Antony's Working Cap.mgmt CPCL

Working Capital Management is concerned with the problems that arise in

attempting to manage the current Assets, current liabilities and the inter-relationship that

exists between them. The aim of working capital management is to manage the concerns

current assets and current liabilities in such a way that an adequate working capital is

maintained. An adequate level of working capital provides a business with operational

flexibility. Emerson has very rightly observed that, “business with an adequate level of

working capital has more option available to it, and can make its own choice as to when

working capital will be used. On the other hand, if a firm is short of working capital, it

may be forced to limit business operations, extension of credit to customers and the

amount that it invests in inventory. This will adversely affect production as well as sales

which in turn will affect probability of a concern.”

Meaning and definition

There is no universally accepted definition of Working Capital, but the one most

widely acceptable is the observation that ‘Working Capital’ represents the excess of

current assets over current liabilities.

Although the term ‘Working Capital’ has been depreciated by the Institute of

Chartered Accountants for use in balance sheets and has preferred the term ‘current assets

less liabilities’ nevertheless, for management purposes the former is useful phrase to

summarize the factor, which is effective lifeblood of much business.

Importance

Study of working capital is of major importance to internal and external analysis

because of its close relationship to current day-to-day business. Inadequacy or

mismanagement of working capital is the leading cause of business failure. Choyal is of

the view that, “The working capital of a firm is the lifeblood which flows through the

veins and arteries of the structure, Indeed, it engages every part of the structure, gives

courage and moral strength to brain (management) and muscles (Personnel), digests to

the best degree the raw material used by its constant and regular flow and returns to the

heart (Cash flow) for another journey and so when working capital is lacking or slows

down, the financial bodies have value just as much as junk.”

It is reflected by the fact that Financial Manager spends a great deal of time in

managing current assets and current liabilities. Arranging short term financing,

negotiating favorable credit terms, controlling, administering accounts receivables and

monitoring the investment in inventories consume a great deal of their time.

In the words of I.M.Pandey: “The net Working Capital indicates

The liquidity position of the firm.

Suggests the extent to which working capital needs may be financed by

permanent sources of funds.”

INDUSTRY PROFILE

At present, there are seventeen refineries operating in the country, fifteen in

public sector unit, and one in private sector. Out of the public sector refineries seven

refineries are owned by Indian Oil Corporation, two by Hindustan Petroleum Corporation

Limited, two by Chennai Petroleum Corporation Limited and one each by Bharat

Petroleum Corporation Limited, Kochi Refineries Limited, Bongaigaon Refineries and

Petrochemical Limited and Numaligarh Refineries Limited. The one Refinery in joint

sector Mangalore Refineries and Petrochemicals Limited and one by private sector

Reliance Petroleum Limited.

The installed capacity of the Indian refineries is about 117 million tonnes per

annum from which the product availability may be about 108 million tonnes. Taking into

account the product availability from the fractionators of about 4.5 million tonnes, the

total products availability would be about 113 million tonnes at 100% capacity

utilization. While this is on overall basis, product like LPG is in deficit and other

products are in surplus, which would necessitate operating refining capacity to match

demand or export products depending on refinery economics and logistics.

During the year, as a part of reconstructing of downstream oil sector, KRL and

NRL have become the subsidiaries of BPCL. Government of India has sold its entire

shareholding in BRPL and CPCL to IOCL. Thus, BRPL and CPCL have become

subsidiaries of IOCL.

By this arrangement, the refineries have to face the challenge of deregulation, for

which the Government of India has already taken measures like phased dismantling of

Administered Pricing mechanism for refinery sector, particularly marketing deregulation

etc. As per the current program contemplated by the government, the marketing of

controlled products has been de regulated from 1.4.2002.

INDUSTRY STRUCTURE

As part of the deregulation of the oil sector as notified by the Government of

India in 1997, the oil sector was deregulated in phases. The refining sector was

deregulated in the first phase from 1.4.1998. The oil sector has since been totally

deregulated from 1.4.2002. The year 2002-03 was the first year of operation of the oil

sector in the deregulated scenario and the prices to the customers were fixed by and large

on import parity (IPP) basis.

In the liberalized business scenario, CPCL has completely switched over to

Market Driven Pricing Mechanism (MDPM) from APM, ie. Administered Pricing

Mechanism.

The table below gives the refining capacities of the oil refineries in India:

Name of the company Capacity

Million MTs(MMTPA)

Assam Oil company, Digboi, Assam 0.50

IOC, Gauhati, Assam 0.85

IOC, Barauni, Bihar 3.30

IOC, Haldia, West Bengal 2.75

IOC, Koyali, Gujarat 9.50

IOC, Mathura, UP 7.50

BPCL, Mumbai 6.00

HPCL, Vizag 4.50

HPCL, Mumbai 7.00

Kochi Refineries Ltd, kerala 7.50

CPCL, Chennai 9.50

CPCL, CBR 1.00

Karnal Refinery, Punjab 6.00

Mangalore Refineries & Petrochemicals Ltd 3.00

Reliance Petroleum Corporation Ltd 27.00

Bongaigoan Refineries & Petrochemicals Ltd 2.35

COMPANY PROFILE

Chennai Petroleum Corporation Limited (CPCL), formerly, Madras Refinery

Limited (MRL), Chennai was incorporated on Dec-30, 1965 with an authorized capital of

Rs. 9 Crore under a formation agreement amongst the government if India, National

Iranian Oil company of Iran and AMOCO India Limited Inc., of USA. The initial paid up

capital was Rs 8.50 Crore, of which the government of India held 74% and the other two

partners held 13% each, AMOCO relinquished their share holdings in 1985 – 86 in favor

of government of India, and the entire government of India’s share holdings of 51.81 %

was disinvested in favor of Indian Oil Corporation on 29/03/2001 and hence CPCL in

now a subsidiary of IOCL

Chennai Petroleum Corporation Limited is one of the three refineries producing

lube stocks. And initial crude refining capacity of 2.5 MMTPA was put up at a cost of Rs

43 Crore. De-bottlenecking then increased the capacity to 2.8 MMTPA in 1972 –. A

20000 TPA wax plant was commissioned in March 1984. Expansion of refining capacity

to 5.6 MMTPA was completed in 1984 – 85 at a cost of Rs 170 Crore. The refining

capacity was further increased to 6.5 MMTPA by optimization in 1993-94 at a cost of Rs

38 Crore.

The 0.5 MMTPA Cauvery basin refinery of CPCL, at Panangudi village near

Nagapatnam, TamilNadu went into the commercial production in Nov 1993. The refinery

processes indigenous crude available from the near by ONGC fields.

As crude supplies from ONGC fields near by are insufficient to meet the

throughput levels of CBR unit, crude is also transported from Manali unit to CBR unit by

road to maximum capacity utilization at CBR. The marketing products from this refinery

is being done through M/S IBP CO LIMITED.

The lube expansion project to increase the lube production from 1, 40,000 TPA to

2, 70,000 TPA at a cost of RS 238.71 Crore was commissioned in 1994. The additional

power generation project involving installation of a Boiler and Turbine of 20 MW

capacity at a cost of Rs 44 Crore was commissioned in 1994.

The project to install wax hydro-finishing unit in place of existing wax de-oiling

unit plant capacity from 20000 TPA to 30000 TPA at a cost Rs 41.32 Crore were

commissioned in 1997. The project diesel hydro de-Sulphurisation to reduce the sulphur

content in diesel from 1% to 0.25 % by weight has been commissioned during the year

1999-2000.

In order to meet the future specifications of 0.5% sulphur in Diesel and to

medicate the particulate emissions, a second reactor in Diesel hydro de-sulphuriser unit

was installed at a cost of Rs 20 Core in the existing Diesel Hydro de-sulphurisation unit,

to produce a eco-friendly fuels. This unit was commissioned in Sep 2001. With a view to

ensure reclamation of sewage generator from various refineries buildings and canteen

waste waters, project to facilitate their collection, treatment and reuse was implemented

in May 2001 at a cost of Rs 2.13 Crore.

As per the directive of OISD, the company has installed and commissioned during

Aug 2001, manual call point, fire alarm system project to augment the safety

requirements of Manali Refinery and the tank form areas at a cost Rs 1.16 Crore. This

project would enable quicker communications and response actions during emergencies.

In additions to above, the projects were completed during the year 2001-2002: The

facilities to de-bottleneck the existing capacity from 0.5MMTPA to 1.0 MMTPA at

Cauvery basin refinery were installed. Two numbers of new crude takes and seven

numbers of new product tanks were commissioned. One cell of new cooling tower was

also commissioned. New RO unit was installed for additional requirement of de-materials

water for boilers.

The company also commissioned the zero discharge projects at a cost RS 4.6

Crores. This project is for the purpose of converting refinery treated effluents into usable

water for various process applications and the treated effluent water would end with

“Zero discharge” from the Manali refinery.

Proposed Projects

Power Project

The company had signed an “Expression of Intention” with Neyveli Lignite

Corporation (NLC), a premier PSU in the power sector, for the joint development of 492

MW power project. Discussions are on with NLC regarding formations of a joint venture

company, carrying on project development activities and fuel supply issues.

Crude unloading facilities for Manali Refinery

The company proposes to have new facilities for crude unloading for the Manali

refinery, since the life of the existing crude oil pipeline from Chennai port to the Manali

Refinery may be outlived by 2006. The transportation of crude oil in very large crude

carriers (VLCCs) has also been found to e cost effective as per the study do new by

Indian oil tanking limited. The company will benefit by way of lower crude

transportation costs on completion of this is project.

Desalination Project

The company is proposing to install a desalination plant to supplement the current

raw water requirement at Manali complex and the future requirements of 3MMTPA

expansion project, near Chennai on built own and operates (BOO) Basis.

Joint Venture Project

Indian additives Limited (IAL)

The performance of Indian additives Ltd, the joint venture of the company with

Chevron Oronite Company (LLC) (Successor of Chevron Chemical Corporation) has

shown improvements over the previous year and it posted cash profit of Rs 4.89 Crore.

Indegeniousing and outsourcing has been taken up in the big way to improve the

competitiveness of the unit.

National Aromatics and Petrochemical Corporation Ltd (AROCHEM)

The government of India has approved the memorandum of settlement (MOS) to

e entered in to between the company and SPIC; SPIC had indicated that they are in the

process of finalizing the financial tie-up with banks and financial institutions.

Research and Development (R & D)

The company recognizes the need for continuous up gradation of technologies

and absorption of cutting edge technology to attain leadership position under the

liberalized policies of the government. Accordingly, all the facts of the operations if the

company receives the focused attention of the management to keep pace with

technological developments in the rest of the world.

The company has taken all the required steps to further accelerate and intensify its

R&D activities to augment its growth opportunities.

The company’s R&D center has been continuously providing technical support

service to the refinery in evaluation of crude’s, catalyst and feedstock. R&D pilot plants

and analytical facilities provide valuable data for solving problems related to the Refinery

process units optimizing the operating parameters.

Information Technology

The company firmly believes that Information Technology is integral to all

aspects of the company’s operations and continuous assimilations of emerging

technologies, web enabled business solutions and constant automation is becoming

inevitable commercial compulsions to sustain growth and profitability.

Towards achieving this end the company engaged M/S CMC Ltd and M/S

RAMCO SYSTEMS LTD for implementing the state-of-art enterprise resource planning

(ERP) based business information systems encompassing the functional areas of finance

and accounts, material managing, human resources management. Sales and distribution,

stock and oil movement, maintenance and project management, the above functional

areas were automated, data availability, data integrity and information flow between

various modules have been achieved. The system facilitates effective operational

monitoring and decision-making, on comprehensive operational report and online

information availability.

The company has taken a number of steps for improving network performance

over wide area network (WAN) through installation of necessary hardware and software.

Import Substitution and Development of Small Scale Industries .

The company continued to give thrust to the development of small-scale

industries. The value of import substitution amounted to Rs. 0.69 crore during the year.

The company effected purchases to the tune of Rs.1.60 crore during the year from scale

industries.

Safety

The company recognizes safety management as an important tool for preventing

accidents involving people and property. The company is strongly committed to achieve

production without compromising on safety, which is clearly reflected in the safety

policy of the company aims at zero accident and freedom from occupational illness at the

work place. The safety practices adopted by the company received many accolades from

various quarter .the most important ant prestigious among them was the award of the

OHSAS 18001 certification for occupational health safety management systems.

The company embarked up on various measures to ensure the safety of its employees

and important among them are:

The best practices team formed for safety in refinery operations continued its

study developed best practices and safety procedures, which are in line with

world-class refineries.

Foreign experts carried out the independent safety studies. Each with specific

focus, this year.

Recommendations for improvement of refinery safety system given by M\s

Solomon associates inc. USA as a part of the Excellency in competitive

performance programme were implemented.

Safety study carried out M\s Allianz Singapore as part of reinsurance assessment.

The five-year safety audit. British safety council carried out U.K out to audit the

safety management system, occupational health & hygiene practices. The audit

score qualified us for a 3-star award. Efforts being taken to bridge the gaps with a

view to achieve 5-star award in future.

M\s CLRI, Chennai, carried out a review of Hazop and risk assessment of the

entire refinery complex. The study was completed. The risk potential assessed and

found to be within controllable limits.

Two off-site the statutory authorities to check the effectiveness of the off-site

emergency plan. Your company conducted mock drills in Manali – Ennore area

participated in these mock drills.

The company sponsored a workshop on “SAFETY IN REFINERIES” jointly with

oil industry safety directorate at Chennai in which safety professionals from other oil

companies participated. Papers on safety were presented, and case studies wee taken up

for discussion. Various safety committees regularly meet and discuss safety related issues

to enhance safety in the refinery.

Share Holding Pattern

The Company’s Authorised Capital was Rs.400 crores and the paid-up share

capital was Rs.149.00 crores as on 31.3.2005.

The Shareholding pattern as on March 2006 was:

(%)

Indian Oil Corporation Ltd. 51.88

Naftiran Intertrade Company Ltd. 15.40

Financial Institutions/Mutual Funds/Banks/ Insurance Companies 15.16

Foreign Institutional Investors 9.70

Corporate Bodies/General Public/Non-Resident Indians etc 7.86

Total 100.00

DIAGRAM

NEED FOR THE STUDY

The study is needed to analyze the working capital management of the company.

The study is being carried out, as it is necessary to identify the over utilization or

under utilization of assets to the turnover of the company.

It is also necessary to identify the idle assets and non-utilization of funds.

It is necessary to identify the ‘liquidity dimension of Working Capital’ and the

‘Profitability’.

OBJECTIVE OF THE STUDY

To study the working capital management of Chennai Petroleum Corporation

Limited by analyzing the profitability, solvency and liquidity position of the

company.

To critically analyze the working capital requirement of Chennai Petroleum

Corporation Limited.

To evaluate the operating efficiency of Chennai Petroleum Corporation Limited.

To measure utilization of various assets with the turnover of the company.

To project the future sales, profit and working capital requirements of Chennai

Petroleum Corporation Limited.

SCOPE OF THE STUDY

The study finds out the operational efficiency of the organization and suggests the

proper utilization and allocation of cash resources, to improve the efficiency of

the organization.

The working capital of the organization will be further revealed through the

adoption of various techniques available for analysis.

These techniques reveal the measures that can adopt to improve the existing trend

LIMITATION OF THE SYUDY

The study will be carried out mainly based on the information gathered from the

Secondary Data mainly Balance Sheet and Profit and Loss Account.

The study will be limited to observations of the past. The observation made will

be related to laws operated in the past.

Sufficient data will not be made available to study the current operations being

carried out in the company.

The company being under the control of Indian Oil Corporation and in the direct

administration of the government, it is not in a position to enjoy the full control of

ownership. It is also not in a position to fix prices for major products produced by

it.

The study will not be carried out from the point of national policies, economic

crisis and emergence of war at the countries from which the crude oil is being

imported.

In the modern business environment, finance plays a role in every organization.

Financial Management is an integral part of the overall management and is mainly

concerned with fund raising operations. At present most of the industrial undertakings are

faced with the problem of effective utilization of resources.

Working Capital is the major importance to internal and external analysis because

of its close relationship with the day-to-day operations of a business. Working Capital is

the portion of asset of a business, which are used in or related to current operations, and

represented at any one time by the operating cycle of such items as against receivables

and cash.

The present study is an effort to analyze the working capital management of

Chennai Petroleum Corporation Limited over a period of time and to provide adequate

support for the smooth functioning of the normal business operations of the company.

Hence, the analysis of working capital helps the management to have knowledge

of current asset required to business concern to have continuous production. It also helps

the finance manager to know about the type of product, market share, attitude of the

management, cost of funds, inflation the demand and the stages of business cycle.

Statement of the Problem

The present study seeks to collect in depth information of the working capital

management of Chennai Petroleum Corporation Limited with special emphasis on an

examination of the management performance in regard to financial management. One

among the reason the company could perform well is the efficient management of the

company’s working capital, which automatically includes inventory, account receivables

and cash i.e., the proper management of working capital has brought access to this

company. The present study undertakes to deal with the net concept of working capital

i.e., excess of current assets over current liabilities.

Research Methodology

The project study mainly focuses on the critical assessment of Working Capital

Management of Chennai Petroleum Corporation Limited and deals with the liquidity

dimension of working capital and the profitability.

Research Design

Research is an organized activity focused on specific objective with the support of

data collection involving tools for analysis deriving logically sound inferences.

Research Design is purely and simply the framework or plan for a study that

guides the collection and analysis of data. The function of researcher is to ensure that

requires the data collected or accurate and economically.

Primary Data

As a part of strengthening the study, personal contacts are made with the officials

and staff members of finance department in the form of discussions and collection of

reports.

Secondary Data

The Secondary Data are collected from Annual Reports, mainly Balance Sheet,

Income and Expenditure and other brouchers of the company.

Method of Collection

The data for the analysis are collected and gathered from the printed reports of

Chennai Petroleum Corporation Limited like annual reports, official files, records and

other available related material.

Period of Study

The period of study will be carried out from last five financial years i.e., from

2000 – 2005.

Tools and techniques for collection of data

Ratio analysis and interpretation

Statement of changes in working capital

Common size balance sheet analysis

Comparative balance sheet statement

Statistical Tools Implemented are

Z-Score analysis

Regression analysis

Ratio Analysis

Current Ratio:

Current Assets, Loans & Advances

Current Ratio =

Current Liabilities & Provisions

This ratio measures the solvency of the company in the short-term. Current assets

are those assets, which can be converted into cash within a year. Current liabilities and

provisions are those liabilities that are payable within a year. A current ratio of 2:1

indicates a highly solvent position.

Quick Ratio or Liquid Ratio:

Current Assets, Loans & Advances - Inventories

Quick Ratio =

Current Liabilities & Provisions – Bank Overdraft

Quick ratio is used as a measure of the company’s ability to meet its current

obligations. Since bank overdraft is secured by the inventories, the other current assets

must be sufficient to meet other current liabilities. A quick ratio of 1:1 indicates highly

solvent position. This ratio is also called the acid test ratio. This ratio serves as a

supplement to the current ratio in analyzing liquidity.

Comparative Balance Sheet Statements:

The comparative balance sheet analysis is the study of the trend of the same

items, group of items and computed items in two or more balance sheets of the same

business enterprise on different dates. The changes in periodic balance sheet items reflect

the conduct of a business. The changes can be observed by comparison of the balance

sheet at the beginning and at the end of a period and these changes can help in forming an

opinion about the progress of an enterprise.

Balance sheets as on two or more different dates are used for comparing the

assets, liabilities and the net worth of the company. Comparative balance sheet analysis is

useful for studying the trends of an undertaking.

Advantages

Comparative statements help the analyst to evaluate the performance of the

company.

Comparative statements can also be used to compare the performance of the firm

with the average performance of the industry between different years.

It helps in identification of the weaknesses of the firm and remedial measures can

be taken accordingly.

Common Size Balance Sheet Analysis:

A statement in which balance sheet items are expressed as the ratio of each asset

to total assets and the ratio of each liability is expressed as a ratio of total liabilities is

called common size balance sheet. The figures are shown as percentages of total assets,

total assets and total liabilities. The total assets are taken as 100 and different assets are

expressed as a percentage of the total. Similarly, various liabilities are taken as a part of

total liabilities.

The figures shown in financial statements viz., Balance Sheet are converted to

percentages so as to establish each element to the total figure of the statement and these

statements are called Common Size Statements. These statements are useful in analysis

of the performance of the company by analyzing each individual element to the total

figure of the statement. These statements will also assist in analyzing the performance

over years and also with the figures of the competitive firm in the industry for making

analysis of relative efficiency.

Operating Cycle Analysis:

A new concept, which is gaining more and more importance in recent years, is the

‘Operating Cycle Concept’ of Working Capital. The operating cycle refers to the average

time elapses between the acquisition of raw materials and the final cash realization.

Operating Cycle consists of four stages:

The raw materials and stores inventory stage.

The work-in-progress inventory stage.

The finished goods inventory stage.

The receivable stage.

Regression Analysis :

A fundamental and versatile research technique that seeks to explain an outcome

(dependent) variable in terms of multiple predictor (independent) variables. This analysis

reveals the nature and strength of the relationship between each predictor variable and the

outcome, independent of the influence from all other predictors. The term typically refers

to Ordinary Least Squares (OLS) regression, which models a linear relationship among

variables.

Z -Score Analysis:

The dozens of financial ratios seem to provide different answers to the same

simple question of “How will a company do”. So, everyone is on the lookout for financial

models that summaries one general aspect of overall company performance. An example

is the Z score, which reveals the efficiency of working capital management.

The original Z score was created by Edward I Altman at New York University in

the mid 1960’s and it has stood as the test of time. Out of a selection of 22 financial

ratios. Altmann found 5 that could be combined to discriminate between the bankrupt and

non-bankrupt companies in this study. The interesting thing about the Z score is that is

good analytical tool no matter what shape the company is in. Even if the company is very

healthy, if the Z score to fall sharply, warning bells should ring.

The study is needed to identify the current position of the company through Z-

Score Analysis.

Ratio Analysis and Interpretation

Current Ratio:

(Rs. In Lakhs)Year Current Assets Current Liabilities CA/CL2000-2001 172673.84 64712.16 2.672001-2002 157667.36 71938.55 2.202002-2003 211078.23 119000.23 1.772003-2004 203573.14 115980.27 1.752004-2005 361170.40 208989.37 1.73

Graphical representation of change of direction of current ratio

Interpretation

The ideal ratio between current assets and current liabilities is 2:1. This is insisted

because even if current assets are reduced to half i.e., 1, the creditors will be able to get

their dues in full. Here, the ratio is showing a decreasing trend, which may be due to rise

in production.

Quick Ratio:

(Rs. In Lakhs)Year Quick Assets Quick Liabilities QA/QL2000-2001 86710.09 64712.16 1.402001-2002 81962.52 71938.55 1.142002-2003 90770.42 119000.23 0.762003-2004 83259.81 115980.27 0.722004-2005 119554.60 208989.37 0.57

Graphical representation of change of direction of quick ratio

Interpretation

The ideal quick ratio is 1. Here, the analysis shown as decrease trend due to in-

creasing inventory level which has resulted in increase in current liabilities. When there is

no corresponding increase in liquidity of current asset, where as the current liabilities as

gone up. The quick ratio is tend to decrease since the company is in an oligopolystic mar-

ket, the company is in an position to liquidate its current asset and gain an recovery of

money within shortest possible time. The downward trend in the quick ratio therefore has

no significant and is not representational.

TURNOVER RATIOS:

Debtor’s Turnover Ratio

(Rs. In Lakhs)

Year Sales Average Re-ceivables

Sales/Avg. receiv-ables

2000-2001 698269.21 22954.92 30.422001-2002 617481.66 30501.04 20.242002-2003 807612.81 48906.84 16.512003-2004 869351.35 56759.48 15.322004-2005 1418835.85 70822.26 20.03

Graphical representation of change of direction of Debtors Turnover ratio

Debtor’s Collection Period

(Rs. In Days)

Year Days in a Year

Debtor’s Turnover Ra-tio

Year/DTR

2000-2001 365 30.42 12.002001-2002 365 20.24 18.032002-2003 365 16.51 22.112003-2004 365 15.32 23.832004-2005 365 20.03 18.22

Graphical representation of change of Debtors Collection Period.

Interpretation

The debtor’s turnover ratio shows a decreasing trend and the debtors collection

period is increasing. This implies that the collection of payments from debtors has been

delayed. In other words, the company has allowed extended credit period to its cus-

tomers.

Creditors Turnover Ratio

(Rs. In Lakhs)

Year Purchases Average Credi-tors

Purchases/Avg. Creditors

2000-2001 628630.94 53579.19 11.732001-2002 558658.42 55809.94 10.012002-2003 724122.91 77785.64 9.312003-2004 768150.85 96024.94 7.992004-2005 1275166.14 128634.42 9.91

Graphical representation of change of direction of Creditors Turnover ratio

Creditors Collection Period

(Rs. In Days)

Year Days in a Year

Creditors Turnover Ra-tio

Year/CTR

2000-2001 365 11.73 31.122001-2002 365 10.01 36.462002-2003 365 9.31 39.212003-2004 365 7.99 45.682004-2005 365 9.91 36.83

Graphical representation of change of Creditors Collection Period.

Interpretation

The Creditors turnover ratio shows a decreasing trend and the creditors collection

period is increasing. It is only an temporary phenomenon.

Working Capital Turnover Ratio

(Rs. In Lakhs)

Year Sales Net Working Capital

Sales/NWC

2000-2001 698269.21 107961.68 6.472001-2002 617481.66 85728.81 7.202002-2003 807612.81 92078.00 8.772003-2004 869351.35 87592.87 9.922004-2005 1418835.85 152181.03 9.32

Graphical representation of change of direction of Working Capital ratio

Interpretation

This analysis helps to measure effective utilization of Working Capital. Here, as

the sales grown the ratio has also gone up, but in the current year 2004-2005, the ratio

shows a decreasing trend, which means that the turnover has increased with a lesser

working capital as sign of efficient management of working capital.

Fixed Asset Turnover Ratio

(Rs. In Lakhs)

Year Sales Fixed Assets Sales/Fixed As-sets

2000-2001 698269.21 117060.36 5.972001-2002 617481.66 114201.89 5.412002-2003 807612.81 119827.06 6.742003-2004 869351.35 257073.25 3.382004-2005 1418835.85 331879.70 4.28

Graphical representation of change of direction of Fixed Asset Turnover ratio

Interpretation

In the year 2003-2004, due to water scarcity the company was shut down for more

than 45 days, which resulted in a poor turnover. That resulted in declining in ratio. In the

year 2004-05, the company completed 3 Million Met Return Per Annum (MMTPA) dur-

ing the course of the year, where as the asset position is taken in full.

Inventory Turnover Ratio

(Rs. In Lakhs)

Year Sales Average Inven-tory

Sales/AI

2000-2001 698269.21 32717.91 21.342001-2002 617481.66 31275.14 19.742002-2003 807612.81 41295.17 19.562003-2004 869351.35 53122.37 16.372004-2005 1418835.85 75967.86 18.68

Graphical representation of change of direction of Inventory Turnover ratio

Interpretation

This ratio indicates that the stock is moving with a constant range, which is rea-

sonable.

Inventory Turnover Period

(Rs. In Days)

Year Days in a Year

Inventory Turnover Ra-tio

Year/ITR

2000-2001 365 21.34 17.102001-2002 365 19.74 18.492002-2003 365 19.56 18.662003-2004 365 16.37 22.302004-2005 365 18.68 19.54

Graphical representation of change of Inventory Turnover Period.

Interpretation

The inventory turnover period is increasing every year. This is only an temporary

phenomenon.

Owned Capital Turnover Ratio

(Rs. In Lakhs)

Year Sales Shareholder’s Fund

Sales/Sh. Holder’s Fund

2000-2001 698269.21 124845.62 5.592001-2002 617481.66 105122.07 5.872002-2003 807612.81 129528.04 6.242003-2004 869351.35 161133.04 5.402004-2005 1418835.85 200433.69 7.08

Graphical representation of change of direction of Owned Capital Turnover ratio

Interpretation

This ratio has shown some improvement over the period of time. This means that

the company has made use of the owner’s fund efficiently. However, the company is

searching for the better growth of company by improving the turnover of the company.

Thus, its aim now being to maximize the profit and to maximize the wealth of the share-

holders.

Comparative Balance Sheet (2000-2001 & 2001-2002)

Particulars 2000-2001 2001-2002 Absolute Change

Change %

Sources of Funds

1.Share Holders Funds a. Capital b. Reserves & Surplus

14900.33109945.32

14900.3390221.74

0.00-19723.58

0.00-17.94

2.Loan Fundsa. Secured Loansb. Unsecured Loans

124845.62

3267.56111978.15

105122.07

3242.94122550.16

-19723.55

-24.6210572.01

-15.80

-0.759.44

3.Deferred Tax Liability (Net)

115245.71 125793.10

24913.43

10547.39

24913.43

9.15

0.00

Total 240091.33 255828.60 15737.27 6.55

Application of Funds

1.Fixed Assets a. Gross Block b. Less: Dep & Amortization

205603.0988542.73

210721.8696519.97

5118.777977.24

2.499.01

c. Net Block d. Capital WIP

117060.3611732.05

114201.8950765.85

-2858.4739033.80

-2.44332.71

2.Investments Interest Accrued on Inv.3.Cur. Assets, Loans & Adv.

a. Inventoriesb. Sundry Debtorsc. Cash & Bank Balancesd. Other Current Assetse. Loans & Advances

128792.41

1903.040.00

85818.4924179.858737.721922.63

52015.15

164967.74

3161.730.46

75743.2336822.2316584.452055.45

26544.51

36175.33

1258.690.46

-10075.2612642.387846.73132.82

-25470.64

28.09

66.140.00

-11.7452.2889.806.91

-48.97

4.Less: Current Liabilities a. Current Liabilities b. Provisions

172673.84

56895.417816.75

157749.87

65253.846729.30

-14923.97

8358.43-1087.45

-8.64

14.69-13.91

5.Net Current Assets6.Miscellaneous Expenditure(to the extent not written off)

64712.16

107961.68

1434.20

71983.14

85766.73

1931.94

7270.98

-22194.95

497.74

11.24

-20.56

34.71Total 240091.33 255828.60 15737.27 6.55

Interpretation

Current Financial Position and Liquidity Position

The current assets have decreased by Rs.14923 lakhs (8.64%) and sundry debtors

have increased by Rs.12642 lakhs (52%). On the other hand, there has been a decrease in

inventories amounting to Rs.10075 lakhs. The current liabilities have increased by

Rs.7270.98 lakhs (11.24%). This further confirms that the company has no improvement

in the short-term financial position.

Long Term Financial Position

There is an increase in fixed assets of about Rs.5118 lakhs (2.49%). There is also

an increase in long-term loans of about Rs.10572 lakhs (9.44%). This depicts that fixed

assets are not only financed from long term sources but part of working capital has also

been financed from long term sources. This fact depicts that the policy of the company is

to purchase fixed assets from the long-term sources of finance thereby not affecting the

working capital.

There is an increase in loaned funds than the share capital, so this increases the in-

terest liability for the company.

Profitability of the Concern

There is a decrease in the reserves and surplus of the company of about Rs.19723

lakhs (17.94%). This is due to appropriation of deferred tax liability.



Change %

Sources of Funds


14900.3390221.74

14900.39114627.65

0.0624405.91

0.0027.05


105122.07

3242.94122550.16

129528.04

17500.00180067.05

24405.97

14257.0657516.89

23.22

439.6346.93


125793.10

24913.43

197567.05

27324.00

71773.95

2410.57

57.06

9.68

Total 255828.60 354419.09 98590.49 38.54



210721.8696519.97

226518.60106691.54

15796.7410171.57

7.5010.54


114201.8950765.85

119827.06139922.28

5625.1789156.43

4.93175.62



164967.74

3161.730.46

75743.2336822.2316584.452055.45

26544.51

259749.34

2397.170.00

120307.8160991.45

901.2810.41

28867.28

94781.60

-764.560.00

44564.5824169.22

-15683.17-2045.042322.77

57.45

-24.180.00

58.8465.64

-94.57-99.49

8.75


157749.87

65253.846729.30

211078.23

101381.8317618.40

53328.36

36127.9910889.10

33.81

55.37161.82


71983.14

85766.73

1931.94

119000.23

92078.00

194.58

47017.09

6311.27

-1737.36

65.32

7.36

-89.93Total 255828.60 354419.09 98590.49 38.54

Interpretation


The current assets have increased by Rs.53328 lakhs (33.81%) and sundry debtors

have increased by Rs.24169 lakhs (65%). On the other hand, there has been a increase in

inventories amounting to Rs.44564 lakhs. The current liabilities have increased by

Rs.47017 lakhs (65%). This further confirms that the company has no improvement in

the liquidity position.


There is an increase in fixed assets of about Rs.15796 lakhs (7.5%). There is also

an increase in long-term loans of about Rs.71773 lakhs (57%). This depicts that fixed as-

sets are not only financed from long term sources but part of working capital has also



working capital.




There is an increase in the reserves and surplus of the company of about Rs.24405

lakhs (27%). This fact depicts that there is an increase in the profitability of the concern.



Change %

Sources of Funds


14900.39114627.65

14900.46146232.58

0.0731604.93

0.0027.57


129528.04

17500.00180067.05

161133.04

94728.99141801.83

31605.00

77228.99-38265.22

24.40

441.31-21.25


197567.05

27324.00

236530.80

34635.60

38963.77

7311.60

19.72

26.76

Total 354419.09 432299.50 77880.37 21.97



226518.60106691.54

375992.81118919.56

149474.2112228.02

65.9911.46


119827.06139922.28

257073.2582319.11

137246.19-57603.17

114.54-41.17



259749.34

2397.170.00

120307.8160991.45

901.2810.41

28867.28

339392.40

1196.800.00

120313.3352527.511242.89

16.5129472.90

79643.02

-1200.370.00

5.52-8463.94

341.616.10

605.62

30.66

-50.070.00

0.00-13.8837.9058.602.10


211078.23

101381.8317618.40

203573.10

105388.8810591.39

-7505.09

4007.05-7027.01

-3.56

3.95-39.88


119000.23

92078.00

194.58

115980.30

87592.87

141.27

-3019.96

-4485.13

-53.31

-2.54

-4.87

-27.40Total 354419.09 432299.50 77880.37 21.97

Interpretation


The current assets have decreased by Rs.7505 lakhs (3.56%) and sundry debtors

have decreased by Rs.8463 lakhs (13%). On the other hand, there has been a increase in

inventories amounting to Rs.5.52 lakhs.


There is an increase in fixed assets of about Rs.79643 lakhs (30%). There is also

an increase in long-term loans of about Rs.77228 lakhs (441%). This depicts that fixed

assets are not only financed from long term sources but part of working capital has also



working capital.




There is a increase in the reserves and surplus of the company of about Rs.31604

lakhs (27%). This fact depicts that there is a increase in the profitability of the concern.



Change %

Sources of Funds


14900.46146232.58

14900.46185533.23

0.0039300.65

0.0026.87


161133.04

94728.99141801.83

200433.69

94344.07145476.99

39300.65

-384.923675.16

26.87

-0.412.59


236530.80

34635.60

239821.06

55082.27

3290.24

20446.67

2.18

59.03

Total 432299.54 495337.02 63037.56 14.58Application of Funds


375992.81118919.56

470804.58138924.88

94811.7720005.32

25.2216.82


257073.2582319.11

331879.704518.00

74806.45-77801.11

27.54-94.51

2.Intangible Assets

3.Investments .4.Cur. Assets, Loans & Adv.


339392.363976.16

1196.80

120313.3352527.511242.89

16.5129472.90

336397.705473.53

1196.80

241615.7389117.01

970.113.65

29463.90

-2994.661497.37

0.00

121302.4036589.50

-272.78-12.86-9.00

-0.8837.66

0.00

100.8269.66

-21.95-77.89-0.03


203573.10

105388.8810591.39

361170.40

185750.3623239.01

157597.26

80361.4812647.62

77.42

76.251.19


115980.30

87592.87

141.27

208989.37

152181.03

87.96

93009.10

64588.16

-53.31

80.19

73.74

-37.74Total 432299.50 495337.02 63037.56 14.58

Interpretation


The current assets have increased by Rs.157597 lakhs (77.42%) and sundry

debtors have decreased by Rs.36589 lakhs (69.66%). On the other hand, there has been a

increase in inventories amounting to Rs.121302 lakhs. The current liabilities have de-

creased by Rs.80361 lakhs (76.25%). This further confirms that the company has im-

provement in the liquidity position.


There is a decrease in fixed assets of about Rs.2994 lakhs (.88%). There is also an

increase in long-term loans of about Rs.3290 lakhs (2.18%). This depicts that fixed assets

are not only financed from long term sources but part of working capital has also been fi-

nanced from long term sources. Also it is clear that there is no addition of fixed assets.

This fact depicts that the policy of the company is to purchase fixed assets from the long-

term sources of finance thereby not affecting the working capital.




There is a increase in the reserves and surplus of the company of about Rs.39300

lakhs (26.87). This fact depicts that there is a increase in the profitability of the concern.

Common size Balance Sheet Analysis

Values in %

Particulars 2000-01 2001-02 2002-03 2003-04 2004-05

Liabilities

a) Current Liabilities Current liab. Provisions

18.72.6

19.92.1

21.43.7

19.21.9

26.43.3

Total

b) Shareholders Funds Capital Reserves & Surplus

21.2

4.936.1

22.0

4.527.5

25.1

3.124.2

21.2

2.726.7

29.7

2.126.3

Total

c) Loan Funds Secured Loans Unsecured Loans

41.0

1.136.7

32.0

1.037.4

27.4

3.738.0

29.4

17.325.9

28.4

13.420.7

Total

d) Deferred Tax Liability

37.8

0.0

38.4

7.6

41.7

5.8

43.1

6.3

34.1

7.8

Total Liabilities 100 100 100 100 100

Assets

a) Net Fixed Assetsb) Intangible Assetsc) Investmentsd) Current Assets Inventories Sundry Debtors Cash & Bank Balances Other Current Assets Loans & Advances

42.30.00.6

28.27.92.90.6

17.1

50.30.01.0

23.111.25.10.68.1

54.90.00.5

25.412.90.20.06.1

62.60.00.2

21.99.60.20.05.4

47.70.80.1

34.312.70.10.04.2

Total

e) Misc. Expenditure

56.7

0.5

48.1

0.6

44.6

0.0

37.1

0.0

99.9

0.1

Total Assets 100 100 100 100 100

Interpretation

In common size balance sheet analysis in CPCL, it is found that the total assets

and liabilities are taken as 100% total and other components of assets and liabilities are

also expressed in terms compared to total asset and total liability. The total capital %

shows a decreasing trend for the last two years.

There is also a decline in reserves & surplus in the last few years due to introduc-

tion of AS-22. The percentage of loan funds is increasing which states the availing of

fresh loan from the year 02 to 04 for the purpose of expansion of the business.

The total net worth has decreased by 10%, which is because of fluctuation in the

reserves & surplus. The company adopted regrouping of certain loans and advances un-

der crude oil loan transaction in line with industry’s practice of representing the same.

This has vitiated the trend in current liabilities from the old years.

Fixed assets have increased in figures during all the years of study. It is due to a

part of current liability arrives net profit have contributed to the increase in fixed assets.

The current asset part has considerably decreased since 2000 and it is due to de-

crease in loans and advances. There is no decrease in inventory; it is because the com-

pany is doing mass production, so as to reduce the production cost.

STATEMENT OF CHANGES IN WORKING CAPITAL

Changes in Working Capital – (2000-2001)

Particulars 2000 2001 Increase Decrease

Current Assets & Adv.Cash and Bank Balance 3472.49 8737.72 5265.23Inventories 96357.04 85818.49 10538.55Sundry Debtors 21729.98 24179.85 2449.87Other Current Assets 1631.95 1922.63 290.68Loans and Advances 53521.68 52015.15 1506.53Total Current Assets (A) 176713.14 172673.84

Current liabilities, Prov.Current liabilities 63214.58 56895.41 6319.17Provisions 25948.01 7816.75 18131.26Total Current Liability (B) 89162.59 64712.16

Net Working Capital (A-B) 87550.55 107961.68

Net Increase in Working Capital (B/F)

20411.13 20411.13

Total 107961.68 107961.68 32456.21 32456.21

Interpretation

In the year 2001, the inventory level is reduced because of low production. The

sundry debtors increased considerably indicating more credit being given to the cus-

tomers. The cash and bank balance increased because of non-utilization of funds. The to-

tal current assets decreased because of decrease in inventory level. The current liabilities

decreased because of repayment of loans.







22232.87 22232.87

Total 107961.68 107961.68 43811.91 43811.91

Interpretation

In the year 2002, the inventory level is reduced because of not holding up the in-

ventory. The sundry debtors increased considerably indicating more credit being given to

the customers. The cash and bank balance include a sum of Rs.162 crores in Term de-

posits that are earmarked for certain short term obligations maturing with in 2-3 days like

payment towards purchase of crude oil. The loans given were reduced because of utiliza-

tion of funds for production purposes.







6349.19 6349.19

Total 92078.00 92078.00 69103.52 69103.52

Interpretation

In the year 2003, cash and bank balance reduced indicating lesser liquidity posi-

tion of the company. However, it shows the best management of surplus funds. The in-

ventory level is raised because of increase in production. The sundry debtors are increas-

ing because of rise in sales level. Loans given were increased slightly. The total current

liabilities are increased because of rise in the level of borrowings made by the business.







4485.13 4485.13

Total 92078.00 92078.00 12470.99 12470.99

Interpretation

In the year 2004, the inventory is increased slightly. The cash and bank balance

raised indicating stability in the liquid position of the company. The level of debtors de-

creased indicating immediate cash flow into the business. The level of loans given also

increased indicating effective utilization of cash. The current liabilities decreased because

of repayment efforts.







64588.16 64588.16

Total 152181.03 152181.03 157891.90 157891.90

Interpretation

In the year 2005, the inventory and sundry debtors shows a big hike. It is due to

the increase in turnover of the company. The cash and bank balance, Loans and advances

have been reduced. It may be due to the repayment of current liabilities. The current lia-

bilities have been decreased, which means that there is an mass payment and settlement

of creditors.

Operating Cycle

Year R.M(a)

WIP(b)

Finished Goods(c)

Drs(d)

Crs(e)

Duration of Oper-ating Cycle(a+b+c+d-e) = f

Operating Cycle in Times (365/f)

2000-01 18 28 11 11 27 41 8.90

2001-02 20 14 13 17 32 32 11.41

2002-03 20 25 14 20 32 47 7.77

2003-04 25 33 16 21 36 59 6.19

2004-05 11 14 11 18 37 17 21.47

Interpretation

Operating Cycle refers to the average time elapses between the purchase of raw

material and final cash collection. Cash is used to buy the raw materials and other stores.

The collection process of the company has improved, but the company is not pay-

ing its trading creditors first, instead it has started closing the outside loans. However, the

company can improve the turnover because of that reason, the creditors has allowed a

maximum credit of 37 days for each supply.

The number of cycles if maximized, then it means that the company is able to col-

lect the payments in time and they are using the funds efficiently for the production pur-

poses. If the company maintains the present year situation, then there will be a comfort-

able growth for the company’s business.

Operating Cycle shows an increasing trend because of increase in debtors and de-

layed payments to creditors. The decrease in the operating cycle of times reveals the pos-

sibility of delay or decrease in yielding the profit.

Z-Score Analysis for the year 2000-2001 to 2004-2005

The formula for calculating Z-Score analysis is

Z = 0.012X1 + 0.014X2 + 0.033X3 + 0.006X4 + 0.010X5

Where, Z = Financial Health Score

X1 = Working Capital / Total Assets * 100

X2 = Retained Earnings / Total Assets * 100

X3 = EBIT / Total Assets * 100

X4 = Net Worth / Total Liability * 100

X5 = Sales / Total Assets * 100

Year X1 X2 X3 X4 X5

2000-01 37.02 2.8 9.56 40.49 244.57

2001-02 31.17 1.23 7.89 31.48 228.09

2002-03 27.63 7.32 17.84 27.32 258.92

2003-04 18.97 6.84 13.40 29.36 205.18

2004-05 21.61 26.34 15.51 28.46 201.46

Year Z-Value Z-Score

2000-01 0.44424 + 0.0392 + 0.31548 + 0.24294 +2.4457 3.48756

2001-02 0.37404 + 0.01722 + 0.26037 + 0.18888 + 2.2809 3.12141

2002-03 0.33156 + 0.10248 + 0.58872 + 0.16392 + 2.5892 3.77588

2003-04 0.22764 + 0.09576 + 0.4522 + 0.17616 + 2.0518 3.00356

2004-05 0.25932 + 0.36876 + 0.51183 + 0.17076 + 2.0146 3.32527

Interpretation

Z-Score more than 3.0 is financially sound and less than 1.8 shows certain in

bankruptcy. Z-Score between 1.8 and 3.0 indicating that the company is prone to finan-

cial sickness.

Z-Score for CPCL in all the years is more than 3.0. It indicates that the company’s

financial position is sound in all the years. This is because of increase in turnover, which

reacts to the growth in the financial grounds of the company.

The past records of the company have revealed some sickness in finance. For ex-

ample, in the year 1999-2000, the z-score is less than 3.0, indicating that the company is

prone to financial sickness. This was mainly because of the mismatching of product

prices with those of crude oil prices under the import parity pricing mechanism. As this

year was the second year of free marketing conditions, the volatility in crude prices have

much affected the company’s financial strength especially when there were huge out-

standing from government, and no support under the erstwhile APM mechanism.

From the year 2000-2001 to the year 2004-05, the score is more than 3.0. Indicat-

ing sound financial policy.

Regression Analysis

Profit on Sales

Year Sales (x)

Rs.crore

Profit (y)

Rs.crore

xy x2

2000-2001 7132 122 870104 50865424

2001-2002 6273 63 395199 39350529

2002-2003 8629 302 2605958 74459641

2003-2004 9475 400 3790000 89775625

2004-2005 16295 596 9711820 265527025

Total 47804 1483 17373081 519978244

x = independent variable (sales)y = dependent variable (profit)a, b = constants

Regression Equation y on x is

yc = a + bx

To find out the values of a, b

Sy = na + bSx

Sxy = aSx + bSx2

By substituting this Equation

1483 = 5a + 47804 b ------------------(Multiplied by 47804)

17373081 = 47804 a + 519978244 b ------------(Multiplied by 5)

70893322= 239020 a + 2285222416 b

86865405 = 239020 a + 2599891220 b

------------------------------------------------------- 15972073 = 314668804 b

------------------------------------------------------

b = 0.05076

By substituting b value in Equation (1)

1483 = 5a + 47804 b

a = - 188.69

The Future Sales Estimation for the year 2006 is 23000 crore and for the year 2007, it is

25700 crore.

By substituting the values of a and b in the regression line y on x is

FOR 2006

y = - 188.69 + 0.05076 (23000)

y = Rs. 978.79 cr.

FOR 2007

y = -188.69 + 0.05076 (25700)

y = Rs. 1115.84 cr.

Interpretation

Here the variable `y’ is taken as Profit and `x’ is taken as Sales. The estimated

sales for 2006 is based on the actuals for nine months up to December 2005 and realistic

estimates for the balance three months of the year 2005-06. The estimated sales for

2006-07 is based on the budget estimates by the organization with a growth rate of about

12% factored over the Revised Estimates for 2005-06.

The projection of Rs. 978.79 cr. and Rs. 1115.84 cr. for the next two years

indicates increase in profit due to estimation that the price of Raw Material and Finished

goods may vary at a higher rate that result in such a huge increase in profit.

Thus the regression analysis estimates a higher quantum of profitability for the

organization in the coming two years 2005-06 and 2006-07.

Debtors to Sales

Year Sales (x) Debtors (y) xy x2

2000-2001 7132 241 1718812 50865424

2001-2002 6273 368 2308464 39350529

2002-2003 8629 616 5315464 74459641

2003-2004 9475 525 4974375 89775625

2004-2005 16295 891 14518845 265527025

Total 47804 2641 28835960 519978244

x = independent variable (sales)

y = dependent variable (debtors)

a, b = constants


yc = a + bx


Sy = na + bSx

Sx = aSx + bSx2


2641 = 5a + 47804 b ------------------(* 47804 )

28835960 = 47804 a + 519978244 b ------------(*5)

126250364 = 239020 a + 2285222416 b

144179800 = 239020 a + 2599891220 b-------------------------------------------------------

179294436 = 314668804 b

-------------------------------------------------------

b = 0.05698


2641 = 5a + 47804 b

a = - 16.56

The Future Sales Estimation for the year 2006 is 23000 crore and for 2007, it is 25700

crore .


FOR 2006

y = - 16.56 + 0.05698 (23000)

y = Rs. 1293.95 cr.

FOR 2007

y = - 16.56 + 0.05698 (25700)

y = Rs. 1447.79 cr.

Interpretation

Here the variable `x’ is taken as Sales and variable `y’ as Debtors. The estimated

sales for 2006 is based on the actual for nine months up to December 2005 and realistic

estimates for the balance three months of the year 2005-06. The estimated sales for

2006-07 is based on the budget estimates by the organization with a growth rate of about

12% factored over the Revised Estimates for 2005-06.

The projection of Rs.1293.95 cr. and Rs. 1447.79 cr. indicates increase in debtors

due to increase in sales. Most of the sales made by the company is taken as credit sales.

So increase in sales will result in increase in the amount of debtors.

Thus the regression analysis estimates a higher quantum of sundry debtors for the

organization for the coming two years 2005-06 and 2006-07

Sales vs. Working Capital

Year Sales (x) Working Capital (y) Xy x2

2000-2001 7132 1079 7695428 50865424

2001-2002 6273 857 5375961 39350529

2002-2003 8629 920 7938680 74459641

2003-2004 9475 875 8290625 89775625

2004-2005 16295 1522 24800990 265527025

Total 47804 5253 54101684 519978244

x = independent variable (sales)

y = dependent variable (debtors)

a, b = constants


yc = a + bx


Sy = na + bSx

Sx = aSx + bSx2


5253 = 5a + 47804 b ------------------(* 47804 )

54101684 = 47804 a + 519978244 b ------------(*5)

251114412 = 239020 a + 2285222416 b

270508420 = 239020 a + 2599891220 b-------------------------------------------------------

19394008 = 314668804 b

-------------------------------------------------------

b = 0.06163


5253 = 5a + 47804 b

a = 461.34

The Future Sales Estimation for the year 2006 is 23000 crore and for 2007, it is 25700

crore .


FOR 2006

y = 461.34 + 0.06163 (23000)

y = Rs. 1878.90 cr.

FOR 2007

y = 461.34 + 0.06163 (25700)

y = Rs. 2045.31 cr.

Interpretation

Here the variable `x’ is taken as Sales and variable `y’ as Working Capital. The

estimated sales for 2006 is based on the actual for nine months up to December 2005 and

realistic estimates for the balance three months of the year 2005-06. The estimated sales

for 2006-07 is based on the budget estimates by the organization with a growth rate of

about 12% factored over the Revised Estimates for 2005-06.

In this analysis, working capital required for the next 2 years is projected. Here

the working capital is projected based on estimated future sales that in turn is derived by

experience. The projected Working Capital of Rs. 1878.90 cr. and Rs. 2045.31 cr. for the

next two years is required because of expected increase in sales.

The projection of Rs.1878.90 cr. and Rs. 2045.31 cr. indicates increase in working

capital due to increase in production and in sales. Most of the production and other

operational requirements like utilities and repairs and maintenance are made by the

company out of working capital. So increase in sales will result in increase in the amount

of working capital demands also.

Thus the regression analysis estimates a higher quantum of working capital (net)

for the organization for the coming two years 2005-06 and 2006-07.

This is matched by the working capital / short term funding limits of Rs.1500

crore approved by the board. This working capital demands in funded mainly by the SBI

and Canara bank.

Trend Analysis

PARTICULARS 2000-01 2001-02 2002-03 2003-04 2004-05

Sales 100 87.95 120.99 132.85 228.47

PBIT 100 77.80 213.21 221.97 390.94

Interest 100 97.44 81.13 35.60 119.17

Depreciation 100 77.45 99.99 115.12 205.21

PBT 100 60.29 330.98 388.16 633.27

PAT 100 52.04 247.40 326.76 487.60

Current Assets 100 87.40 117.01 112.85 200.22

Current Liabilities 100 99.32 164.30 160.13 288.54

Working Capital 100 79.41 85.29 81.13 140.96

Net Fixed Assets 100 97.46 102.36 220.37 288.19

Capital Employed 100 88.85 94.17 149.12 217.55

Net Worth 100 83.61 104.80 130.45 162.34

Debt Equity 100 131.18 164.52 158.06 129.03

EPS 100 52.13 247.38 327.16 488.19

Dividend (%) 25 20 35 50 120

Dividend Amt 100 80.43 140.76 200.97 482.35

Interpretation

(i) The sales have continuously increased in all the years except 2002. The

percentage in 2005 is 228 as compared to the base of 100 in 2001. The

increase in sales is quite satisfactory which is due to the completion of 3

MMTPA refinery expansion and higher value added products

(ii) The earning has increased substantially in the year 2004 and 2005. This is due

to increase in value at production and higher demand for the product.

(iii) Dividend has been increasing continuously from the year 2001 to 2005 except

2002. There is a decrease in the year 2002 that was due to decrease in

earnings. Dividend payment at CPCL show a good track record and shown an

increasing trend for the forth coming year.

(iv) The profitability of the company has increased manifold as evidenced by the

absolute numbers of PBT and PAT. The PBT is at 633% and PAT at 487%

over the base year figure of 2001.

(v) Depreciation also has considerably increased due to the completion,

commissioning and capitalization of the 3 MMTPA refinery expansions cum

modernization project.

(vi) There is a sharp increase in the working capital limits. The net working

capital was Rs.1521 crore for 2005 as against 1079 crore for 2001 which

is140% of the base year figure.

(vii) The long-term borrowings of the company stand at Rs.3000 crore including

the foreign currency component of US $ 150 million. Out of this the company

has availed about Rs.1800 crore as of December 2005 and US $ 105 million

as on the same date (latest figures)

(viii) The working capital limit has been pegged at Rs.1500 crore which is mainly

funded by the SBI and consortium of other banks.

(ix) The debt equity was at its best in 2001 started slowly moving unfavourably

due to huge borrowings resorted to for funding the 3 MMTPA expansion

project. As of 2005, it stood at 1.20 which is anyway a better figure

considering the massive expansion programme.

(x) The EPS has shown remarkable recovery and improvement and it was

Rs.40.08 for 2005 as against Rs.8.21 for 2001, which is about 488% over the

base year figure.

(xi) The company has been aggressively pursuing the dividend policy decisions

and it declared a whopping 120% dividend for 2004-05 entailing an outgo of

Rs.178.71 crore which was equivalent to a payout of about 30%.

Profitability indicates the efficiency and effectiveness with which the

operations are being carried on. It has been found out that the profitability and

investments being made by the firm are sound and showing an increasing

trend.

The profits achieved by the company shows an increasing trend because of

increase in sales and reduction in interest charges for funds borrowed by the

company.

The average collection period of the company is showing an increasing rend.

This is because of rise in credit giving policy made by the company that is

limited for up to 30 days.

The average payment period is also started showing an increasing trend

indicating delayed payment being made to the creditors. This indicates more

time taken by the company to repay the suppliers. However, the payment

period is extended up to 40 days

The inventory turnover of the company is satisfactory. There is no holding up

of inventory thereby saving interest on investment amount. This is because of

effective production techniques implemented by the company.

The current financial position of the company compared to the last three years

is decreased slightly, which should be taken note.

The fixed asset of the company contributes more than 50% of the total asset

position of the company. The company indicating good asset position of the

company. The company has also got sufficient reserves and Surplus to meet

the future financial contingencies of the company.

The Debt- Equity position of the company is satisfactory but it increased

slightly from the last year’s ratio. This is because of decrease in Current

Liability of the Company.

Though the liquidity position of the company is moderate, it showed an

decreasing trend for the last two years. This is because of decrease in Other

Current Assets of the firm.

It is found that there is an increase in Reserves and Surplus Funds. The Total

Resources of the company for the last five years is showing an increase in

trend, which will contribute to a major extend for the company’s production

purposes in future.

There is a sudden decrease in the Cash Balance of the company in the year 2002-

2003. The cash balance has increased in the year 2003-2004.this may be due to

prudent investment/portfolio management being forwarded in the company.

The Working capital position of the company is satisfactory. The working capital

is decreased in the year 2003-2004 because of consistency in maintaining the

required level of inventories.

The Working capital requirement of the company to carry out the production

purpose is satisfactory and is not suffering from any inadequacy.

It is projected from Z-Score analysis that the company is financially sound in the

year 2001-2003. In the year 2003-04, it started showing slightly decreasing trend.

But in the current year it started increasing.

It is projected from Operation Cycle the rotation of Debtors and Creditors are

within the acceptable time period. The Duration of Operation Cycle and operating

Cycle in Times is moderate.

The Fund Flow Analysis reveals that the Total Sources position of the company is

satisfactory and enough to meet the future requirements of the company to carry

out its activities.

The Common Size Balance sheet shows a decreasing trend in Current Assets and

Current Liabilities of the firm indicating changes in policies of repayment made

by the company.

It is found from the analysis that the company has changed its policy after

Administering Price Mechanism (APM). This effect has been mainly focused on

Loans and Advances.

It is projected from Trend Analysis that the sales trend of the company for the last

5 years is satisfactory. This analysis is showing a decreasing tend in all aspects

such as Earnings before Interest and tax, Profit After tax, total assets, Net worth

and Dividend.

It is projected from Regression Analysis that there will be a decrease in profits for

the forthcoming year. This may be due to changes in Government Policies and

wide fluctuations in Crude Oil Prices etc. Due to sample constraint, this analogy

may not however be sustainable.

It has been found out that overall solvency position of the company is satisfactory

and it shows an increasing trend. This indicates the enhancement of credit

worthiness of the company.

The company may try to reduce the Inventory Turnover Period by using the

Inventory Management techniques such as EOQ and ABC analysis.

The payment policy adopted by the company to the suppliers can be reviewed.

This may result in saving of considerable amount of interest further from 6.3% on

long-term loans.

The credit policy given can also be reviewed so that considerable amount of funds

may not and up locking in debtors. This will result in increase of cash balances of

the company.

Effective Costing Techniques may be implemented to control the operating

expenses incurred by the company.

Effective measure have to be carried out to resume the export of petroleum

products for the current year, which will add further sophistication and low cost

techniques of production.

The company may maintain the same Debt-Equity ratio in the future. So that I can

increase EPS.

For their new products. It is better to choose different debt mix that is cheaper. An

alternative proposal of External Commercial borrowings will be cheaper for the

company based on terms and conditions of the foreign fluctuations etc.

There has been slightly decreasing trend in the financial soundness of the

company in the near future. Effective steps should be taken to find the root cause

and control it.

The solvency position of the company can be further improved by arresting the

borrowings made by the company. If the steps were not taken, this may affect the

long-term credit interest of the company.

To conclude that, Chennai Petroleum Corporation Limited has mobilized the

funds in the same manner the funds are invested productivity in the capital asset

as well as working capital. There is a sudden increased in market price during the

year 2002-2003 which is because of better control from top-level management.

The company has a high operational efficiency, the profits for the company has

increased over the past years which proves that the company has taken measure to

generate profits by improving its capacity utilization which would maximize the

generation of resources for expansion, growth and diversification.

There is a sudden increase in market price during the year 2002-2003 which is

because of better control from top-level management.

The company may take efforts to increase its efficiency in taking control, since

the government has dismantled the pricing of he product from 1.4.98

To end with, I conclude that if the company takes the above actions as suggested,

the company would remain no one leader in the Indian Petroleum Industry in

future, with its excellent past records.

T.S. Reddy and Y. Hari Prasad Reddy, Financial and Management Accounting,

Margham Publications, 2002.

ICFAI. Financial Management, ICFAI, 1998.

Center for monitoring Indian Economy, Journal, December 2004.

C.R Kothari, Research methodology, Warsaw Publications, 2002.

Dr. S.N. Maheswari, Principles of Management Accounting, 11th edition, Sultan

Chand & Sons, New Delhi, 1996.

Websites:

1. www.cpcl.co.in

2. www.indiainfoline.com

http://www.indiainfoline.com/

Date post:	01-Dec-2014
Category:	Documents
Upload:	damodharan-rathanavelu
View:	168 times
Download:	3 times

Antony's Working Cap.mgmt CPCL

Documents