. It suggests that HPCL had currents assets of 1.164 times the value of its current liabilities that reduced to currents assets of 1.027 times the value of its current liabilities. This ratio was then seen to rise from 1.027 to 1.066 suggesting that HPCL had currents assets of 1.027 times the value of its current liabilities that further increased to currents assets of 1.066 times the value of its current liabilities in 2010-2011. Even after the fluctuation, the current ratio of HPCL was seen to be above 1, suggesting a positive situation even after the decline in current ratio but the company would need to improve its current ratio as its current liabilities have risen more than the inventories which may affect the short term liquidity of the company. After the fall in the current ratio, the company has seen to increase it current ratio by a small percentage by improving its current assets, mostly inventories. This improvement in the efficiency would have to continue if the company wishes to run profitability and not face credit crunches.

Table 4: Current Ratio of BP, HP and IOC for 2009, 2010 and 2011

Bharat Petroleum Parameters 2008-2009 2009-2010 2010-2011

Current assets* 13827.58 21239.72 27506.94 Current Liabilities* 12275.06 16091.68 20605.10

Current Ratio 1.126 1.320 1.335

Hindustan Petroleum Parameters 2008-2009 2009-2010 2010-2011

Current assets* 13069.81 16755.17 21339.46 Current Liabilities* 11,230.94 16,311.87 20,025.40

Current Ratio 1.164 1.027 1.066

Indian Oil Corporation Parameters 2008-2009 2009-2010 2010-2011

Current assets* 35359.54 49788.96 65599.65 Current Liabilities* 33,390.10 35,165.80 53,210.32

Current Ratio 0.968 1.285 1.253


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!1.126!!

!1.320!!

!1.335!!

!1.164!!

!1.027!!!1.066!!

!0.968!!

!1.285!!!1.253!!

!=!!!!!!0.200!!!0.400!!!0.600!!!0.800!!!1.000!!!1.200!!!1.400!!!1.600!! Current!

Ratio!of!BP!

Current!Ratio!of!HP!

Current!Ratio!of!IOC!

2009(((((((((((((((((((((((((((((2010(((((((((((((((((((((((((2011(

Current Ratio

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Interest Coverage Ratio Interest coverage ratio (ICR) is a financial ratio, which measures the number of

times a company can make the interest payments on its debt with the earnings the company has before interest and tax payment. A higher ICR is better for the company as it reflects the ability of the company to pay off its dues than a low ICR. The ICR is important to the bondholders as it provides a safety gauge and it is important to the stockholders as it depicts the company’s short-term financial health of the company.

Interest coverage ratio=EBIT ÷Interest expense

*EBIT- Earnings before interest and tax expenses

A general rule for the interest coverage ratio is that investors should avoid investing in stocks whose ICR is lower than 1.5, as the companies with this ICR may face problem in clearing their interest expenses. An ICR below 1 shows that the company in unable to generate the money necessary to pay the debts. A higher ratio suggests the safe financial health of the company, i.e., the company is capable to meet its interest obligations from operating earnings on time. But, if the ICR is too high, it reflects that the company is too safe, and is overlooking the opportunities it could grow on through leverage.

Through the above general rule, we can analyze the ICR of BPCL, HPCL and IOC. In 2008-2009, the financial ability of Bharat Petroleum and Hindustan Petroleum to payoff the cost of debt is weak. BP and HP have just `0.47542 and `0.48556, respectively for every `1 of interest expense incurred. IOC shows a better sentiment in this period, as its ICR is 1.96809, which means, IOC has `1.96809 for every `1 of interest expenses. It can cover its debt expenses without financial problems, and also have the investors and bondholder’s confidence unlike BPCL and HPCL.

In 2009-2010, the EBIT was seen to rise for BPCL, HPCL and IOC along with a fall in the interest expenses. It can be seen that BPCL has an ICR of 2.46486 suggesting that it has `2.46486 of EBIT for every `1 of interest expense incurred. Similarly, HPCL has an ICR of 2.6729 suggesting that it has `2.6729 EBIT for every `1 of interest expense. The ICR of IOC has seen to rise by a steep slope. The ICR has risen from 1.96809 to 9.05594 showing that IOC is able to pay the interest expenses 9 times with the current earnings and has `9.05594 of EBIT for every `1 of interest expenses. The rise in ICR for the three companies is due to the rise in reserves and surplus over the years with a decline in the debts, which reduced the interest expenses.

During the financial year 2010-2011, the ICR of BPCL and HPCL were almost similar. BPCL experienced a slight decline while HPCL saw a slight rise in the ICR. BPCL’s ICR fell to 2.28438 that mean BPCL has `2.28438 EBIT for every `1 of interest expense incurred. HPCL’s ICR fell to 2.96423 implying that it has `2.96423 EBIT for every `1 of interest expense incurred. During the same period, IOC observed a sharp decline in its ICR to 9.05594 to 3.9493, which was due to the fall in EBIT with a rise in interest expenses. This reduced the ability to pay interest expenses from 9 times with the current EBIT to 3 times. Though there is a decline, it is still a positive position for IOC as it can cover its interest expense. Also, though

! 17!

IOC had a high ICR of 9.05594, it is an undesirable ratio as it is too high. It would indicate that IOC is not using the available finance for profitable projects or to raise further leverage and in the year 2011, the company had invested in projects or raised borrowings due to which it ICR fell to 3.9493 and the company used its ability to pay back interests efficiently for raising more loans.

It can be observed that the interest expenses for the three companies have fallen in the year 2009-2010 against the year 2008-2009 even after the liabilities have risen which is because the companies avoided the high interest borrowings and concentrated on low interest borrowings that reduced the interest expenses even about the debt increased in the companies. This is a positive step to improve the financial position of the companies.

Table 5: Interest Coverage Ratio of BP, HP and IOC for 2009, 2010 and 2011

Bharat Petroleum Parameters 2008-2009 2009-2010 2010-2011 EBIT* 1143.07 2772.13 2848.26 Interest Expenses* 2404.32 1124.66 1246.84 Interest coverage ratio 0.47542 2.46486 2.28438

Hindustan Petroleum Parameters 2008-2009 2009-2010 2010-2011 EBIT* 1011.35 2415.63 2620.38 Interest Expenses* 2082.84 903.75 884.00 Interest coverage ratio 0.48556 2.67290 2.96423

Indian Oil Corporation Parameters 2008-2009 2009-2010 2010-2011 EBIT* 8281.00 15632.00 11769.00 Interest Expenses* 4207.64 1726.16 2980 Interest coverage ratio 1.96809 9.05594 3.9493


0.4754! 2.4649!2.2844!

0.4856!

2.6729! 2.9642!1.9681!

9.0559!

3.9493!

0.0000!

2.0000!

4.0000!

6.0000!

8.0000!

10.0000!

2008=2009! 2009=2010! 2010=2011!

Bharat!Petroleum!Hindustan!Petroleum!Indian!Oil!Corporation!

! 18!

Non-Financial indicators The financial ratios show the position of the company based on its profitability,

efficiency and productivity in numeric or monetary terms but the non-financial indicators are the measures of an entity or individual’s performance, which is not expressed, in monetary terms. They are normally based on performance measures such as employee satisfaction, mergers or acquisitions, quality of the products, marketing strategies, employee turnover, etc. These factors help an individual understand the position of the company apart from analyzing the financial data.

Every company has certain non-financial indicators that assesses the growth of the company and helps investors understand the growth strategies the company would adapt to fulfill the objectives of the company. Through the non-financial indicators the individuals can predict the position of the company, which the financial indicators may not identify. For the same reasons, we identify the scenarios in Bharat Petroleum, Hindustan Petroleum and Indian Oil Corporation that may affect the company financially in the present or future.

Bharat Petroleum

During the financial year 2008-2009, Bharat petroleum ventured to soak `2200 crore in bio-diesel projects as its CSR initiative whose budget has risen from 0.5% to 2% of the net profit. Through exploring more fields using R&D, BPCL wished to explore more possibilities in promoting environmental friendly fuel, which would reduce pollution levels along with reduction in dependency on imported fuels. For the same, BPCL entered a joint venture with M/s. Bharat Renewable Energy Ltd. and launched a project named “Project Triple One”. BPCL also set up a 1 MW capacity grid connected solar farm at its LPG bottling plant in Uttar Pradesh. Through this the company aims at creating one million jobs and produce one million tones of bio-diesel from the plantation cultivated in the one million acre land over the next ten years. For the same, the company is entitled to receive carbon credits. Prior to this, BPCL also received carbon credits due to the generated of power using windmill operations in Karnataka whose project was approved by the UNFCCC in February 2009. This would benefit the company as investment in R&D will pay the company in the long run along with improve its goodwill in the market for working towards using renewable sources for energy.

In the financial year 2009-2010, Bharat Petroleum developed new products which is, Passenger Car Engine oil for the prime Original Equipment Manufacturer, Fully Synthetic gear oil, customer specific metal working fluid, high performing grease, etc. These new products would add advantage to the company by increasing its product portfolio, increase in market share, and make better quality products available to the customer, reduction in input costs and improved profitability. During this financial year, the net profits were seen to rise from `1164.81 crore to `2051.73 crore which could have been due to the new product development.

In the financial year 2011, the Mumbai refinery of BPCL made a number of improvements in its process and quality control and enhancement philosophies by implementing tools such as six sigma and quality circles in their major functional areas. BPCL’s six sigma and quality circle team achieved the “Gold award” which is the highest category award in the International Convention of Quality Control Circles

! 19!

where 448 such teams from 11 countries were competing. Also, the Mumbai refinery successfully got the management systems standards, which are ISO 9001, ISO 14001 and OHSAS 18001. This quality control mechanism will reduce the wasting such reduce costs for the company combined with better efficiency and productivity. Also, a quality control management will provide better quality products to the customer, which in turn will increase the customer base.

The market share of BPCL was seen to be at 22.62% on the 31st March 2009 in the public sector oil companies, which represents a marginal decline from being 22.68% in the financial year 2008. This decline continued in the next financial year by falling from 22.62% in 2009 to 22.38% to 2010 and rose in the financial year 2011 to 22.49%. In the initial year from 2009 and 2010, the loss in market share represents a reduction in efficiency over the years that could result in loss in customer base to the competitors. The oil and petroleum industry was affected by the international debt crisis in Europe, and the market share of BPCL was seen to fall during the same. It could suggest the inability of BPCL to manage assets and use resources efficiently during critical times. As the economy was seen to recover during the financial year 2011, the market share of BPCL also rose.

Hindustan Petroleum

HPCL grew and get set up new terminals, depots and similar marketing infrastructure at the cost of `34 crore in the financial year 2009. It set up pipelines in Bathinda, Punjab to Bhadurgarh near Delhi as a joint venture operation with HPCL Mittal Energy Ltd. which cost `605 crore. The refinery, which will be set as a joint venture with Mittal Energy, is expected to start by March 2011 that would add a production of 180000 barrels-per-day to HPCL. This expansion strategy will benefit the company with increased operations, as it does not have room to expand in Mumbai. These activities will improve accessibility of HPCL products to the customers with its wide retail network.

HPCL planned to revive its Vizag refinery that is a petro-chemical refinery in 2010. This was to happen in 2007, but due to weak investments the project was postponed. This revival will increase the availability of inputs, thus result in cheaper production of the output. Also, it will be able to make the products available in higher quantities to the customer combined with its increased accessibility.

HPCL has been working towards improving the safety measures at its Visakha refinery and has taken various safety steps for its employee protection as well as preventing any mishap during the production process. This is necessary for the employees as working at a petro-chemical refinery can be hazardous if proper protection is not taken. For the same, HPCL installed blast-proof control room, flood control, hydrocarbon detectors, automatic water deluge system and safety interlocks. It also set 1560 fire and gas detectors. This refinery also works on solid and oil waste management, which reduce the environment hazard, and organizes safety mock drills for the workers. In the financial year, HPCL spent `75 lakh on improving the safety measures in the company that was recognized by the Green Tech Gold Award for environmental excellence. The affect of their safety measures can be seen through the 10 million man hours of safe operation, which means that the HPCL Visakha refinery has experienced an accident free working environment for the past 10 million working hours. This benefits HPCL as it improves employee satisfaction along with

! 20!

reduction in the possible costs the company could have incurred due to accidents and mishaps in the refinery.

Indian Oil Corporation

Indian Oil Corporation has over the three financial years which are 2009, 2010 and 2011 has grown in terms of distribution network through the increase in the number of pipeline networks.

Years Operating pipeline

Domestic Sales

2009 10329 KM 60.887 MMT

2010 10541 KM 63.030 MMT

2011 10899 KM 65.314 MMT

The graph above represents a rise in the pipeline network by IOC in the three consecutive years. This rise in the pipeline represents an increase in the number of branches and marketing outlets in the country, which would increase in the accessibility of IOC products to the customers. This would improve the overall infrastructure of the economy. When we see the rise in domestic sales of IOC over the years, we can claim that the increase in the operating pipeline has increased the sales of the IOC products whose results can be seen in the table above.

During the financial year 2011, IOC developed 132 new products of which 85% were commercialized. They obtained 46 approvals from Original Equipment Manufacturers along with defense certification. They filed for 12 patents of which 2 were granted. These factors could strengthen the market position of the company as the number of products in the market will increase due to new product development and the technology or products that IOC has patented will be exclusive to IOC which gives it the opportunity to increase the value of the company. Also, it increases the ability of the firm to compete in the market as it product profile has increased.

Similar to BPCL and HPCL, IOC has made investments towards CSR activities showing its concern towards the society and environment for a sustainable living. For the same, it invested 2% of its retained profits towards corporate governance. In 2011, it sponsored educational sponsorship to promote education to deserving candidates, which was increased from 450 to 2600. It also increased it contribution towards providing medical services in rural India through its IndianOil Kisan Seva Kendra. Such activities improve the goodwill of the company, which in future may generate returns. In order to maintain a sustainable environment and conduct safe business, IOC conducts health checks at all its refineries quarterly, conducts workshops and provides training on safety measures. Also, IOC worked towards energy conversation during this financial year which saved fuel of 93600 standard refinery fuel tonne (SRFT) annually which would have cost `240 crore. Thus a direct affect of indulging in CSR initiative was seen where IOC saved financially. Indulging in such activities will add intangible value to the firm that in future might be able to help the company financially.

10329!10541!

10899!

10000!

10500!

11000!

2009! 2010! 2011!

Total Operating pipeline (Km)

Total!Operating!pipeline!(Km)!

! 21!

Capital Structure Capital structure is defined as the way the company finances its assets through a

combination of debt capital and equity capital. Debt capital is the borrowed money used for the working of the business. It is considered the safest method to raise long-term finance as the company has years to pay of the principal while it can pay interest in the time. Companies generally concentrate more on raising long-term debt at lower rate. Equity capital is the money that is invested and owned by the shareholders (owners). Equity capital is of two types, first, contributed capital which is the money which the shareholders put in the company for share of stock or ownership and the second is retained earnings which is the profit the company owns due to past activities. Decisions made about capital structure are highly critical for the business as it may reflect and impact the company’s profitability and solvency.

The capital structure can be analyzed trough the debt-to-equity ratio of the company, which refers to the proportion of debt and proportion of equity in the company, and it reflects the ability to leverage finance. Equity consists of share capital and reserves and surplus while the debt (long-term) consists if secured and unsecured loans. In certain situations, the company uses a complete financing through equity capital.

Debt-to-equity Ratio= Total Liabilities ÷Shareholder’s equity

If the debt/equity ratio is seen to be high, it suggests that the company has used aggressive means to finance the company. This would result in have high earnings at the expense of an additional interest expense. Theoretically, a high debt in the finance of the company generally would earn more profits to the company than a low debt financing. This would be the situation unless and until the cost of debt (interest on debt) is lower than the earnings, which will benefit the shareholders.

This ratio varies depending on the industry the company is in. A capital-intensive firm will have a higher D/E ratio and is generally above 2 while less capital-intensive industries will have about 0.5. Also, a company’s D/E ratio will change depending on the social and economic factors. If the D/E ratio is higher than 1, it suggests that the company is mainly financed by debt and if it is lower than 1, it is mainly financed using equity. In the table, the D/E ratio for Bharat Petroleum, Hindustan Petroleum and Indian Oil Corporation for the years 2009, 2010 and 2011 have been calculated using the above formula. It can be seen that apart from IOC (2009-2010), all the three companies have mainly been financed through debt over the years, i.e., the contribution of debt capital is higher in the capital structure of the company.

In the case of Bharat Petroleum, it can be seen that the D/E ratio has fluctuated over the years but not to a great extent. By analyzing D/E ratio, it can be seen that during the 2008-2009, BPCL has `1.705 of debt for every `1 of equity. Similarly, it had `1.77 of debt with every `1 of equity in 2010 which was because of the increase in secured loans from `6681.34 crore to `13514.68 crore, which was higher than the rise in reserves and surplus with no rise in the share capital of `361.54 crore. This D/E ratio reduced to `1.541 of debt for every `1 of equity which was due to the reduced secured debt from `13514.68 crore to `8868.86 crore. In the case of Hindustan Petroleum, when the table is reviewed, it can be seen that the D/E ratio is almost the same over the years. By analyzing D/E ratio of 2008-

! 22!

2009, HPCL has `2.16 of debt for every `1 of equity. Similarly, it had `2.005 of debt with every `1 of equity in 2009-2010 which was because of the rise in reserves and surplus by `995.5 crore while the debt rose by just `275.23 crore which was because the rise in secured loans was covered by the fall in unsecured loans. This resulted in an overall low long-term liability that resulted in the fall in the D/E ratio during 2009-2010 since rise in the equity was higher than rise in debt. Contrastingly, the D/E ratio rose in 2010-2011 as HPCL had `2.343 of debt with every `1 of equity. This was due to the rise in debt by `6788.14 crore while the equity rose by `1142.24 crore. A continuous rise in secured loans can be seen at Hindustan Petroleum that would affect the D/E ratio overtime along with the continuous rise in equity.

Indian Oil Corporation has experienced less fluctuation with its capital structure. It is seen to be in a less risky position than BPCL and HPCL as higher the D/E equity ratio, higher is the risk attached with it. IOC has `1.04 of debt for every `1 of equity in 2009 that fell to `0.943 of debt for every `1 of equity in 2010, which was due to the issue of share capital, thus improving the equity. This D/E ratio fell to `1.005 of debt for every `1 of equity in 2011 as the debt rose more than the equity due to an increase in the secured and unsecured loans in the next financial year. Through this we can see the changes the company has had in its capital structure over the years.

Table 6: Debt/Equity Ratio of BP, HP and IOC for 2009, 2010 and 2011

Bharat Petroleum Parameters 2008-2009 2009-2010 2010-2011 Total Liabilities* 24239.16 26692.08 25185.46 Shareholders Equity* 14212.67 15082.51 16348.31 Debt-to-equity ratio 1.705 1.770 1.541

Hindustan Petroleum Parameters 2008-2009 2009-2010 2010-2011 Total Liabilities* 24061.15 24336.38 31124.52 Shareholders Equity* 11142.61 12136.87 13281.68 Debt-to-equity ratio 2.16 2.005 2.343


Parameters 2008-2009 2009-2010 2010-2011 Total Liabilities* 47346.87 49472.57 57837.61 Shareholders Equity* 45504.36 52462.33 57575.21 Debt-to-equity ratio 1.04 0.943 1.005 * Value is in `. Crore(s)

It can be seen that the companies have tried to maintain the ratio of debt and equity capital in their business suggesting that they may perceive this structure to be profitable for the business. It also brings in stability in the business and the investors will be able to understand the business better. If the capital structure fluctuated continuously, its stability can be questioned which may raise issues at times of additional debt requirement.

! 23!

The table below shows the proportion of debt (wd) and proportion of equity (we) for the three companies over the three years. Proportion of debt is the weightage of debt in the capital structure while proportion of equity is the weightage of equity in the capital structure. It can be seen that the debt and equity has not seen a significant change of more than 3% in any of the companies over time. This suggests that Bharat Petroleum, Hindustan Petroleum and Indian Oil Corporation have adapted a stable capital structure. This could interest the investors as a company with high fluctuations in the capital structure may confuse the investors about the capital structure policies of the company and long-term stability.

Table(7:(Proportion(of(debt(and(Proportion(of(equity(of(BP,(HP(and(IOC(

Proportion of debt (wd): Proportion of equity (we)

Parameters 2008-2009 2009-2010 2010-2011

Bharat Petroleum

0.63: 0.37 0.64: 0.36 0.61: 0.39

Hindustan Petroleum

0.68: 0.32 0.67: 0.33 0.70: 0.30


0.51: 0.49 0.49: 0.51 0.50: 0.50

Apart from D/E equity ratio and the proportion of debt and equity, the interest coverage ratio, which has been analyzed in the financial ratios, also helps in understanding the capital structure of the company. Through the ICR, it can be seen that the capital structure of the company is becoming favorable as the company is able to cover it current liabilities which is the interest expenses through it earnings before interest and tax. This shows that the companies are progressing towards a more stable and profitable capital structure and are secure in the short-term.

1.705!1.77! 1.541!

2.16! 2.005! 2.343!

1.04! 0.943!1.005!

0!

0.5!

1!

1.5!

2!

2.5!Debt=to=equity!ratio!of!BP!

Debt=to=equity!ratio!of!HP!

Debt=to=equity!ratio!of!IOC!2009(((((((((((((((((((((((((((((((((2010(((((((((((((((((((((((((((((2011(

DebtJtoJEquity(Ratio(

! 24!

Table 8: Interest Coverage Ratio of BP, HP and IOC for 2009, 2010 and 2011

Parameters 2008-2009 2009-2010 2010-2011 Bharat Petroleum 0.47542 2.46486 2.28438

Hindustan Petroleum 0.48556 2.67290 2.96423

Indian Oil Corporation 1.96809 9.05594 3.9493

Along with the above ratios, the weighted average cost of capital (WACC) helps in understanding the profitability of the company’s capital structure in more detail. WACC is the minimum rate of return the firm that is expected by the investors, at which the company will produce value. The lesser the WACC, the higher the value of the firm as the minimum rate of return is lower. If the WACC is higher, the company is required to generate higher returns, which if not achieved will dilute the value of the company. If the companies’ return is below the WACC, it makes the company unprofitable for the investors, as the company is unable to meet its cost of capital.

WACC can be calculated by the formula below,

WACC= we × re + wp × rp + wd × rd (1-tax rate)

we =proportion of equity

re =cost of equity

wp =proportion of preference capital

rp =cost of preference capital

wd=proportion of debt

rd=cost of debt

In the case of BPCL, HPCL and IOC, they do not issue preference shares, due to which there is no preference capital. Due to this, the WACC formula applying to BPCL, HPCL and IOC is,

WACC=we × re + wd × rd (1-tax rate)

The Proportion of debt and Proportion of equity have been discussed above.

Cost of Equity (re ): Cost of equity is the return that the market expects in return of owning the asset and undertaking the risk of ownership. It reflects the individual shareholders opportunity cost for investing in the company. It would vary in different companies because of the difference in business and financial risk of each company.

To calculate the cost or equity, the Capital Asset Pricing Model (CAPM) is used. It is a theoretical model used to calculate the price of an asset such as a security.

CAPM= Rf+β (Rm-Rf)

Rf= risk free return

β= market risk factor

! 25!

Rm=Average return of market

Rick free return (Rf) is the lowest return an investment would generate. These are generally the government securities, which are least risky.

Here, for the calculation for the cost of equity, we assume the risk free rate of return (Rf) as 4% or .04.

β (Beta) is the sensitivity to market risk.

To calculate the β, the slope of the return on the company (NSE) and return on nifty was used, dated from 1st April to 31st March of each financial year, which was calculated using Microsoft Excel.

Market return (Rm) is the return on market as a whole that is computed by adding the Nifty returns dated from 1st April to 31st March of each financial year. This was computed using Microsoft Excel.

Note: The computation of the cost of Equity using the CAPM has been attached in the Appendix 1.

Cost of Debt: It is the interest paid on the capital raised through debt such as loans and bonds by the firm. Tax rate reduces the cost of debt that is applicable on the company, as companies have an advantage of tax benefit. The cost of debt is calculated by using the formula,

Cost of debt= Interest expenses ÷ previous years’ total debt

The tax rate for any company earning higher than `10,00,000 is 30%, due to this the tax rate for BPCL, HPCL and IOC is 30%.

Note: The computation of the cost of Debt calculated by the above formula has been attached in the Appendix 1.

By using the proportion of debt, proportion of equity, cost of debt, cost of equity and tax rate, the pre-tax WACC and the post-tax WACC have been calculated for BPCL, HPCL and IOC during the three financial years.

Table 9: Pre-tax WACC and Post-Tax WACC for BP, HP and IOC

Pre-tax WACC (2009)

Post-tax WACC (2009)

Pre-tax WACC (2010)


Pre-tax WACC (2011)


Bharat Petroleum 10.93% 8.10% 2.67% 1.78% 4.63% 3.78%

Hindustan Petroleum 5.59% 3.13% 12.38% 11.63% 8.60% 6.46%

Indian Oil Corporation 4.25% 2.21% 2.46% 1.91% 5.27% 4.36%

*The calculation of the WACC has been attached in Appendix 1.

! 26!

In the table above, the pre-tax WACC and the post-tax WACC have been depicted. It can be seen that the pre-tax WACC is higher than the post-tax WACC for the three companies’ over the years. This shows the tax benefit the companies have. The tax benefit is an allowable deduction on a tax return that reduces the taxpayers’ burden. A tax benefit allows an adjustment, which benefits the taxpayer’s tax liability. The advantage of the tax benefit can be seen by the reduced WACC (post-tax WACC) for every year, suggesting a reduced minimum return the company would have to achieve.

For analysis, we will consider the post-tax WACC that is more realistic situation. It can be seen that the minimum expected return of Bharat Petroleum has seen to fall and rise. In 2009, it was 8.1%, which means that BPCL has to generate a minimum return of 8.1% at which it will be able to cover its cost of capital. This also implies that BPCL would have to pay an interest of 0.081 for every rupee it raises as finance. A company return below 8.1% would signify that the company is unable to meet its costs thus reducing the value of the company. Stockholder’s values will deteriorate in this situation because of which they might withdraw their investments in the company. During the same time period, HPCL has experienced a WACC at 3.13% and IOC at 2.21% that means that HPCL needs a minimum return of 3.13% on its activities if it needs to make a profit and retain its shareholders while IOC needs to make a minimum profit of 2.21%. If we consider only the WACC, we can analyze that the value of IOC was the highest in 2009 among the three firms as it has the lowest cost of capital.

In the financial year 2009-2010, the WACC of BPCL drastically fell to 1.78% which was due to a negative cost of equity and a reduced cost of debt as the company changed its debt policy and indulged in low cost investments; this overall reduced the cost of capital. This fall in the cost of capital from 8.1% to 1.78% improves the value of the firm as the minimum rate of return BPCL has to earn is reduced. Through this it can gain shareholder confidence. At the same time, HPCL has experienced a rise in WACC to 11.63%, this was because the cost of equity of HP increased along with the sensitivity to market risk. Due to this, HPCL would have to put in more efforts to earn a higher return to hold on to the investors. While the WACC of HPCL rose, at the same time, it reduced for IOC from 2.21% to 1.91%, which was the result of a fall in

8.10%!

1.78%!

3.78%!

3.13%!

11.63%!

6.46%!

2.21%!

1.91%!

4.36%!

0.00%! 5.00%! 10.00%! 15.00%!

Post=tax!Wacc!(2009)!

Post=tax!Wacc!(2010)!

Post=tax!Wacc!(2011)! Indian!Oil!

Corporation!

Hindustan!Petroleum!

Bharat!Petroleum!

! 27!

cost of equity and cost of debt. BPCL had the highest WACC in the previous financial year while it had the lowest in 2009-2010. This reduction can benefit the company in the short term, as investors would be more interested in BPCL compared to its competitors during this year.

When we analyze the WACC of 2010-2011, it can be seen that the WACC of BPCL is 3.78%, HP is 6.46% and IOC is 4.36%. Like the previous year, BPCL has again experienced the lowest BP in this year as well. Due to a continuous low WACC, investor confidence would be strengthened towards BPCL. IOC has seen a rising WACC in this financial year that it must concentrate on. HPCL’s WACC reduced from 11.63% to 6.46%, which means that HPCL’s investments need to generate a return of 6.46% to cover the costs of capital, which is lower than the minimum return it required in the previous year. This increases the value of the firm in this financial year.

A high WACC makes the investments of the company unattractive as the company’s minimum return to make a profit or to break even is high, which at times maybe unachievable.

The WACC affects the value of the firm as the lower the value of the WACC, higher is the value of the firm. Since WACC affects the value of the firm, it can be noted that the value of the firm is highly dependent on the cost of capital, which is a direct result of the capital structure of the company. To analyze the affect of the WACC on the value of the firm, we will calculate the value of the firm using the formula,

Value of firm= net cash flow ÷ WACC To show the impact of the cost of capital on the value of the firm, we assume

the net cash flow of the company three companies to be at 1000 crore. This stable cash flow over the years can help depict how the cost of capital will affect the value of the firm in the market.

Table 10: Value of the firm for BP, HP and IOC for 2009, 2010 and 2011

Bharat Petroleum Parameters 2008-2009 2009-2010 2010-2011 Cash flow* 1000 1000 1000 WACC 0.0810 0.0178 0.0378 Value of the Firm* 12345.679 56179.775 26455.027

Hindustan Petroleum Parameters 2008-2009 2009-2010 2010-2011 Cash flow* 1000 1000 1000 WACC 0.0313 0.1163 0.0646 Value of the Firm* 31948.882 8598.452 15479.876

Indian Oil Corporation Parameters 2008-2009 2009-2010 2010-2011 Cash flow* 1000 1000 1000 WACC 0.0221 0.0191 0.0436 Value of the Firm* 45248.869 52356.021 22935.780 * Value is in `. Crore(s)

In the table above, it can be noticed that the value of BPCL has risen in 2010 (`56179.775 crore) from 2009 (`12345.679 crore) because its WACC has fallen, and the value of the firm has fallen in 2011 because to `26455.027 crore because the WACC has risen. Similar scenarios can be seen in the case of HPCL and IOC during

! 28!

the same financial years where the value of the firm has risen to the fall in the WACC and fallen due to the rise in WACC. Through this it can be stated that a lower WACC will improve the stock value of the company, i.e., WACC and the stock value are inversely proportional to each other. This shows that the company has to pay a lower interest on the borrowings, which will help the company generate more profits and help satisfy shareholder expectations rather than spending revenue on paying interests on borrowings. We can claim that,

Value of firm= net cash flow ÷ WACC The capital structure of the company is known to affect the profitability of

the company. In theory, it is known that a company with a higher debt proportion is more profitable than a company with a high equity proportion but only till a certain level, after which it might affect the profitability negatively. We can analyze the impact of the capital structure on profitability of the company by comparing the debt/equity ratio and total debt of the company with the net profits.

Table 11: Net profit and D/E ratio for BPCL, HPCL and IOC

Bharat Petroleum Parameters 2008-2009 2009-2010 2010-2011 Net profit* 686.87 1164.81 2051.73 Total Debt* 24239.16 26692.08 25185.46

Hindustan Petroleum Parameters 2008-2009 2009-2010 2010-2011 Net profit* 8797.00 9994.86 10996.53 Total Debt* 24061.15 24336.38 31124.52


Parameters 2008-2009 2009-2010 2010-2011 Net profit* 8084.31 15777.58 8057.77 Total Debt* 47346.87 49472.57 57837.61 * Value is in `. Crore(s)

In the case of BPCL, when we try to correlate the total debt to the net profits of the company, we see that the net profits do not rise and fall along with the debt in the capital structure. The graph on the right displays the rise and fall in the total debt of BPCL while there is only a rise seen in the net profits of BPCL. We can claim that there is no significant relation between the profitability of BPCL and its capital structure. In this situation, BPCL would have to concentrate on its operating activities and sales that may raise the net profits over the years.

686.87!

24239.16!

1164.81!

26692.08!

2051.73!

25185.46!

0! 10000! 20000! 30000!

net!pro3it!of!BP!

Total!Debt!of!BP!

2011!

2010!

2009!

! 29!

In the case of HPCL, when

we review the relation between the capital structure and the profitability of the company, we can see that when the total debt in the company rises, so does the net profit of HPCL. Through this we can claim that in HPCL, the debt and net profit are directly proportional, due to which if the debt increases, the net profits will also rise. In this case, HPCL can be advised to have a high debt, but would have to also look on the cost of debt aspect.

In the case of IOC, a direct

relation between the net profit and the total debt of the company cannot be seen in the graph. We can claim that the profits of IOC are not directly related to its capital structure, as there is no common trend between the two components.

To analyze the affect of the capital structure of the companies on the profitability, we analyze the

relation between the cost of capital and total profits the companies may generate, as theoretically, a company with a high WACC will earn low profits as its minimum return is high only after which the company makes profit.

Table 12: Net profit and WACC for BPCL, HPCL and IOC(* Value is in `.Crore(s))

Bharat Petroleum Parameters 2008-2009 2009-2010 2010-2011 Net profit* 686.87 1164.81 2051.73 WACC 8.1% 1.78% 3.78%

Hindustan Petroleum Parameters 2008-2009 2009-2010 2010-2011 Net profit* 8797.00 9994.86 10996.53 WACC 3.13% 11.63% 6.46%


Parameters 2008-2009 2009-2010 2010-2011 Net profit* 8084.31 15777.58 8057.77 WACC 2.21% 1.91% 4.36%

8797!

24061.15!

9994.86!

24336.38!

10996.53!

31124.52!

0!

5000!

10000!

15000!

20000!

25000!

30000!

35000!

Net!pro3it!of!HP! Total!Debt!of!HP!

2008=2009!

2009=2010!

2010=2011!

8084.31!

47346.87!

15777.58!

49472.57!

8057.77!

57837.61!

0! 20000! 40000! 60000! 80000!

Net!pro3it!of!IOC!

Total!Debt!of!IOC!

2011!

2010!

2009!

! 30!

The graphs below depict the WACC of BPCL and the Net profits of BPCL during the same financial years. It is seen that the net profits of BPCL are rising while the WACC is fluctuation. The above analysis on the relation between the net profits and total debt of BPCL, no correlation was established and is followed in the analyses the well. By this we can conclude that BPCL does not show a direct relation with its capital structure.

A similar analysis was done for HPCL, in the above analysis the total debt and net profits of HPCL showed a direct correlation stating that the profits of HPCL will arise along with the total debt. We aim to strengthen the argument of the dependency of the profitability on the capital structure; we analyze the WACC and the net profits of HPCL. When we review the graphs above, we see no relation between the WACC and the net profits. Through this we can state that the profitability of HPCL does not depend on the cost of capital but on its total debt. A relation between HPCL’s capital structure and profitability can be seen.

In the case of IOC, we see that the WACC and the net profits of the company are

inversely proportional. We can claim that as the cost of capital rises, the net profits of the company falls, as it would have to pay a higher proportion as interest than that of a low WACC. There was no direct relation between the net profit and the total debt of the company, but a relation between the net profit and the WACC is seen. Through is we can claim that the capital structure does affect the profitability of IOC.

686.87!

1164.81!

2051.73!

0! 1000! 2000!

Net!pro3it!of!BPCL!

2011!2010!2009!

8797!

9994.86!

10996.53!

0!

2000!

4000!

6000!

8000!

10000!

12000!

Net!pro3it!of!HPCL!

2009!

2010!

2011!

8.1!

1.78!

3.78!

0! 2! 4! 6! 8! 10!

WACC!of!BPCL!

2011!2010!2009!

3.13!

11.63!

6.46!

0!2!4!6!8!10!12!14!

WACC!of!HPCL!

2009!

2010!

2011!

! 31!

Through the above analysis on the impact of the capital structure on the profitability of the firms in the same industry, we can conclude that it depends on the functioning of the firm and is not constant for any firm within an industry.

2.21!

1.91!

4.36!

0! 1! 2! 3! 4! 5!

WACC!of!IOC!2011!

2010!

2009!

8084.31!

15777.58!

8057.77!

0! 5000! 10000! 15000! 20000!

Net!pro3it!of!IOC!2011!

2010!

2009!

! 32!

Dividend Policy Dividend is defined as the distribution of earnings in the real assets to the

shareholders of the firm depending on the proportion to their ownership. The dividend policy is the payout policy that managers of any organization conduct to decide the amount of cash distribution to the shareholders overtime. The aim of the company is to increase the wealth of the company, which would ultimately maximize the value of the firm. Dividend it generally distributed as cash (Cash dividend) or shares (share dividend).

BPCL, HPCL and IOC have shared the profits the company has made by distributing dividends to its investors over the three year in the form of cash. The table below depicts the dividend percentage shared with the shareholders for face value of 10 per share.

It can be seen that BPCL, HPCL and IOC have shared profits, which have fluctuated over the years. BPCL declared dividends of `7 that accounted for 70% of the face value of `10 in 2009. This in 2010 and doubled by distributing `14 of dividend for every share worth face value `10 and stayed constant during the financial year 2011. This rise in the dividend from year 2009 to 2010 was due to the considerable rise in the net profits from `724.13 crore to `1719.98 crore. The dividend in 2011 had seen no rise as compared to the dividend issued in 2010 as the net profits rose by just `22.08 crore.

HPCL issued dividends to the shareholders during the financial years 2009, 2010 and 2011. The dividend declared was seen to rise from `5.25 in 2009 to `12 in 2010 and `14 in 2011. This consistent rise in the dividend declared was because of the rise in the net profits from `8797 in 2009 to `9996.19 crore in 2010 and `10996.53 in 2011. It can be seen that the company is sharing it profits with the shareholders on a continuous basis.

IOC has displayed a fluctuation in the dividend distributed over the three years from `7.5 for share of face value of `10 that increased to `13 in 2010. This dividend declared fell to `9.5 in 2011. This fluctuation in the dividend declared was due to the continuous fluctuation in the net profits earned which was `8084.31 crore in 2009 to `15777.58 crore in 2010 which fell to `8057.77 crore in 2011.

!

!

70%!

52.50%!

75%!

140%!

120%!

130%!

140%!

140%!

95%!

0%!20%!40%!60%!80%!100%!120%!140%!160%!

Dividend!percentage!of!BP!

Dividend!percentage!of!HP!

Dividend!percentage!of!IOC!

2011!

2010!

2009!

Dividend(Percentage(

! 33!

Table 13: Dividend Percentage for BPCL, HPCL and IOC for 2009, 2010 and 2011

2009 Particulars Bharat

Petroleum Hindustan Petroleum


Face Value of the share* 10 10 10 Dividend per share* 7 5.25 7.5 Dividend percentage 70% 52.5% 75%




Face Value of the share* 10 10 10 Dividend per share* 14 12 13 Dividend percentage 140% 120% 130%




Face Value of the share* 10 10 10 Dividend per share* 14 14 9.5 Dividend percentage 140% 140% 95% * Value is in `.

When we look at the graphs above, and the analysis, a direct association

between the net profits and the dividend declared can be seen. Through this we can concluded that the companies distribute dividend depending on the net profits and do not show a constant dividend policy.

We can further analyze the dividend policy adopted by BPCL, HPCL and IOC by analyzing the dividend payout ratio. Dividend payout ratio is the percentage of earnings, which is paid to the shareholders in the form of dividend. It is calculated as,

Dividend payout ratio= dividend per share ÷earnings per share

In the table below, it can be seen that during the financial year 2009, BPCL pays 34.38% of the investor returns through dividends, i.e., for every `1 the investor gains as return on the share, `0.3438 is from the dividend declared. This fell to 32.92% in 2010 and further fell to 32.73% in 2011. The dividend payout ratio of HPCL has seen a small rise over the three financial years from being 23.47% in 2009,

686.87!

8797.00!

8084.31!

1164.81!

9994.86!

15777.58!

2051.73!

10996.58!

8057.77!

0.00! 4000.00! 8000.00! 12000.00! 16000.00!

Net!pro3it!of!BP!

net!pro3it!of!HP!

Net!pro3it!of!IOC!2011!

2010!

2009!

Net Profit

! 34!

i.e., the investor gets 23.47% of the returns on investment through dividends, to 27.52% in 2010 and further rose to 27.83% in 2011.

When analyzing the dividend payout ratio of IOC from 2009 to 2011, a strong fluctuation can be seen during the year 2008-2009 to 2009-2010. In the financial year 2009, the dividend payout ratio of IOC was 70.03%, which means that for every `1 of return on investment, the shareholders get `0.7003 through dividends. This fell in 2010 to 29.47% implying the fall in dividend contribution towards the investors’ investment. This could have been due to the rise in net income that increased in EPS, thus increasing the profitability of the stocks in the company. A higher dividend payout ratio suggests that the stocks of the company are not giving enough returns to the shareholders, for which the company has to pay dividends to keep the investor confidence intact. The dividend payout ratio of IOC in the year 2011 was the same as in the year 2010.

Table 14: Dividend Payout Ratio for BPCL, HPCL and IOC




Earnings per share (EPS)* 20.36 22.37 10.71 Dividend per share* 7 5.25 7.5 Dividend payout ratio^ 0.3438 0.2347 0.7003




Earnings per share (EPS)* 42.53 43.61 44.12 Dividend per share* 14 12 13 Dividend payout ratio^ 0.3292 0.2752 0.2947




Earnings per share (EPS)* 42.78 50.31 32.25 Dividend per share* 14 14 9.5 Dividend payout ratio^ 0.3273 0.2783 0.2946 * Value is in `. ^ Expressed as a percentage

! !

Dividend!Payout!Ratio!0.3438!

0.2347!

0.7003!

0.3292!0.2752!

0.2947!0.3273!0.2783!

0.2946!

0!0.1!0.2!0.3!0.4!0.5!0.6!0.7!0.8!

Dividend!payout!ratio!of!BP!

Dividend!payout!ratio!of!HP!

Dividend!payout!ratio!of!IOC!

2009!

2010!

2011!

! 35!

The! graph! above! depicts! the! dividend!payout! ratio! for! BPCL,!HPCL! and!IOC! during! the! financial! years! 2009,! 2010! and! 2011.! In! the! case! of! BPCL,! the!point! which! mark! the! dividend! payout! ratio! are! almost! in! the! same! position,!suggesting! that! BPCL! could! might! follow! a! dividend! payout! policy! in! which!approximately!33%!of!the!return!to!the!investor!would!be!contributed!through!dividends.!Similarly,!HPCL!is!also!seen!to!follow!a!dividend!payout!policy,!as!the!dividend!payout!ratio!is!constantly!around!25%!suggesting!that!a!close!to!25%!of!the!return!to!the!investor!would!be!contributed!through!dividends.!In!the!case!of!IOC,! the!dividend!payout! ratio!has! seen! to! fall! drastically! from!70%! to! around!30%! and! has! stayed! constant! at! 30%.! This! could! state! that! IOC! is! moving!towards!following!a!dividend!payout!policy!that!will!help!the!investors!know!the!possible!returns!IOC!would!give!them!in!the!form!of!dividends.!Having!a!stable!dividend!payout!ratio!reduces!the!uncertainty!towards!the!returns!the!investors!may! expect! from! their! investments! and! can! analyze! the! growth! curve! of! their!investments!much! easily! than! if! they! had! invested! in! a! company!who! did! not!follow!a!fixed!dividend!payout!policy.!

Another ratio that helps the investor learn about the return they would receive on their investment is the dividend yield. The dividend yield shows how much a company pays to its investors as dividends annually respective to the share price. The dividend yield is calculated as,

Dividend yield= annual dividend per share÷ MV per share

The dividend yield helps in analyzing the stock’s productivity as it explains how much cash flow the investor is getting for every rupee of investment in the stock as equity. Investors try to invest their money in stocks that give a high and stable dividend yield as it secures the investors cash flow.

When analyzing the dividend yield of BPCL, HPCL and IOC for the financial year 2009, it can be seen that in 2009 BPCL’s dividend yield is 1.796% that suggests that for every `1 of investment, the company gives `0.01796 in the form of dividends. When compared to its competitors during the same financial year, it can be seen that HPCL gives a return of `0.01097 while IOC gives a return of `0.01391 in the form of dividends to its investors for every `1 of equity.

In the financial year 2010, BPCL sees a rise in the dividend yield to 5.183% that implies that for `1 of equity, the company gives a return of `0.05183 through dividend. During this financial year, the dividend yield of HPCL has also risen to 3.842% that suggests that for `1 of equity, HPCL gives a return of `0.03842 through dividends. A similar scenario can be seen in the case of IOC as the dividend yield rises to 4.042%, which shows that IOC gives a return of `0.04042 through dividends for every `1 of equity. This rise in the dividend yield was due to the fall in the market value of the share during the financial year 2010 and theoretically, the lower the value of the stock; the higher is the dividend yield as they are inversely proportional.

In the financial year 2011, the dividend yield has seen to fall, which is due to the rise in the value of the stock. The dividend yield of BPCL has fallen to 3.142% implying that for `1 of equity, BPCL gives a return of `0.03142 through dividends. The dividend yield of HPCL falls by a small percent to 3.704% suggesting that for `1 of equity, HPCL gives a return of `0.03704 through dividends while the dividend yield for IOC fell to `0.3189 which means that for `1 of equity IOC gives a return of `0.03189 as dividend.

! 36!

Table 15: Dividend Yield for BPCL, HPCL and IOC for 2009, 2010 and 2011




Dividend per share* 7 5.25 7.5 Market value per share* 389.75 478.5 539 Dividend yield^ 0.01796 0.01097 0.01391




Dividend per share* 14 12 13 Market value per share* 270.1 312.35 321.6 Dividend yield^ 0.05183 0.03842 0.04042




Dividend per share* 14 14 9.5 Market value per share* 445.45 378 297.875 Dividend yield^ 0.03142 0.03704 0.3189 * Value is in `. ^ Expressed as a percentage

By observing the dividend yield graph above, it can be seen that BPCL gives a higher dividend yield for consecutive year (2009 and 2010) due to which may gain investor interests but lacks stability. The lack of stability may drive away investors to its competitors if they wish to build a profitable and stable portfolio.

Through the above analysis, we can state that the investors would prefer to invest in Bharat Petroleum over Hindustan Petroleum and Indian Oil Corporation as it is giving a high dividend to its investors for the shares. Also, BPCL seems to follow a close to 33% dividend payout ratio, which has been similar every year. This helps the investors know about the possible returns they may generate which would help them analyze their returns more efficiently. Also, the dividend yield offered by BPCL has been high over the years, which suggests a high productivity for the firm. The factors represent a positive position for Bharat Petroleum over its competitors, thus making it more attractive.

0!

0.01!

0.02!

0.03!

0.04!

0.05!

0.06!

dividend!yield!of!BP!

dividend!yield!of!HP!

dividend!yield!of!IOC!

0.01796!0.01097! 0.01391!

0.05183!

0.03842! 0.04042!0.03142! 0.03704! 0.03189!

2009!

2010!

2011!

! 37!

Reflection During the period of this coursework, I experienced a steep rising learning

curve. It gave me an opportunity to analyze the financial statement of the companies over years that I would have not done otherwise. It helped me understand about the functional of the company and factors that would benefit the company. Concepts that were theoretically studied were practically used to analyses financial statements in this project that has strengthened by concepts. It helped me realized the different parameters on which the company’s performance can be judged and as an investors which are the few components I would look in a company before investing.

It gave me an insight in the problems the company would have due to economic changes and the activities, which may not be reflected in the financial reports but would make a lot of difference to the investors and the growth of the company.

If I was given a chance to redo this project, I would like to analyze it in further depth and try to understand the other aspects of profitability or performance of a company that I did not in this project like the cash flow analysis and the share distribution. I would try an take professional help who would guide me in analyze the statements in depth and help me learn about the different components a company would look into before decision making. Also, I would like to interact with investors and people from the companies and see their perspective when it comes to investing in a company that would help me analyze the reports better.

I did face certain limitations, as this was the first time I analyzed a company’s performance in this depth. Also, it was difficult to analyze in some stages at the companies were in the same industry and showed different results during the same years. Some figures were difficult to find as I was not exposed to analyzing an annual report before but these challenges helped me grow and understand the financial reports better.

! 38!

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Bharat Petroleum, 2010. Annual Report 2009-2010. Mumbai.

Bharat Petroleum, 2011. Annual Report 2010-2011. Mumbai.

Efinancemanagement.com (n.d.) Debt to Equity Ratio. [online] Available at: http://www.efinancemanagement.com/financial-analysis/89-debt-to-equity-ratio [Accessed: 5 Nov 2012]. Financeformulas.net (2009) Asset Turnover Ratio. [online] Available at: http://www.financeformulas.net/Asset_Turnover_Ratio.html [Accessed: 8 Nov 2012]. Hindustan Petroleum Corporation Limited, 2009. Annual Report 2008-2009. Mumbai.

Hindustan Petroleum Corporation Limited, 2010. Annual Report 2009-2010. Mumbai.

Hindustan Petroleum Corporation Limited, 2011. Annual Report 2010-2011. Mumbai.

IndianOil, 2009. Annual Report 2008-2009. Mumbai



Investinganswers.com (2012) Cash Flow From Investing Activities Definition & Example | InvestingAnswers. [online] Available at: http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/cash-flow-investing-activities-2785 [Accessed: 8 Nov 2012]. Investopedia (2012) Debt/Equity Ratio Definition | Investopedia. [online] Available at: http://www.investopedia.com/terms/d/debtequityratio.asp#axzz2AE3byXGq [Accessed: 5 Nov 2012]. Investopedia.com (2012) Asset Turnover Definition | Investopedia. [online] Available at: http://www.investopedia.com/terms/a/assetturnover.asp [Accessed: 8 Nov 2012] Investopedia.com (2012) Cash Flow From Investing Activities Definition | Investopedia. [online] Available at:

! 39!

http://www.investopedia.com/terms/c/cashflowfinvestingactivities.asp#axzz2Am084BUp [Accessed: 8 Nov 2012]. Investopedia.com (2012) Price-Earnings Ratio (P/E Ratio) Definition | Investopedia. [online] Available at: http://www.investopedia.com/terms/p/price-earningsratio.asp#axzz2AE3byXGq [Accessed: 8 Nov 2012]. Investopedia.com (2012) Profit Margin Definition | Investopedia. [online] Available at: http://www.investopedia.com/terms/p/profitmargin.asp#axzz2AE3byXGq [Accessed: 8 Nov 2012]. Kapoor, S. (2009) Impact of dividend policy on shareholders' value: A study of Indian Firms. [online] Available at: http://www.jiit.ac.in/uploads/SUJATA%20SYNOPSIS.pdf [Accessed: 8 Nov 2012]. Kenfaulken, B. (2006) Cash Flow Statements: Analyzing Components, Format, and Purpose. [online] Available at: http://blog.arborinvestmentplanner.com/2011/06/analyzing-components-format-and-purpose-of-a-cash-flow-statement/ [Accessed: 8 Nov 2012]. Kennon, J. (n.d.) Interest Coverage Ratio. [online] Available at: http://beginnersinvest.about.com/od/incomestatementanalysis/a/interest-coverage-ratio.htm [Accessed: 4 Nov 2012]. Lexicon.ft.com (2012) Non-Financial Performance Measures Definition from Financial Times Lexicon. [online] Available at: http://lexicon.ft.com/Term?term=non_financial-performance-measures [Accessed: 7 Nov 2012]. Moneycontrol.com (2009) HPCL�s Visakha refinery implementing safety measures - Business Line. [online] Available at: http://www.moneycontrol.com/news/business/hpcl’s-visakha-refinery-implementing-safety-measures_415296.html [Accessed: 8 Nov 2012]. Moneycontrol.com (2010) Bathinda refinery to start by March 2011: HPCL - Reuters. [online] Available at: http://www.moneycontrol.com/news/business/bathinda-refinery-to-start-by-march-2011-hpcl_460465.html [Accessed: 8 Nov 2012]. Moneycontrol.com (2010) HPCL says plans Vizag refinery, petchem project revival - Reuters. [online] Available at: http://www.moneycontrol.com/news/business/hpcl-says-plans-vizag-refinery-petchem-project-revival_486482.html [Accessed: 5 Nov 2012]. Morris, M. (2001) Creating Shareholder Value Through Capital Structure Optimization. [online] Available at: http://www.valueinc.com/press/files/optimalcapitalstructure.pdf [Accessed: 4 Nov 2012].

! 40!

Nerd (2011) Analyzing The Statement Of Cash Flows. [online] Available at: http://nerdenterprises.com/blog/2011/10/analyzing-the-statement-of-cash-flows/ [Accessed: 6 Nov 2012]. Readyratios.com (2011) Interest Coverage Ratio (ICR). [online] Available at: http://www.readyratios.com/reference/debt/interest_coverage_ratio_icr.html [Accessed: 8 Nov 2012]. Richards, D. (2006) Interpreting Financial Statements - The Cash Flow Statement. [online] Available at: http://entrepreneurs.about.com/od/beyondstartup/a/cashflowstate.htm [Accessed: 6 Nov 2012]. Richards, D. (2006) Interpreting Financial Statements - The Cash Flow Statement. [online] Available at: http://entrepreneurs.about.com/od/beyondstartup/a/cashflowstate.htm [Accessed: 7 Nov 2012]. Ross, R. et al. (2012) Fundamentals of Corporate Finance. Tata-Mcgraw Hill Publisher.

Student.unl.edu (n.d.) Weighted Average Cost of Capital (WACC). [online] Available at: http://www-student.unl.edu/cis/fina361b04/online_course/unit4/lsn11-tp03.html [Accessed: 4 Nov 2012].

! 41!

Appendix 1 Calculation of WACC using we × re + wd × rd (1-tax rate)

COST OF EQUITY Table : Cost of Equity for BP, HP and IOC for 2009, 2010 and 2011

Cost of Equity using CAPM (2009) Particulars Bharat



Market Return Rm -0.458891322 -0.458891322 -0.458891322 Risk free market return Rf 0.04 0.04 0.04 Sensitivity to market risk β -0.000733044 0.247029661 -0.017710005 CAPM or Cost of Equity [Rf+β (Rm-Rf)]

Re 0.040365 -0.08324 0.04883535




Market Return Rm 0.521043747 0.521043747 0.521043747 Risk free market return Rf 0.04 0.04 0.04 Sensitivity to market risk β -0.1001025 0.53353939 -0.0575069 CAPM or Cost of Equity [Rf+β (Rm-Rf)]

Re -0.00815 0.29665 0.01233688




Market Return Rm 0.05747859 0.057478598 0.057478598 Risk free market return Rf 0.04 0.04 0.04 Sensitivity to market risk β 0.322271077 0.515284602 0.290691185 CAPM or Cost of Equity [Rf+β (Rm-Rf)]

Re 0.0456328 0.0490064 0.0450808

COST OF DEBT Table : Cost of Debt for BP, HP and IOC for 2009, 2010 and 2011

Cost of Debt (2009) Particulars Bharat



Interest expenses 2404.32 2082.84 3952.14 Previous year’s total debt

16065.83 17299.88 38820.93

Cost of debt 0.149654 0.120396 0.101804 Cost of Debt (2010)

Particulars Bharat Hindustan Indian Oil

! 42!

Petroleum Petroleum Corporation Interest expenses 1124.66 903.75 1726.16 Previous year’s total debt

24239.16 24061.15 47346.87

Cost of debt 0.046404 0.037561 0.036458 Cost of Debt (2011)

Particulars Bharat Petroleum

Hindustan Petroleum


Interest expenses 1246.84 884.00 2980.26 Previous year’s total debt

26692.08 24336.38 49472.46

Cost of debt 0.046712 0.036324 0.060241

Proportion of debt and Equity

Table : Proportion of debt and equity for BP, HP and IOC for 2009, 2010 and 2011

Bharat Petroleum

Parameters 2008-2009 2009-2010 2010-2011

Total Liabilities* 24239.16 26692.08 25185.46

Shareholders Equity* 14212.67 15082.51 16348.31


0.630377: 0.369623

0.638955: 0.361045

0.606385: 0.393615

Hindustan Petroleum

Parameters 2008-2009 2009-2010 2010-2011




0.683482: 0.316518

0.667239: 0.332761

0.700905: 0.299095


Parameters 2008-2009 2009-2010 2010-2011




0.509922: 0.490078

0.485335: 0.514665

0.501137: 0.498863

! 43!

WACC Pre-Tax WACC

Table : Pre-tax WACC for BP for 2009, 2010 and 2011

Bharat Petroleum Source of Capital Cost of Capital Weights Weighted cost Debt 0.149654 0.630377 0.0943384 Equity 0.040365 0.369623 0.0149198 WACC 0.109258

2009

10.93% approx Source of Capital Cost of Capital Weights Weighted cost Debt 0.046404 0.638955 0.0296501 Equity -0.00815 0.361045 -0.0029425 WACC 0.0267076

2010

2.67% approx Source of Capital Cost of Capital Weights Weighted cost Debt 0.046712 0.606385 0.028325 Equity 0.045633 0.393615 0.017962 WACC 0.046287

2011

4.63% approx

Table : Pre-tax WACC for HP for 2009, 2010 and 2011

Hindustan Petroleum Source of Capital Cost of Capital Weights Weighted cost Debt 0.120396 0.683482 0.082288 Equity -0.08324 0.316518 -0.026347 WACC 0.055941

2009


2010


2011

8.6% approx

! 44!

Table : Pre-tax WACC for IOC for 2009, 2010 and 2011

Indian Oil Corporation Source of Capital Cost of Capital Weights Weighted cost Debt 0.036458 0.509922 0.018591 Equity 0.04883535 0.490078 0.023933 WACC 0.042524

2009


2010


2011

5.26% approx

Post-Tax WACC

Table : Post-tax WACC for BP for 2009, 2010 and 2011

Bharat Petroleum Source of Capital Cost of Capital Weights Weighted cost Debt (1-Tax Rate) 0.149654(1-0.30)=

0.1047578 0.630377 0.0660369

Equity 0.040365 0.369623 0.0149198 WACC 0.0809567

2009

8.096% approx Source of Capital Cost of Capital Weights Weighted cost Debt (1-Tax Rate) 0.046404 (1-0.30)=

0.0324828 0.638955 0.020755047

Equity -0.00815 0.361045 -0.0029425 WACC 0.017812547

2010


0.0326984 0.606385 0.019827819

Equity 0.045633 0.393615 0.017962 WACC 0.037789819

2011

3.779% approx

! 45!

Table : Post-tax WACC for HP for 2009, 2010 and 2011

Hindustan Petroleum Source of Capital Cost of Capital Weights Weighted cost Debt (1-Tax Rate) 0.120396 (1-0.30)=

00842772 0.683482 0.057601949

Equity -0.08324 0.316518 -0.026347 WACC 0.031254949

2009


0.0262927 0.667239 0.017543515

Equity 0.29665 0.332761 0.0987136 WACC 0.116257115

2010


0.0712628 0.700905 0.049948453

Equity 0.0490064 0.299095 0.0146576 WACC 0.064606053

2011

6.46% approx

Table : Post-tax WACC for IOC for 2009, 2010 and 2011

Indian Oil Corporation Source of Capital Cost of Capital Weights Weighted cost Debt (1-Tax Rate) 0.036458 (1-0.30)=

0.0255206 0.509922 0.01301351

Equity 0.04883535 0.490078 0.009109461 WACC 0.022123

2009


0.0262927 0.485335 0.012760768

Equity 0.01233688 0.514665 0.0063494 WACC 0.019110168

2010


0.0421687 0.501137 0.021132296

Equity 0.0450808 0.498863 0.0224891 WACC 0.043621396

2011

4.36% approx

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