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8/7/2019 finance latest

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CASH CONVERSION CYCLE OF IOCL:

Table9: Cash Conversion Cycle

ANALYSIS:

Cash conversion cycle is likely to be negative as well as positive.

A positive result indicates the number of days a company must borrow or tie up capital whileawaiting payment from a customer. A negative result indicates the number of days a company hasreceived cash from sales before it must pay its suppliers.

Of course the ultimate goal is having low CCC, if possible negative. Because the shorter the CCC,the more efficient the company in managing its cash flow.

It can be seen that the Cash Conversion Cycle for Indian Oil is on the higher side with an average of

23.76 days. It means that IOCL have to borrow for 23.76 days to finance its working capitalrequirement.

The main reason for this high CCC is a very high Inventory Holding Period. This is because IOCLpurchases Crude from the International Market and so have to maintain a high Inventory to meetthe unforeseen requirements.

The Days of Sales Outstanding is decreasing yearly which is a positive trend and is Lowering theCash Conversion Cycle

But the Days of Payable Outstanding is also decreasing yearly. This is mainly due to the Circular bythe Goverment of India which has restricted the payment period to be 30 days from the receipt of the delivery of the crude.

The Year 2008-09 shows the lowest CCC of 16 days. The main reason behind this is the lowestInventory Holding Period of 34.95 days.

IOCL should try to get more credit period from its Creditors and lower the Inventory Holding tolower this CCC even negative to better it Cash Flow position.

Particulars 2005-06 2006-07 2007-08 2008-09 Average

Days of Sales Outstanding 13.98 11.36 11.09 8.25 11.17

Days of Sales in Inventory 50.67 41.65 50.33 34.95 44.40

Days of Payable Outstanding 37.46 31.07 31.50 27.20 31.81

Cash Conversion Cycle 27.19 21.93 29.92 16.00 23.76


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Sales in DGS&D Sector for 2008-09 & 2009-10 in the Northern region:

Fig.19 : Sales in DGS&D Sector for 2008-09 & 2009-10

Month 2008-09 2009-10 % Increase(Decrease)

April 123.84 176.48 42.51

May 143.04 199.98 39.81

June 149.02 192.26 29.02

July 143.08 243.59 70.25

August 147.71 222.28 50.48

September 166.80 242.80 45.56

October 138.15 219.22 58.68

November 178.70 202.12 13.11 December 193.01 214.90 11.34

January 167.24 166.47 -0.46

February 183.37 187.41 2.20

March 243.85 199.04 -18.38

Total 1977.81 2466.55 24.71


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ANALYSIS:

It can be seen from the above table that the Sales in the DGS&D Sector for Northern region hasseen a constant growth in 2009-10 over the previous year. For every month, except January andMarch, the sales has increased from 70 to 2%. The overall growth of sales for the year is alsoshowing positive trend and has a stable growth of 24.71%.

This is mainly due to the excess demand of Lubes and MS/HSD in the Railways and AirForce.

The drop in Sales in the month of March is due to the stricter credit policy due to the year endingand more focus on the Credit Collection.

Sales Figure of DGS&D Customers on Month-wise basis in 2009-10(ER):

Total 186.69 1,324.70 277.98 444.75 232.43

Table 11: Sales Figure of DGS&D Customers on Month-wise basis in 2009-10(ER)

Customers DGS&D Rly Army Air Force DGBR

Month

April 8.74 100.48 17.75 42.36 7.42

May 15.58 105.40 21.92 43.61 13.22

June 16.03 109.85 24.71 34.21 7.46

July 17.21 132.86 24.55 43.60 25.36

August 14.47 115.72 24.82 40.02 27.79

September 23.94 118.34 28.61 50.92 20.46

October 15.85 117.68 24.40 40.29 21.00

November 18.64 91.54 23.33 45.94 22.67

December 19.88 114.28 25.15 35.06 20.53

January 18.86 92.22 16.73 22.69 15.97

February 11.81 100.61 20.32 23.70 30.95

March 5.68 125.72 25.69 22.35 19.60


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The Average Collection Period for DGS&D can be calculated by the following formula:

Average Collection Period= Total Outstanding / Daily Sales

Where, Daily Sales= Current Month Sales / Number of Working Days in a Month

Considering 26 days a month the Average Collection Period for Railways for month of March is

Daily Sales=125.72/26 = 4.835

Average Collection Period = 30.51/4.835=6.31 Days

Similarly, the ACP is calculated for the other customers shown in the following table.

Customers DGS&D Rly Army

Month

April 31.37 14.57 20.51 13.55 132.49 20.68

May 24.88 10.83 22.33 37.94 91.41 20.31

June 33.66 12.77 23.18 21.49 88.42 20.34

July 27.68 13.68 22.08 16.66 39.50 18.74

August 40.82 16.23 29.83 19.55 20.22 20.47

September 32.58 10.16 18.40 13.66 25.50 15.38

October 21.15 16.13 22.14 14.89 28.81 22.63

November 42.21 14.03 23.47 15.21 34.42 20.28

December 33.58 11.87 23.33 16.27 31.79 17.84

January 38.04 16.05 26.08 27.57 50.59 24.44

February 40.85 13.18 22.33 27.93 37.08 21.73

March 46.87 6.31 10.92 22.96 39.13 13.16

Total


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Table 14 : IOCL`s Average Collection Period of DGS&D (ER) for 2009-10


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Fig. 21: Comparison of IOCL`s ACP of DGS&D (ER) with Overall ACP for 2009-10

ANALYSIS:

From Table 14 , we can see that the Average Collection Period for the DGS&D customer is 12.75days, i.e. 13 days approximately which is much higher than the Overall average.

Fig. 21 shows the deviation of the ACP of different DGS&D customers from the Overall Avearge of 7.53. This shows that there is a huge deviation for DGBR and Airforce and other DGS&D. This haseffected the liquidity of the Company and created a cash flow problem.

For most of the DGS&D customers the negotiated credit period varies from 15, 30 to 60 days . sothe ACP is high in their cases. From that perspective it can be said that the Customers are followingthe Negotiated period of Credit.


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Average Collection Period of Non DGS&D Customers in 2009-10:

Fig. 22 : Comparison of AACP of Non DGS&D Customers with Overall in 2009-10

Customer name Period(Days)

Fertilizers 4.58

Steel Plant 4.22

Power House 5.07

Aviation 5.13

Shipping Co. 6.38

LPG 5.03

Export 5.20

Navy 3.88

RO/ Agency 5.37 Others 3.08


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The Fig. 22 shows the Average Collection Period for IOCL and compares this ACP with the ACP of the different Non DGS&G Customers.

The ACP for the Company is 7.81 in 2009-10 but the ACP for all of the Non DGS&D Customers ismuch less than that. The Shipping Co. has the ACP of 6.38 which is highest among the Non DGS&DCustomers.

So it can be said that the Northern region has maintained a strong regulation of the Oustanding forthe Non DGS&D Customers.


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Comparative Analysis of IOCL with BPCL & HPCL

DEBTORS TURNOVER RATIO AND DEBTOR DAYS (COLLECTION PERIOD)

It is a test of the liquidity of the debtors of a firm. The debtors turnover shows relationship betweencredit sales and debtors of a firm.

Table 17: Comparison DTR and ACP of IOCL with HPCL and BPCL BPCL

Company Ratios 2005-06 2006-07 2007-08 2008-09 Average

Debtor Turnover Ratio 27.35 32.78 36.63 48.46 36.31 IOCL Average Collection

Period(Days) 13.35 11.14 9.96 7.53 10.50

Debtor Turnover Ratio 53.18 57.96 60.70 51.96 55.95

HPCL Average Collection 6.86 6.30 6.01 7.03 6.55 Period(Days)

Debtor Turnover Ratio 64.71 70.75 75.65 101.98 78.27 BPCL Average Collection

Period(Days) 5.64 5.16 4.83 3.58 4.80


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ANALYSIS:

Fig. 23: Comparison DTR and ACP of IOCL with HPCL and BPCL


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The Average Collection Period has continuously decreased for IOCL and BPCL over the period of 2005-06 to 2008-09 whereas it has incresed for HPCL in the year 2008-09 after a constant decreaseover the previous 3 years.

Moreover the decrease in the Collection Period for IOCL is more acute than its counterpart BPCL.For IOCL the ACP has decreased almost 43% which shows that IOCL has a better collection procedureand credit policies than its competitors.

The situation is a little alarming for HPCL because the ACP has increased 17% in the year 2008-09after a slow decline over the previous.

However the average of ACP for IOCL is maximum among the chosen 3 comapanies putting BPCL atrank1 followed by HPCL and IOCL. But the Average is definite going to decrease over the years withthe present collection procedure which IOCL is following.

Table18 : Debtors as a percentage of Gross Sales for IOCL, HPCL and BPCL

Average Sales of the 3 Companies from 2006 to 2009:(Rs in Crores)

IOCL 2,35,373.62

HPCL 96,439.40

BPCL 1,14,919.51

The Debtors as a percentage of Gross Sales is seen in the above table which shows that IOCL isdefinitely on the higher side in comparison to HPCL and BPCL. But the sales of IOCL is almost doublethan the that of both the companies. So considering the size of the business it is obvious that theinventory and the Debtors will be on the higher side. But the positive side of it is that it is constantlycoming down. Even in the year 2007-08 which was a year a great turmoil they maintained a lowdebtor percentage of 2.73.

Company 2005-06 2006-07 2007-08 2008-09 Average

IOCL 3.66 3.05 2.73 2.06 2.88

HPCL 1.88 1.73 1.65 1.92 1.79

BPCL 1.55 1.41 1.32 0.98


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CASH CONVERSION CYCLE:

Table 20: CCC of HPCL

Table 21: CCC of BPCL

ANALYSIS:

Fig. 25: Comparison of CCC for IOCL, HPCL, BPCL












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PROFITABILITY RATIO:

Table 22: Profitability Ratios of IOCL, HPCL and BPCL

ANALYSIS:

Fig. 26: Area graph showing Profitability Ratios of IOCL, HPCL and BPCL

Company Ratios 2005-06 2006-07 2007-08 2008-09 Average

IOCL Gross Profit Ratio 4.47 5.00 4.51 1.50 3.87

Return on Capital 16.89 25.78 24.53 9.84 19.26Employeed Return On Fixed Assets

11.26 13.69 12.32 4.78 10.51

HPCL Gross Profit Ratio 0.42 2.35 1.17 0.65 1.15

Return on Capital Employeed 3.26 20.49 10.50 6.64 10.22

Return On Fixed Assets 5.53 17.81 9.51 4.93 9.45

BPCL Gross Profit Ratio 1.82 4.27 3.92 3.14 3.29

Return on Capital Employeed 4.45 25.79 22.24 8.28 15.19

Return On Fixed Assets 2.64 15.27 12.41 5.26 8.89


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Fig.27: Line Graph showing Return on Capital Employedand Return on Fixed Assets

From the above graph we can see that after the year 2006-07 which showed a huge rise in theGross Profit for all the companies, there has been a downward trend for the profit of all thecompanies. For IOCL it can be said that there had been a huge fall in the profitability and hence theGross Profit Ratio. This is mainly due to a huge rise in the Manufacturing, Administration, Selling and

Other Expenses. This expense shot up to Rs. 160352.58 Crores in 2008-09 from Rs. 115163.07 Croresin 2007-08. The Raw Material consumption increased in this year which was due to the increase inthe purchase by 24.59% which decreased the Gross Profit of the Company.

The Return on Capital Employed is on the very higher side for all the 3 Companies. This is becauseall these companies being PSU s a very small portion of the Capital is through Equity Shares.


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The Return on Fixed Assets has been on a comparatively higher position for IOCL than HPCL &BPCL. The main difference in the Fixed Assets of the other two Companies is with IOCL is in the Plant& Machinery. The Plant & Machinery for IOCL is almost 3 times that of the other 2 Companies. This isdue to the huge Refineries and Bottling Plants which IOCL pocess.

So in conclusion it can be said that IOCL has maintained the highest average of Gross Profit Ratioamong the 3 Companies. Though there was a sharp decrease in the Profitabilty in the Year 2008-09the situation has completely changed in 2009-10 where the company has registered a gross profit of 10000 Crores. So in terms of profitability also IOCL is in a better situation than its PSU Competitors.

Recomendations:

1. Strict collection procedure should be implemented for the Beyond Credit outstanding Customersfor IOCL. In severe cases Debt Collection Agencies can be implemented to collect the debts andreduce the Bad Debts.

2. IOCL restrict the credit period to the consumers specially the DGS&D Customers so that the tax

proceeds and the consequent equivalents interest amount can be enjoyed for a longer policy

3. Just in Time Inventory mechanism should be followed by IOCL to reduced the Inventory HoldingPeriod and there-by the CCC of the Company can be decreased mitigating the problem of cash flow.

4. IOCL should try to get a higher Credit period from its Creditors to infuse more liquidity. This canwill also solve the Cash flow problems and can allow IOCL to give a better Credit Period for itsDebtors to retain a competitive edge in this Highly competitive market with Private players likeReliance and Essar Oil entering the scenerio.

5. For better receivable Management, IOCL has to take some Steps:

a. Prices and Discounts should be updated in SAP regularly,so that correct challans are generatedfrom time to time.

b. There should be reduction in lead time between Sales Data and Actual Data of dispatch fromlocation.

c. All the customers should use the RTGS or Core-to-Core fecility for better regulation

6. IOCL buys product at International Prices and it is forced to sell the products to ratailers andcustomers at Goverment regulated prices, which is sometimes less than the purchase prices. All thisleads to huge loss to IOCL.Therefore IOCL has to take some policies:

a. Government should consider the better Pricing Policies to prevent losses.

b. To allow IOCL to control the prices of the Premium Brands. Rates of commercial products likeNaphtha and Bitumen should be regulated correctly.

c. By introduction of differential rate to different income groups in the society for the same product.Eg. High rate of LPG cylinders to high income groups and subsidized rate to low income groups.


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Conclusion :

The Debtors of IOCL are more or less well managed because though the Sales is increasing everyyear the Sundry Debtors are decreasing. So is the Average Collection Period which is also showing adownward trend every year.

But from the Schedules of Sundry Debtors it can be seen that Unsecured Debts are on the Higherside in comparison to the Secured loans and almost 67% of the of the Total Debt per year isunsecured. Another aspect is that almost 96% of this Unsecured Loans are from the OtherCompanies which are not Subsidiaries of IOCL.

The debts from the Other Companies are almost 78% of the total Debt which should be reduced tomeet the Cash Flow of the Company.

The main problem of the Current Assets of IOCL is the Inventory Control which shows a hugefluctuation every year from -16% to 35.6%. So a better Inventory Control Procedure should be takenup by the company to regulate its Working Capital.

The Cash Conversion Cycle is on the higher side for IOCL whose basic cause in the InventoryHolding Period only.

The debtors in the Northern region have a higher Average Collection Period than the Overall forthe Company. If this ACP can be reduced then the Overall Collection period can also be reducedwhich will also help in reducing the CCC of the Company.

In comparison to the competitors like HPCL(6.55 days) and BPCL (4.80 days), IOCL gas a muchhigher Average Collection Period of 10.5 days which can be brought down if the Credit period in theDGS&D in decreased as the ACP of Non DGS&D is well below the Overall Company average.


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Limitations:

1. Time is definitely the main Constraint. Time was not sufficient enough to assess all processes andpolicies of an organization of the stature of IOCL.

2. Inadequecy of required data is another constraint. In such situations data is taken with certainassumptions.

3. Even if the actual data can be gathered, it is often against the company policy to disclose suchdata in the project report.

4. 2009-10 Annual Report was not published during the preparation of the report and so it isneglcted in many of the analysis.

References:

Books:

Khan M.Y. and Jain P.K. (2007), Financial Management , The McGraw-Hill Companies

Pandey I.M.(2008), Financial Management

Weblinks:

http://www.iocl.com

http://www.hpcl.com

http://www.bpcl.com

http://myiris.com/shares/research/motilal/INDOILCO_20100129.pdf

http://www.dart-creations.com/article-tree/dbt/Debt_Collections_Law.html

http://www.articlesbase.com/finance-articles/debt-collection-techniques-420145.html

http://www.feefunding.com.au

http://www.sooperarticles.com/business-articles/things-do-before-selecting-debt-consolidationcompany-60339.html

http://www.magfinancial.com/account-receivable-management.cfm

http://www.indiastudychannel.com/projects/1583-working-capital-management.aspx

http://www.ferret.com.au/c/Business-Diagnostics-and-Solutions/Debtor-Control-n667421

http://www.business.qld.gov.au/dsdweb/v4/apps/web/content.cfm?id=7415


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