Capital Structure Analysis of IOCL

Capital Structure Analysis Analysis of Indian Oil  Corporation Limited (IOCL)

SUBMITTED BY – 

AMIT SARDANA ANUPAM SHARMA ARVIND GUPTA

OBJECTIVES OF THE STUDY

 To  To examine the Capital Structure policy and pattern of IOCL. •

 To  To understand the capital structure of Indian Oil Corporation •

•

 To  To identify the share capital and debt of the company. company.

•

 To  To Find out the earnings earnin gs per share

•

 To  To Find out the leverage

•

Evaluate the contents of IOCL Debts and Equity.

CAPITAL STRUCTURE A mix of a companys long!term debt" specific short!term debt" common e#uity and preferre preferred d e#uity e#uity . structure is ho$ a firm finances its overall gro$th

by

using

different

sources

of

The capital capital

operations

and

funds.

%ebt comes in the form of bond issues or long!term notes payable" $hile e#uity is classified as common stoc&" preferred stoc& or retained earnings. Short!term debt such as $or&ing capital capital re#uirem re#uirements ents is also considered considered to be part of the capital structure. 'ut the IOCL does not issue the preference shares and debenture to the public of the company

COMPONENTS STRUCTURE:

OF

CAPITAL TAL

CAPITAL STRUCTURE

Shareholder’ s fund s -equity capital

Borrowed funds

-preference capital (Nil(

-debenture (Nil) -Term loan

)

SHARE CAPITAL !!! "!!! #!! !

Au&hor'sed Ca('&al )CR* Issued Ca('&al )CR*

$!! ! %!! ! +!!! ! %!+#

%!+$

%!+%

 AUTHORISED CAP ITAL:

%!++

%!+!

 The maximum e#uity capital

a company can raise" $hich is mentioned in the *emorandum of Association and Articles of Association of the Company. +o$ever" share premium is excluded from the de,nition of authori-ed capital .

SSUED

CAPITAL: Issued capital

is

the

amount

of 

nominal value of share held by the shareholders. It is the face value of the shares that have been issued

to

shareholders.

premium

Issued

share

capital

and

share

the

represent the amount invested by the shareholders in the

company. It is also &no$n as the subscribed capital or subscribed share capital.

Anal,s' s:

'ut here" IOCL issued very less share capital I

/revious years if I compared to Authori-ed capital. IOCL is only issued the limited share to the shareholders

Pa'd u( -a('&al

From !  To

Instrument

Shares0nos(

Face value

Capital

)123 )124

5#uity share

)4)678)49)

21

)4)6.78

)12) )123

5#uity share

)4)678)49)

21

)4)6.78

)122 )12)

5#uity share

)4)678)49)

21

)4)6.78

)121 )122

5#uity share

227)36431:

21

227).36

)117 )121

5#uity share

227)36431:

21

227).36

)119 )117

5#uity share

669:64917

21

669.:6

Pa'd u( -a('&al;  The amount of a companys capital that has been funded by shareholders" /aid!up capital can be less than a companys total capital because a company may not issue all of the shares that it has been authori-ed to sell. /aid!up capital can also re
 TOTAL %5'T The IOCL has onl, &wo de.&s

:

Secured loan >nsecured loan  Total debt means here included debenture" 'onds" Long term loans" short term loan etc. 'ut Indian Oil Corporation limited 0IOCL( did not issued debenture" bonds etc.

Secured loan; Secured loans are those loans that are protected by an asset or collateral of some sort. The item purchased" such as a home or a car" can be used as collateral" and a lien is placed on such item. The finance company or ban& $ill hold the deed or title until the loan has been paid in full" including interest

and all

applicable

fees.

Other

items

such

as

stoc&s" bonds" or personal property can be put up to secure a loan as $ell. Secured loans are usually the best 0and only( $ay to obtain large amounts of money. A lender is not li&ely to loan a large amount $ith assurance that the money $ill be repaid. /utting your home or other property on the line is a fairly safe guarantee that you $ill do everything in your po$er to repay the loan.

Secured loans usually offer lo$er rates" higher borro$ing limits and longer repayment terms than unsecured loans. As the term implies" a secured loan means you are providing ?security? that your loan $ill be repaid according to the agreed terms and conditions. Its important to remember" if  you are unable to repay a secured loan" the lender has recourse to the collateral you have pledged and may be able to sell it to pay off the loan.

Unsecured loan: On the other hand, unsecured loans are the opposite of secured loans and include things like credit card purchases, education loans, or personal signature! loans. Lenders take "ore of a risk by "aking such a loan, #ith no  property or

assets

to recover in case of default, #hich is #hy

the interest rates are considerably higher. If you have been turned do#n for  unsecured credit, you "ay still be able to obtain secured loans, as long as you have so"ething of value or if the purchase you #ish to "ake can be used as collateral. $hen you apply for a loan that is unsecured, the lender believes that you can repay the loan on the basis of your financial resources. %ou #ill be &udged  based on the five '! C(s of credit )) character, capacity, capital, collateral, and conditions * these are all criteria used to assess a borro#er(s credit#orthiness. Character, capacity, capital, and collateral refer to the borro#er(s #illingness and ability to repay the debt. Conditions include the borro#er(s situation as #ell as general econo"ic factors .

SECURE/ LOAN %"!!! %!!!! +"!!! +!! !!

)CR*

"!!! !

%!+# )CR* +01

%!+$ +$!#

%!+%

%!++

%!$1!

%!+!

+1%2%

+0""

Anal,s' s: In )124 the secured loan proportion is high than )123. The India oil corporation limited 0IOCL( has try to reduce the secured loan because secured loan effect the assets of the company and it $ill be effect on future periods

so the IOCL

Increasingly firms are moving from secured debt to unsecured debt in order to free their assets. +ecured loans have the largest positive i"pact on Co"panys credit #hen they are repaid. If co"pany have never taken a secured loan, co"panys credit "ay be lo# despite your good record of repay"ent.

UNSECU RE/ LOAN 0!! !! !! !! )CR *

"!! !! #!! !! $!! !! %!! !! +!! !! ! %!+#

%!+$

%!+%

%!++

%!+!

)CR %0$$ "0%0 $%$"# %%0$ %0#! 3+ 3% 31 30 1 *

Anal,s +ere unsecured loan is constantly high from )121 to )123. Indian oil corporation limited 0 IOCL(.>nsecured loan is more better than secured loan 'ecause secured loan $ill be affect the assets of the company in future period of time so the

IOCL has increasing the unsecured loan for reducing the ris& of the company . *ost of the company has preferred the unsecured debt $hich $ill not a@ect any assets of the company. In some cases" IOCL may be able to reduce IOCL unsecured debts by negotiating $ith creditors for a lo$er balance. 5ither IOCL can tal& to creditors on IOCL o$n" or IOCL can solicit the help of a credit counseling

organi-ation. In some cases" credit counselors can negotiate $ith creditors better

than debtors can. +o$ever" if IOCL

choose to $or& $ith a credit counselor ma&e sure the organi-ation is reputable.

EARIN4 PER SHARE )EPS* 5arnings per share represent a portion of a companys profit that is allocated to one share of stoc&. Therefore" if you $ere to multiply the 5/S by the total number of shares a company has" youd calculate the companys net income. 5/S is a calculation that many people $ho $atch the stoc& mar&et pay attention to.

hen calculating" it is more accurate to use a $eighted average number of shares outstanding over the reporting term" because the number of shares outstanding can change over time. +o$ever" data sources sometimes simplify the calculation by using the number of shares outstanding at the end of!the!period.

%iluted 5/S expands on basic 5/S by including the shares of  convertibles or $arrants outstanding in the outstanding shares number.

5/S of IOCL Shareholders from )121 to )124; "! #! $!

%! )Rs* +! ! %!+ )Rs %132

%!+

%!+

%!+

%!+

%!3

+3%

$!3

#%3+

Anal,s's: In )124" IOCL shareholders earned per share of Bs )9.72. 'ut in )121" 5/S $as Bs 4).2. At that time shareholders of  IOCL

$as

earned

more than

last

year.

So

constantly

decreasing the earning capacity of shareholders of the IOCL" 'ut still there 5/S is good if I compared to other companies. IOCL is to increase earnings or decrease the number of  shares. In order to increase earnings" a business has to

increase revenues" reduce expenses or both. In order to decrease the number of shares" do a share buybac& from shareholde rs.

LE5ERA 4E  The degree to $hich an investor or business is utili-ing borro$ed money. Companies that are highly leveraged may be at ris& of ban&ruptcy if they are unable to ma&e payments on their debt they may also be unable to find ne$ lenders in the future. Leverage is not al$ays bad" ho$ever it can increase the shareholders  return on investment and often there are tax advantages associated $ith borro$ing. Components of  leverage are;

L5D5BA E5 Financial leverage

Operating

leverage

Financial  leverage; Financial leverage is a leverage created $ith the help of debt component in the capital structure of a company. +igher the debt" higher $ould be the financial leverage because $ith

higher debt comes the higher amount of interest that needs to be paid. Leverage can be both good and bad for a business depending on the situation. If a firm is able to generate a higher return on investment 0BOI( than the interest rate it is paying" leverage $ill have its positive effect shareholder=s return. The dar&er side is that if the said

situation is opposite" higher leverage can ta&e a business to a $orst situation li&e ban&ruptcy. the %egree of Financial Leverage 0%FL( can be calculated $ith the follo$ing formula; D-L  / Change in E0+ 1 / Change in E2I3 $here E0+ is the Earnings per +hare and E2I3 is the Earnings before interest and 3a4es .

O(era&'n6 le7era6e: Operating leverage" ust li&e the financial leverage" is a result of operating fixed expenses. +igher the fixed expense" higher is the operating leverage. Li&e the financial leverage had an impact on the shareholder=s return or say earnings per share" operating leverage directly impacts the operating profits 0/rofits before

Interest and

Taxes

0/'IT((.

>nder

good

economic conditions" due to operating leverage" an increase of 2G in sales $ill have more than 2G change in operating profits. 3he for"ula used for deter"ining the Degree of Operating Leverage or DOL is as follo#s5 DOL  / Change in E2I3 1 / Change in +ales

So" Indian oil corporation limited 0IOCL(

need to be very

careful in adding any of the leverages to your business vi-. financial leverage or operating leverage as it can also $or& as a double edged s$ord.

/e6ree F'nan-'al le7era6e of IOCL: % +3" +

)Ra&'o*

!3"

!

%!+# %!+$ %!+% %!++ %!+! )Ra&'

+3+

+32+

+3#2

+3$+

+3++

Anal,s's: In )124 degree of financial leverage of Indian Oil Corporation limited 0IOCL( ratio is 2.:2 and it has constantly higher than previous years. 'y borro$ing funds" the IOCL incurs a debt that must be paid. 'ut" this debt is paid in small installments over a relatively long period of time. This frees funds for more immediate use.

Indian Oil Corporation limited that

successfully uses leverage demonstrates by its success that it can handle the ris&s associated $ith carrying debt. This can

become an important factor $hen additional financing is needed. ot only $ill loans more li&ely be available" but they $ill be available at more attractive interest rates. Li&e individuals" companies $ith solid financials.

%egree of Operating leverage of Indian Oil Corporation li mited 0I OCL(; +3+" +3+ +3!"

+ )Ra&'o* !32" !32

%!+# %!+$ )Ra&'   +3+%

+3+#

%!+% %!++

%!+!

+3!2

+3!+

+3+$

Analysis; In )124 Indian oil corporation operating ratio is 2.2)

limited

has

degree

of 

.$hich is constantly almost same from )122 to )124. According to this chart IOCL having a good position in future period of time. The more operating leverage a company has" the more it has to sell before it can ma&e a profit. IOCL $ith a high operating leverage must generate a high number of sales to cover high fixed costs" and as this sales increase" so does the profitability of the company. Conversely" a company $ith a

lo$er

operating

leverage

$ill

not

see

a

dramatic

improvement in profitability $ith higher volume" because

variable costs" or costs that are based on the number of units sold" increase $ith volume.

To&al le7era6e of Ind'an O'l Cor(ora&' on l'8'&ed: $ %3" % )Ra&'o*

+3" + !3" !

%!+#

%!+$

%!+%

%!++

%!+!

)Ra&'   +31%

%3#$

+3#

+3#2

+3%+

Analysis; Combined or total leverage measures total ris& of the Indian oil

corporation

limited

0IOCL(.

In

this

year

Indian

Oil

Corporation has minimum ris& than last year $hich ratio $as ).43. In this diagram is measured by percentage change in earning per share 05/S( due to percentage change in sales. IOCL as& their existing shareholders to issuing common stoc& rights. Stoc& rights allo$ existing shareholders to purchase additional shares at belo$! mar&et prices" in order to raise e#uity. hile

this practice does

improve a company=s

financial

strength"

shareholders= percentage o$nership.

of 

it

also

dilutes

the

current

FIN/I N4S IOCL has issued less shares capital to the shareholders" constantly from •

)121 to )124. IOCL does not fulfill the of authori-ed share capital $hich is mention in memorandum of association. IOCL" /reference share and %ebenture not existent in the industry. •

•

 The return on investment ratio of IOCL is the lo$est among its competitors $hich imply that the degree of efficiency of  IOCL in utili-ing the funds entrusted by shareholders and long term creditors is lo$er than its competitors.

•

IOCL has maximum no of total debts in the period of )124" if I compared $ith previous years.

In )124" unsecured loan is constantly higher than previous years. •

•

In )124" IOCL has maintained the secured loan amounts. hich is mostly remain same $ith previous years.

•

In )124" earning per share 05/S( value is Bs )9.72" $hich is higher than )123 but overall five years" IOCL shareholders has earned minimum 5/S in )124.

IOCL has %egree of operating leverage almost same $ith last five years. •

IOCL having a good position in future period of time.