report on budgeting process in ongc
TRANSCRIPT
SUMMER TRAINING REPORT
ON
BUDGETING PROCESS IN ONGC
A summer training project Submitted in partial fulfilment of the requirements for theAward of degree of Bachelor of Business Administration
SUBMITTED BY:
VISHNU TRIPATHI,
BBA – VTH SEM
EN. NO. : G-0841241
EXTERNAL GUIDE : INTERNAL GUIDE:
Mr. P. C. NAIK MR. DEEPAK SHANIDy. Manager (F&A) FACULTY - FINANCEHead Quarter Finance, SGRRITS, PATEL NAGAR
ONGC, Tel Bhavan, Dehradun,
SHRI GURU RAM RAI INSTITUTE OF TECHNOLOGY & SCIENCE , DEHRADUN
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ACKNOWLEDGEMENT
No task is a single person effort. Same is the case with this project. I would like to extend my
sincere thanks to all those people who helped me in accomplishing this project. I owe my project
success to all our faculty members, especially our for providing me wonderful opportunity and
guidance. I would like to extend my special gratitude to Mr. P.C.Naik, Dy.Manager(F&A), my
faculty supervisor for providing excellent supervision for the successful completion of this
project.
This project provided me a platform to increase my knowledge and empowered me with a better
understanding of concepts in the real world scenario.
My special thanks to ONGC, which accepted me in spite of my inexperience in the field, and
gave me the opportunity to work and learn with them. Words seem to be inadequate to express
my sincere thanks to my Corporate Internship Supervisor Mr. P.C.Naik, Dy.Manager(F&A) at
ONGC Tel Bhavan, who, in spite of his busy schedule, gave me his valuable guidance,
constructive criticism, untiring efforts and immense encouragement during the entire course of
study due to which my efforts have been rewarded.
Apart from this, I am also thankful to S/Shri Monoj Kaushik, Mr. B. Sridhar Rao, both Sr.
Finance & Accounts Officers at ONGC Tel Bhavan who provided me immense help in
understanding the budget structure and helped me in preparing my project report.
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STUDENT UNDERTAKING
This is to certify that I, Vishnu tripathi, have successfully completed my project titled
“Report on Budgeting Process in ONGC”, Head Quarter Finance, Dehradun under the
guidance of Mr. P.C. Naik in the month of may , June and July from 21-06-2010 to 16-08-
2010, in the particular fulfillment of the requirement for the award of degree of Bachelor of
Business Administration of SGRRITS, DEHRADUN. This is also to certify that this report is
an original product and no unfair means like copying etc. have been used for its completion.
VISHNU TRIPATHI
Signature:
Date: 16th August, 2010
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CERTIFICATE FROM COMPANY
This is to certify that Mr. VISHNU TRIPATHI pursuing BBA from Shri Guru Ram Rai Institute Of Technology And Science, Dehradun has successfully completed the Summer Training in our organization on the subject titled “ Report on Budgeting Process in ONGC” from 21st June2010 to 30th July 2010. During his project tenure in the organization we found him to be sincere and hard working and his conduct during the training was found to be satisfactory.
Mr. P.C.NaikDy. Manager (F&A)
Head Quarter Finance,ONGC, Tel Bhavan,Dehradun,Uttarakhand
Date: 30th July ‘2010
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To Whomsoever It May Concern
This is to certify that Mr. VISHNU TRIPATHI of BBA has completed his project
titled, Report on Budgeting Process in ONGC under my supervision and guidance.
His work is original to the best of my knowledge and belief.
Project Guide
P.C.Naik
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CERTIFICATE
This is to certify that the summer project titled “Report on Budgeting Process in
ONGC” is an academic work done by “ VISHNU TRIPATHI ” submitted in the
partial fulfilment of the requirement as per the University rules for the award of the
degree of “Bachelor of Business Administration” from “SRI GURU RAM RAI
INSTITUTE OF TECHNOLOGY & SCIENCE” DEHRADUN .
Mr. P.C.Naik
Director
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TABLE OF CONTENTS
CHAPTER 01: Corporate Internship Objectives.................................................................09
CHAPTER 02: Abstract.......................................................................................................10
CHAPTER 03: Company Profile.........................................................................................11
3.1 Background......................................................................................................................11
3.2 Overview of the Company’s business..............................................................................11
3.3 Organization Structure.....................................................................................................12
3.4 Vision and Mission Statement.........................................................................................12
3.4.1 World Class.............................................................................................................12
3.4.2 Integrated In Energy Business.................................................................................13
3.4.3 Dominant Indian Leadership...................................................................................13
3.5 Strategic Vision................................................................................................................13
3.6 A brief about the competitors of ONGC. ........................................................................13
3.7 Organization Structure of the Finance Function of ONGC.............................................15
CHAPTER 04: Industry Analysis........................................................................................17
4.1 Competition Analysis.....................................................................................................18
4.1.1 Business Model Analysis.......................................................................................18
4.2 Product portfolio...................................................................................................20
4.2.1 Marketing, Transportation and Distribution..........................................................21
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CHAPTER 05: Financial Statement Analysis....................................................................22
5.1 Ratio Analysis................................................................................................................22
5.1.1 Liquidity ratios......................................................................................................22
5.1.2 Profitability Ratios................................................................................................25
5.1.3 Activity Ratios......................................................................................................31
5.1.4 Leverage Ratios....................................................................................................36
5.2 Comparative Analysis (ONGC & RIL).........................................................................38
5.2.1 Comparison of Balance Sheet.............................................................................38
5.2.2 Comparison of Profit and Loss Accounts...........................................................44
5.2.3 Comparison of Cash Flow Statements................................................................48
CHAPTER 06: Research Project on Budget Process.........................................................50
6.1 Definitive understanding of Budgeting……………………………………………….51
6.1.1 Budget.................................................................................................................51
6.1.2 Budgeting............................................................................................................51
6.2 Budget preparation in ONGC, Head Quarters...............................................................52
6.2.1 Introduction.........................................................................................................52
6.2.2 Preparation of Budget Estimate (BE) and Revised Budget Estimate (RBE).......52
6.2.3 Fund Center – Cost Center Concept…………………………………………....53
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6.2.4 Types of budget in ONGC ……………………………………………………..54
6.2.4.1 General budget……………………………………………………………55
6.2.4.1.1 Procurement budget ………………………………………………...56
6.2.4.1.2 Operational budget.............................................................................56
6.2.4.1.3 Cash budget........................................................................................56
6.2.4.1.3.1 Income Budget………………………………………………..57
6.2.4.1.3.2 Expenditure budget...................................................................57
6.2.4.1.3.2.1 Planned Expenditure (Capex)…………………………...57
6.2.4.1.3.2.2 Non-planned expenditure (Opex).....................................58
6.2.4.2 Performance budget……………………………………………………….59
6.2.5 Driving factors for Budget……………………………………………………...60
6.2.6 Structure of Budget in ONGC..............................................................................61
6.3 Budgetary process................................................................................................... 62
6.3.1 Time schedule.......................................................................................................62
6.3.2 Operating the budget............................................................................................63
6.3.3 Routing / Flow chart of making Expenditure………………………………......63
6.3.4 Purchase Requisition (PR)...................................................................................64
6.3.5 Service Entry Sheet..............................................................................................66
6.3.6 Role of MRP Controller………………………………………………………...66
6.3.7 Role of Budget Coordinator...…………………………………………………...66
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6.3.8 Re-appropriation...................................................................................................67
6.3.9 Online Earmarking...............................................................................................67
6.3.10 Offline Earmarking............................................................................................67
6.3.11 Manpower (HR)……….....................................................................................67
6.4 Analysis of Budgetary Figures as approved by the board of Head Quarters Finance,
Dehradun............................................................................................................................67
6.4.1 Detailed Analysis................................................................................................69
CHAPTER 07: Report Writing........................................................................................73
CHAPTER 08: Conclusions and Recommendations.......................................................74
ANNEXURES & REFERENCES...............................................................................75&76
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01CORPORATE INTERNSHIP OBJECTIVES
Below are the main objectives of my corporate internship, which I tried to fulfil by putting in my
efforts to the fullest:
To understand the business and competitive environment of ONGC in the Oil & Gas
industry.
To analyze and understand the financial position of ONGC with respect to its
competitors.
To study the practices and entire working of the budget section of finance department,
Tel Bhavan, ONGC Head Quarter Finance, Dehradun.
To apply my knowledge, which I have gained through the foundation courses of
management which have been covered up to this juncture, and enhance it with the
assistance of industry interface.
To get an experience of the corporate life and its functioning and understanding various
interaction styles and behaviours.
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02ABSTRACT
My internship was carried out at ONGC, Head Quarter Finance, Tel Bhavan, Dehradun,
Uttarakhand. I was placed in the budget section in Finance department. I was thoroughly
motivated to learn as much as possible during these crucial eight weeks of my internship. I was
made to pursue a project of my choice from a number of choices given by my corporate
supervisor. I chose to undergo a project of budgeting process in ONGC.
I was regular in attending all the sessions conducted by my corporate supervisor. I did everything
as directed by my corporate supervisor. I learnt many invaluable things about how things are
done in the corporate environment. The working environment of ONGC as an employer is just
tremendous. All the people work together as if they are a family at ONGC. Everyone is ready to
help at anytime. I was greeted very auspiciously with every person whom I tried to
communicate. The most important thing which I observed is the teamwork. Even at managerial
level, team work with the seniors, subordinates as well as juniors is of utmost importance.
Another important lesson which I learnt through this industry interface is how to deal with
different things diplomatically. I was told not to behave in an aggressive manner especially when
sitting at a managerial position in an organization.
Through my project, I learnt that ONGC is an organization with very strong fundamentals. The
company has been performing outstandingly in the oil and gas industry and is contributing a lot
to the Government of India. The company is very strong in its financials as compared to its peers
in the industry. The budgeting process at ONGC is without any kind of errors. Each and every
expense is cross checked many times at different levels before actually executing it. The project
gave me an exhaustive insight on the working of Public Sector Undertakings.
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03COMPANY PROFILE
3.1 Background
Oil and Natural Gas Corporation Limited (hereinafter referred to as “ONGC” or “the Company”) is the leading Oil and Gas Company in Hydrocarbon sector in India. It is engaged in the exploration and production of Oil, Gas and other related petroleum products. The Company was initially established as a commission in 1959 by an act of parliament with the objective of exploration, development, production and distribution of hydrocarbons in the country. ONGC came into existence in 1994 and all the assets and liabilities of the commission were transferred to the Company.
ONGC is the flagship company of India, and making this possible is a dedicated team of nearly 40,000 professionals who toil round the clock. It is this toil which amply reflects in the performance figures and aspirations of ONGC. Over 18,000 experienced and technically competent executives mostly scientists and engineers from distinguished Universities / Institutions of India and abroad form the core of manpower. They include geologists, geophysicists, geochemists, drilling engineers, reservoir engineers, petroleum engineers, production engineers, engineering & technical service providers, financial and human resource experts, IT professionals and so on.
The liberalized economic policy, adopted by the Government of India in July 1991, sought to deregulate and de-license the core sectors (including petroleum sector) with partial disinvestments of government equity in Public Sector Undertakings and other measures. As a consequence thereof, ONGC was re-organized as a limited Company under the Company's Act, 1956 in February 1994.
3.2 Overview of the Company’s business
At present, ONGC is a Public Sector Company with Central Government holding 74.14 percent of total equity shares. ONGC is a major producer of Oil & Gas in India and the biggest wealth creator in the recent years. ONGC has its registered Office and Corporate Office at New Delhi.
Oil and Natural Gas Corporation Limited is the largest Exploration and Production Company in India. The principal activities of ONGC include acquisition of mineral interests in properties, exploration (including prospecting), development, production, transportation and marketing crude oil and natural gas. It also produces several value added products (VAPs) like Liquefied Petroleum Gas (LPG), Naphtha, Superior Kerosene Oil (SKO), Ethane-Propane (C2-C3), High Speed Diesel (HSD), Sulphur, Low Sulphur Heavy Stock (LSHS), ATF at their crude & gas processing facilities.
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The Company has also entered into joint ventures in the nature of production sharing contracts (PSC), with various corporate bodies for executing exploration, development and production activities in India. The PSC lays down Participating Interest (PI) of each partner and the production of crude oil and natural gas is shared as per the provisions of PSC. Some of these properties are operated by the Company and some by JV partners.
The aforementioned activities are collectively referred to as upstream operations and form part of the 'Upstream Petroleum Industry'. The industry is commonly referred to as the Exploration & Production (E&P) industry which further forms a part of the Oil and Gas industry.
In the year 2002-03, after taking over MRPL from the A V Birla Group, ONGC diversified into the downstream sector. ONGC will soon be entering into the retailing business. ONGC has also entered the global field through its subsidiary, ONGC Videsh Ltd. (OVL). ONGC has made major investments in Vietnam, Sakhalin and Sudan and earned its first hydrocarbon revenue from its investment in Vietnam.
3.3 Organization Structure
The current organization structure of the company is given below:
At present, the services mentioned under “To be filled” are reporting to other Directors based on Administrative orders issued from time to time.
3.4 Vision and Mission Statement
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“To be a world-class Oil and Gas Company integrated in energy business with dominant Indian leadership and global presence.”
3.4.1 World Class
• Dedicated to excellence by leveraging competitive advantages in R&D and technology with trained, dedicated and motivated work force.
• Imbibe high standards of business ethics and organizational values.
• Abiding commitment to health, safety and environment to enrich quality of organizational and community life.
• Foster a culture of trust, openness and mutual concern to create a stimulating and challenging experience for our people.
3.4.2 Integrated In Energy Business
• Focus on domestic and international oil and gas exploration & production business opportunities.
• Provide value linkages in other sectors of energy business.
• Create growth opportunities and maximize shareholder value.
3.4.3 Dominant Indian Leadership
• Retain dominant position in Indian petroleum sector and enhance India's energy security.
3.5 Strategic Vision
Focusing on core business of E&P, ONGC has set strategic objectives of:
Doubling reserves (i.e. accreting 6 billion tones of O+OEG) by 2020. Out of this, 4 billion tones are targeted from the Deep-waters.
Improving average recovery from 28 % to 40 %.
Tie-up 20 MMTPA of equity Hydrocarbon from abroad.
The focus of management will be to monetize the assets as well as to assetise the money.
3.6 A brief about the competitors of ONGC
3.6.1 Reliance Industries Limited
Mission Statement
• To be the lowest specific energy consumer in the industry.
• To widen the options for energy source, and
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• To minimize the adverse impact of our operations on the environment.
We plan to achieve the above within the framework of sustaining the business by:
• Integrating energy management with the business management and establishing performance drive goals.
• Upgrading hardware, deploying new technologies and improving our practices to increase energy efficiency, reduce greenhouse gas emissions and minimize environmental impacts.
• Supporting scientific research and technological efforts to deliver new sources of energy including renewable and alternate fuels.
• Carrying out regular audits and training employees to promote energy conservation as a culture across the entire business functions.
• Continuously benchmarking our energy efficiency and energy productivity against others.
• Promoting awareness on energy conservation among all members of the RIL family and the community at large.
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3.7 Organization Structure of the Finance Function of ONGC
The organizational structure of the finance function is reviewed periodically to align with the changes in the company. The current organizational structure of the finance function is given below:
The chief of the finance function is Director (Finance). The Director (Finance) is a part of the Board of Directors and functionally reports to the Chairman & Managing Director (C&MD) of the Company.
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Several functions report to the Director (Finance). These functions can be classified into 3 categories based on the reporting relationship:
a) Functional Reporting
All the corporate Finance functions centralized at the corporate office in Delhi or Headquarters in Dehradun report functionally as well as administratively to the Director (Finance). The roles and responsibilities of each of these functions have been described in detail in the relevant chapters of the manual.
b) CRC Reporting
Under the CRC regime all Assets, Basins, Plants, Services and Institutes are self contained units having their own Finance division. The Heads of Finance of each of these units administratively and functionally report to the respective Head of their units. However, they are also required to report to the Director (Finance) on all policy matters and other critical matters relating to finance and accounts.
The Head of Finance at each unit is responsible for all financial activities relating to their unit.
c) Administrative Reporting
As per prudent corporate governance practices, the Chief of Internal Audit reports functionally to the Audit & Ethics Committee and administratively to Director (Finance).
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04INDUSTRY ANALYSIS
4.1. Oil & Gas Industry Overview
The oil and gas industry took its birth in India way back in 1867, with the discovery of oil
deposits in Makum, near Margherita, Assam. The oil and gas sector in India has since witnessed
the birth of numerous oil and gas companies. In India, the oil and gas industry jobs attract huge
workforce. With the inset of bigger players into the oil and gas sector in India engaging in mass
oil and gas production, the oil and gas prices have been revised although still in the unaffordable
segment for many.
A rapid increase is also seen in the demand of oil and gas exploration and drilling equipment and
services. The oil and gas fields, both onshore and offshore, provides mass employment
opportunities and also contribute in a wholesome way in increasing the oil and gas reserves of
India. Despite of exploration of new oil and gas wells, increase in the drilling operations,
advancement in oil extraction methods, pumps and machine and other equipments and
technology, the costs have not come down. The oil and gas prices are still a matter of utmost
concern for the Government of India.
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4.2 Competition Analysis
4.2.1 Business Model Analysis
Value Proposition
The company has presence in all aspects of the Oil and Gas value chain. The company has operations in oil exploration and production both in India and abroad. The company’s subsidiary OVL (ONGC Videsh Ltd) has presence across 12 countries through partnerships/ strategic alliances / joint ventures with preferred partners.
Target customers
The major customers are corporate like fertilizer companies, power companies and power companies.
Core Capabilities
ONGC is practically Zero Debt Corporate. With numerous tie-ups, joint ventures acquisitions and efficient management ONGC has become one of the largest Oil & Gas company in India. The core capabilities can be summed up as follows:
ONGC owns and operates more than 15000(Onshore) kilometers of pipelines in India, including nearly 3800 kilometers of sub-sea pipelines. No other company in India operates even 50 per cent of this route length.
Strong intellectual property base, information, knowledge, skills and experience.
Maximum number of Exploration Licenses, including competitive NELP rounds.
State-of-the-art seismic data acquisition, processing and interpretation facilities.
One of the biggest ERP implementations in the Asia.
ONGC’s success rate is at par with the global norm and is elevating its operations to the best in class level, with the modernization of its fleet of drilling rigs and related equipment.
Growth Drivers
The growth drivers of the company are as follows:
State-of-the-art seismic data acquisition, processing and interpretation facilities.
Professionally managed organization with high operational efficiency.
Strong intellectual property base, information, knowledge, skills and experience.
Bagged the most number of contracts (24 out of 52) under NELP.
Has presence across the value chain.
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Got license to open 1100 retail outlets.
With large number of Joint ventures the company is leveraging on its capabilities to have a global presence.
Pricing Regime in India
Prior to the commencement of RIL's gas production, out of the total gas availability of around 96 mmscmd in the country, around 53 mmscmd is Administered Pricing Mechanism (APM) gas and 43 mmscmd in non-APM gas (which includes 20 mmscmd produced by Joint Ventures between ONGC & Private sector (JV) under Production Sharing Contracts (PSCs) 5 and 23 mmscmd Re-gasified LNG .
Although the Government has dismantled the APM, it continues to set the end-consumer prices of fuel sold at retail pumps, and upstream companies such as ONGC and OIL are asked to partially bear the burden of under-recoveries of the Oil Marketing Companies. APM prices are revised from time-to-time, but are currently well below prevailing market prices.
The table below gives the various price-points of privately-produced domestic gas in the country, with the highest price being charged by the Panna-Mukta-Tapti (PMT) consortium of ONGCBG-RIL. In addition, gas from domestic Joint Venture (JV) fields and imported LNG is also sold at non-APM prices, and some customers have shown the willingness to pay relatively high prices for spot Liquefied Natural Gas (LNG) imported by Petronet LNG or Shell at their Dahej and Hazira terminals respectively.
Source: IDFC-SSKI Research, March 2009, Industry sources
4.3 Product portfolio
Oil and Natural Gas Corporation (ONGC) is engaged in the exploration, production, refining, transporting and marketing of the following products and services:
Crude oil
Natural gas
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Liquefied petroleum gas
Natural gas liquid
Ethane / propane
Apart from these, ONGC also deals in some other products and services but these ones form the major portion of the company’s portfolio. The company’s brand name is enough in itself. This can be witnessed from the fact that the company is the leading provider of all the oil and gas products and services in the upstream oil and gas sector.
Finished products in Rs. Cr as on March, 2010
Product Name Unit Installed
Capacity
Production
Quantity
Sales
Quantity
Sales
Value
Oil Crude NA 27,931,576.00 24,076,241.00 38,680.27
Gas Natural NA 25,121,504.00 20,427,710.00 7,178.00
Aromatic Rich
Naphtha
Metric Tonnes 1,468,228 1,469,429.00 1,442,019.00 4,384.86
Liquefied
Petroleum GasMetric Tonnes 1,158,000 1,034,611.00 1,036,773.00 2,016.86
C2/C3
(Ethane/Propane)Metric Tonnes 570,000 519,711.00 519,957.00 929.07
Product Name UnitInstalled
Capacity
Production
Quantity
Sales
Quantity
Sales
Value
Motor Spirit NA NA 231,758.00 915.90
Superior
Kerosene OilNA NA 308,164.00 740.08
LSHS Metric Tonnes 16,270 17,187.00 17,544.00 41.83
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Kerosene/ATF NA 16,498.00 10,093.00 39.36
Others NA NA NA 11.29
HSD Metric Tonnes 42,637 31,865.00 379.00 1.28
Total 54,938.80
4.3.1 Marketing, Transportation and Distribution
Marketing
The marketing of petroleum products in India is being done by four major public sector oil companies, namely, IOC, HPCL, BPCL and IBP. Their retail distribution comprises of over 16,000 retail outlets, over 6,000 kerosene agencies and over 5,000 LPG distributorships.
Transportation
At present, there is only one major long distance gas transportation pipeline, connecting ONGC delivery point near Hazira in Gujarat to demand centers in the north-west corridor of the country including Jagdishpur in Uttar Pradesh and Vijaipur in Madhya Pradesh.
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05FINANCIAL STATEMENT ANALYSIS
5.1 Ratio Analysis
5.1.1 Liquidity ratios
(A) CURRENT RATIO
The liquidity and solvency of a firm are closely related to its working capital position. The usual way to measure a company’s liquidity is to divide the current assets by the current liabilities to get the current or 2:1 ratio:
Current ratio =
This ratio sometimes called the working capital ratio provides a rough measure of the safety afforded to the company’s short term creditors. For in the events of a technical liquidation, current assets are more likely to yield a higher percentage of their real value than are fixed assets. Short term lenders regard current assets as the ultimate source for the repayment of their loans.
As on 31st
March 10As on 31st
March09As on 31st
March 08As on 31st
March 07As on 31st
March 06
Current Assets 476443 434298 387850 326279 285477
Current Liability 211051 176083 139932 105951 108763
Current Ratio = 2.25 2.46 2.77 3.08 2.62
INTERPRETATION:
Although the high ratio shown by the graph says that we can easily meet up our current liabilities but too high ratio is also not beneficial for the company as it shows that because of poor investment policies of the management and poor control of inventory, assets are lying idle and they should be further invested.(B) QUICK RATIO :
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Quick ratio also called acid test ratio establishes a relationship between quick, or liquid, assets and current liabilities. An asset is liquid if it can be converted into cash immediately. Inventories are considered to be less liquid. Inventories normally require some time for realizing into cash.
Generally a quick ratio of 1 to 1 is considered to represent a satisfactory current financial condition. Thus, a company with a high value of quick ratio can suffer from the shortage of funds if it has slow paying, doubtful and long duration outstanding debtors. On the other hand a company with a low value of quick ratio may really be prospering and paying its current obligation in time if it has been turning over its inventories efficiently.
As on 31st
March 10As on 31st
March09As on 31st
March 08As on 31st
March 07As on 31st
March 06Quick Assets = Current Assets - Inventory
435836 399492 357512 295894 259785
quick ratio= quick assets /total current liabilities
2.065074319 2.268770977 2.554898093 2.792743816 2.388542059
INTERPRETATION:
As the inventory does not play a major part in current assets therefore, the difference between quick and current ratio is not high. This can be explained by the fact that ONGC being into an exploration sector, requires less amount of raw material
(C)CASH RATIO
The cash ratio measures the extent to which a corporation or other entity can quickly liquidate assets and cover short term liabilities, and therefore is of interest to short term creditors.
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CASH RATIO OF ONGC FOR LAST FIVE YEARS
As on 31st
March 10As on 31st
March09As on 31st
March 08As on 31st
March 07As on 31st
March 06
CASH 121405.48 160143.04 136705.08 42792.65 58488.06
Marketable Securities 0 0 0 0 0
Current Liabilities 130150.90 109151.42 88169.7 65270.11 92030.61
Cash Ratio 0.932805535 1.467164055 1.550476865 0.655623991 0.635528331
Interpretation:
A perusal of above data shows that the concerned ratio is quite satisfactory in all the previous years because it is much higher than the rule of thumb i.e. .5.Moreover a higher ratio in all the years shows that the company has improved its needed short term financial position.
Note: ONGC has no short term securities.
5.1.2 PROFITABILITY RATIOS
Profitability ratios are calculated to measure the operating efficiency of the company. Besides management of the company, creditors and owners are also interested in the profitability of the firm. Creditors want to get interest and repayment of principal regularly. Owners want to get a required rate of return on their investment. This is possible only when company earns enough profit.
As on 31st
March 10As on 31st
March09As on 31st
March 08As on 31st
March 07As on 31st
March 06Income from Operation ( Turnover)
650494 615426 590575 494397 472454
Gross Income or (PBDIT) 319684 314790 306465 283731 246784
Operating Income (PBIT) 198835 216811 211471 199158 184768
Operating Profit or (PBT) 239807.32 252345.91 236702.12 218371 196655
PAT 161264.10 167016.47 156429.17 144308 129830
A) GROSS PROFIT MARGIN:
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The gross profit margin reflects the efficiency with which management produces each unit of product. A high gross profit margin relative to the industry average implies that the firm is able to produce at relatively lower cost. It is a sign of good management. A gross margin ratio may increase due to; i)higher sales prices, ii)lower cost of goods sold, iii)a combination of variations in sales prices and costs, iv)an increase in the proportionate volume of higher margin items.
A low gross profit margin may reflect higher cost of goods sold due to the firm’s inability to purchase raw materials at favorable terms, inefficient utilization of plant and machinery, or over investment in plant and machinery resulting in higher cost of production.
As on 31st
March 10As on 31st
March09As on 31st
March 08As on 31st
March 07As on 31st
March 06
Gross Profit Margin
0.511 0.518 0.574 0.522
INTERPRETATION:
Gross profit ratio is a reliable guide to the adequacy of selling prices and efficiency of trading activities. As the figure states that the ratio on 31st mar 2006 is highest which shows its higher adequacy to cover the administrative and marketing expenses and to provide for fixed charges, dividends and building up of reserves. Of course, higher the gross profit ratio, the better it is. As on 31st mar 08, the ratio is 51.1%, which is quite similar to the ratio of previous year. Thus, we can say that ONGC is maintaining the gross profit ratio.
B) NET PROFIT MARGIN
Net profit is obtained when operating expenses interest and taxes are subtracted from the gross profit.
Net profit margin ratio establishes a relationship between net profit and sales and indicates management’s efficiency in manufacturing, administering and selling the products. This ratio indicates the firm’s capacity to withstand adverse economic conditions. A firm with a high net margin ratio would be in an
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advantageous position to survive in the face of falling selling prices, rising costs of production or declining demand for the product. It would really be difficult for a low net margin firm to withstand these adversities.
As on 31st
March 10As on 31st
March09As on 31st
March 08As on 31st
March 07As on 31st
March 06Net Profit Margin =PAT/SALES
0.24 0.27 0.26 0.29 0.27
INTERPRETATION:
On comparison of gross profit margin and net profit margin for the last two years, it is observed that net profit margin for year09-10 is greater than for year 08-09 irrespective of having higher gross profit margin in 08-09. This can be explained by the reason that Deferred tax liability is higher for the year 09-10 than for the year 08-09.
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C) OPERATING EXPENSE RATIO
The operating expense ratio explains the changes in the profit margin (EBIT to sales) ratio.
A higher operating expenses ratio is unfavorable since it will leave a small amount o operating income to meet interest, dividends etc. The variations in the ratio, temporary or long lived can occur due to several factors such as:
a) Change in the sales prices b) Change in the demand for the product
c) Change in proportionate shares of sales of different products with varying gross margins.
For 08-09 for 07-08 for 06-07 for 05-06
Operating expense 123812 106823 102016 76762
Sales 601370.2 569123.1 482009
Operating expense ratio 17.76% 17.93% 15.93%
D) RETURN ON CAPITAL EMPLOYED
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The term investment may refer to total assets or net assets. The conventional approach of calculating return on investment (ROCE) is to divide PBDIT or PBIT by capital employed. Capital employed represents pool of funds supplied by shareholders and lenders, while PAT represent residue income of shareholders.
As on 31st
March 10As on 31st
March09As on 31st
March 08As on 31st
March 07As on 31st
March 06PBDIT 319684 314790 306465 283731 246784
CAPITAL EMPLOYED
640583 604844 540744 493763 419926
ROCE = PBDIT/ Capital employed
49.90% 52.04% 56.67% 57.46% 58.77%
Note: PBDIT taken in accordance with annual report of ONGC.
INTERPRETATION:Return on Capital employed judges the overall performance of the enterprise. ROCE shows a good trend of average 54% in the past five years. It shows the strong profitability and god performance efficiency.
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E) RETURN ON EQUITY (ROE)
Common or ordinary shareholders are entitled to the residual profits. The rate of dividend is not fixed; the earnings may be distributed to shareholders or retained in the business. A return on shareholders equity is calculated to see the profitability of owners investment. The shareholders equity or net worth will include paid up share capital, share premium and reserves and surplus less accumulated losses.
As on 31st
March 10As on 31st
March09As on 31st
March 08As on 31st
March 07As on 31st
March 06ROE =PAT/ EQUITY
0.2048163 0.23650 0.25261 0.26743 0.27714
INTERPRETATION:ONGC is capable of earning a return of average 25% on the equity employed in the last five years. It shows that equity shareholder’s funds are being used efficiently. A constant trend also helps in increased trust worthiness of organization among its shareholders.
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5.1.3 ACTIVITY RATIOS
Activity ratios are measures of how well assets are used. Activity ratios -- which are, for the most part, turnover ratios -- can be used to evaluate the benefits produced by specific assets, such as Inventory or accounts receivable. Or they can be use to evaluate the benefits produced by all of Company’s assets collectively. These measures help us gauge how effectively the company is at putting its investment to work. A Company will invest in assets – e.g., inventory or plant and equipment – and then use these assets to generate revenues. The greater the turnover, the more effectively the company is at producing a benefit from its investment in assets.
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A) INVENTORY TURNOVER RATIOS
Inventory turnover is the ratio of cost of goods sold to inventory. This ratio indicates how many times inventory is created and sold during the period:
As at March 2010 As at March 2009
NET SALES 639681.9 601370.2
GROSS PROFIT 377331 314790
COST OF GOODS SOLD
262350 286580.2
OPENING INVENTORY
34806.37 30337.58
CLOSING INVENTORY
40606.71 34806.37
AVG. INVENTORY 37706.54 32571.98
I.T.R. 6.95 8.80
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INTERPRETATION
ONGC is turning its inventory of finished goods into sales 8.80 times in 2008. In other words it holds average inventory for 41 days in 2009. The average inventory figure is more appropriate to use than the year end inventory figure because the levels of inventories fluctuate over the year. The average inventory figure smoothes out the fluctuations.
B) DEBTORS TURNOVER RATIO
Debtors turnover ratio establishes the relationship between the net credit sales and average debtors of the year. Average debtors are calculated by dividing the sum of debtors in the beginning and at the end by 2. This ratio is calculated as :
As on 31st As on 31st As on 31st As on 31st As on 31st
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March 10 March09 March 08 March 07 March 06 Net credit sales 601370.23 569123.06 482443.9 467112.48
Opening Balance( debtors) 27594.4 37042.76 37293.07 23177.99
Closing Balance 43603.66 27594.4 37042.76 37293.07
Avg. Acc. Receivables 35599.03 32318.58 37167.915 30235.53
Debtors Turnover ratio 16.89 17.61 12.98 15.45
AVG COLLECTION PD (days)
21 20 27 23
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INTERPRETATION
ONGC is able to turnover its debtors 16.89 times a year in 2008. In other words, its debtors remain outstanding for 21days in 2009. It shows the efficiency of the staff entrusted with collection of amounts due from debtors. The decreased avg. collection period in the last two years is a good indicator and shows the efficiency of collection policies.
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5.1.4 LEVERAGE RATIOS
To judge the long term financial position of the firm financial leverage ratios are calculated.
As on 31st
March 10As on 31st
March09As on 31st
March 08As on 31st
March 07As on 31st
March 06UNSECURED LOANS
267 369 696 1069.76 1490
DEBT 267 369 696 1069.76 1490SHARE CAPITAL 21388.87 21388.87 21388.87 14259.3 14259.28RESERVES AND SURPLUS
765965 684785.12 597850.39 525337.39 454194.87
EQUITY 787354 706173.99 619239.26 539596.69 468454.15CAPITAL EMPLOYED
641583 605213 541440 494832 421416
NET WORTH 780848 699435 614099 535934 463142
A) DEBT RATIO Several debt ratios may be used to analyze the long term solvency of a firm. The firm may be interested in knowing the proportion of the interest bearing debt in the capital structure. Total debt will include short and long term borrowings from financial institutions, debentures/bonds, deferred payment arrangements for buying capital equipments, bank borrowings, public deposits and any other interest bearing loan.
As on 31st
March 10As on 31st
March09As on 31st
March 08As on 31st
March 07As on 31st
March 06DEBT RATIO = TOTAL
DEBT/ CAPITAL EMPLOYED
0.000527569 0.001287116 0.002166545
0.003548244
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INTERPRETATIONIt is seen that debt ratio is decreasing since 2009 and now its been very less. This is just because financing through outside has decreased in ONGC.
B) CAPITAL EMPLOYED RATIO
This is yet another alternative way of expressing the basic relationship between debt and equity.
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As on 31st
March 10As on 31st
March09As on 31st
March 08As on 31st
March 07As on 31st
March 06CAPITAL EMPLOYED 641583 605213 541440 494832.76 421416
NET WORTH 780848 699435 614099 535934 463142
CAPITAL EMPLOYED RATIO
0.82 0.86 0.88 0.92 0.90
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5.2 Comparative Analysis
ONGC vis-a-vis Reliance Industries Limited
5.2.1 Comparison of Balance Sheet
(i) Total Share Capital
Mar '07 Mar '08 Mar '09
ONGC 1,425.93 2,138.89 2,138.89
RIL 1,393.17 1,393.21 1,453.39
In Rs. Crore
For all the three years under study, ONGC enjoys a better total share capital than RIL. More
precisely, the liabilities of ONGC are much higher than RIL in terms of the capital which the
company owes to its owners.
(ii) Reserves
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Mar '07 Mar '08 Mar '09
ONGC 52,533.74 59,785.04 68,478.51
RIL 43,760.90 59,861.81 77,441.55
In Rs. Crore
For all the three years, there has been an increase in reserves of both the companies. But on
comparing them, RIL enjoys a better position than ONGC. Thus, during the times of
contingencies RIL will be able to deal with them more easily and thus will be more stable than
ONGC.
(iii) Total Debt
(In Rs. Crore) Mar '07 Mar '08 Mar '09
ONGC 12,722.61 15,109.07 12,482.71
RIL 21,865.61 27,825.73 36,479.68
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Since RIL is carrying more debt than ONGC, therefore the total credit extended towards latter is
much higher than the former and hence the position of RIL is quite unstable as compared to
ONGC.
(iv) Net Block
Mar '07 Mar '08 Mar '09
ONGC 7,842.20 8,839.12 10,518.01
RIL 55,716.75 63,660.46 61,883.63
In Rs. Crore
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Net block comprises of the assets of the company less accumulated depreciation. For all the three
years under consideration, RIL has a higher amount of net block than ONGC. Thus, the worth of
RIL’s assets is much higher than the worth of ONGC’s assets.
(v) Capital Work in Progress
Mar '07 Mar '08 Mar '09
ONGC 33,373.92 37,794.16 41,154.63
RIL 6,957.79 7,528.13 23,005.84
In Rs. Crore
The Capital Work in Progress of ONGC has gradually increased over the three years under
consideration, and that of RIL has increased gradually towards Mar ’07, and has increased
sharply towards Mar ’08. But still at the end of Mar ’08, the capital work in progress and thus the
amount of incomplete work of ONGC is much higher than that of RIL.
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(vi) Investments
Mar '07 Mar '08 Mar '09
ONGC 4,888.57 5,702.05 5,899.50
RIL 5,846.18 16,251.34 22,063.60
In Rs. Crore
Investments are the monetary assets purchased with the idea that the assets will provide income
in the future or appreciate and be sold at a higher price. By looking at the bar chart above, we can
see that the difference between the investments made by the two companies was very low
towards Mar ’06 but towards the end of Mar ’08 the investments made by RIL has grown up to
nearly four folds than that of ONGC.
(vii) Net Current Assets
(In Rs. Crore) Mar '07 Mar '08 Mar '09
ONGC 20,211.25 24,183.59 24,854.08
RIL 3,149.15 4,352.93 10,975.21
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For all the three financial years, the net current assets of ONGC are much higher than that of
RIL. Thus, ONGC is enjoying a much stable position than that of RIL in terms of short term
solvency.
5.2.2 Comparison of Profit and Loss Accounts
(i) Net Sales
Mar '07 Mar '08 Mar '09
ONGC 47,989.74 56,913.44 60,065.10
RIL 80,877.79 111,699.03 133,805.78
In Rs. Crore
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For all the three years, RIL has been making more sales, thus earning higher revenue than
ONGC. This clearly indicates that RIL is making more business than ONGC.
(ii) Total Expenses
Mar '07 Mar '08 Mar '09
ONGC 21,205.74 28,607.62 30,424.78
RIL 68,550.24 91,947.72 109,506.10
In Rs. Crore
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For all the three years, RIL has been incurring more expenses than ONGC. At the same time, the
expenses incurred by ONGC are way behind than that of RIL. This shows that the management
of ONGC is much more efficient in saving the company’s expenses.
(iii) Operating Profit
Mar '07 Mar '08 Mar '09
ONGC 26,995.58 28,286.09 29,754.43
RIL 14,458.74 20,405.91 22,432.52
In Rs. Crore
For all the three years, ONGC has made higher operating profit than that of RIL. This further
shows that ONGC’s efficiency in terms of making profits is much more than that of RIL.
(iv) Tax
Mar '07 Mar '08 Mar '09
ONGC 7,321.43 8,041.02 8,941.85
RIL 1,642.72 2,585.35 3,559.85
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The tax paid by ONGC is way ahead than that of RIL for all the three years under consideration.
This shows that ONGC is contributing more to the Government of India by paying higher
amount of corporate taxes and is making the oil and gas industry very tax efficient.
(v) Equity Dividend
(In Rs. Crore) Mar '07 Mar '08 Mar '09
ONGC 6,416.70 6,630.51 6,844.39
RIL 1,393.51 1,440.44 1,631.24
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For all the three years, ONGC has paid much higher equity dividend than that of RIL. This
shows that the company paid better returns to the stakeholders of the company.
5.2.2 Comparison of Cash Flow Statements
(i) Closing Cash & Cash Equivalents
Mar '07 Mar '08 Mar '09
ONGC 8812.82 19280.79 22417.66
RIL 2146.16 1835.35 4280.05
In Rs. Crore
For all the three years, the closing cash & cash equivalents of ONGC are much higher than that
of RIL. This shows that ONGC enjoys much high liquidity position than RIL.
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06RESEARCH PROJECT ON BUDGETING PROCESS
Preface
Every segment of human life would get stuck if fuel is absent, as it is needed not only to carry
out day-to-day activities of human being, but also for the development of a nation. It is virtually
impossible to imagine the life without petroleum. Its role in human life is explicable. Sometimes,
it is even referred to as liquid gold.
India has 0.50% of the total natural reserves out of which 0.30% is owned by ONGC. India
contributes to 1.10% of the total natural gas production, where the contribution of ONGC is
1.00%. India has 15% of world’s population and 0.50% of world’s oil and gas reserves. Thus,
every year we have to spend a lot to meet the nation’s oil and gas requirements.
Today’s finance is deeply concerned with proper utilization of the organization budget and other
resources for achieving its objectives. To achieve any target in the changing environment is not
an easy job. It requires a planned effort to review the organizational target, improved technology,
planning as well as decision making processes, and for achieving this target, budget plays a
significant role as blood plays in a human body. Thus, the management should follow a
methodology to have a well managed financial control. And this is only possible when we have a
budget system.
In order to analyze and gain fair idea about ONGC, a research project report on budgeting
structure in ONGC would be worthwhile.
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6.1 Definitive understanding of Budgeting
6.1.1 Budget
A budget is a detailed plan of operations for some specific future period. It is an estimate prepared in advance of the period to which it applies. It acts as a business barometer as it is complete programme of activities of the business for the period covered.
According to Gordon and Shillinglaw, budget may be defined as “a predetermined detailed plan of action developed and distributed as a guide to current operations and as a partial basis for the subsequent evaluation of performance”. The Chartered Institute of Management Accountants, England, defines a budget as “a financial and quantitative statement prepared prior to a defined period of time of the policy to be perused during that period for the purpose of attaining a given objective”.
Objectives of Budget
It gives the direction to the organization and brings into focus the physical and financial targets to be achieved during the budgeting period.
It forecasts the requirement of resources for achievements of laid-down targets.
It enables coordination between the activity of various departments which helps in reducing wastage of resources and duplication of efforts.
In a big organization like ONGC, it helps in control by measuring the actual achievement vis-à-vis established targets down the line. The performance of each business unit can be assessed accurately.
6.1.2 Budgeting
The term budgeting indicates the procedure for preparing plan in respect of future financial and physical requirement. In other words, budgeting is the formulation of plans for future activities that seeks to substitute carefully constructed objective for hit and miss performance and provide yardstick by which deviations from the planed achievements can be measured. Thus budgeting implies the process of preparing budget. This includes budget plans and preparation, budgetary control and related technique. It involves the preparation of the quantitative and financial statement in advance. It indicates the intention of the management for controlling and regulating the activities of employees.
Significance of Budgeting
Budgeting is an essential management tool for every organization. The future of an organization depends on how effectively it implements its plan and consequently the budgets.
This applies even more to ONGC as it falls in an industry where returns are highly probabilistic and not deterministic. In ONGC, special emphasis is given to budget preparation and utilization, as it is only through proper and determined utilization which translate into physical activity which can bring success to the organization.
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6.2 Budget preparation in ONGC, Head Quarters
6.2.1 Introduction
As ONGC is a Public Sector Undertaking (PSU), therefore it is a statutory requirement for the organization to prepare budget for the next year and submit them in the form of annul plan to the ministry after the budget is approved by the board. Along with the estimates for the next year, ONGC also prepares the revised estimates for the current year. These are primarily the corrections made to the plans which were previously adopted by the company.
6.2.2 Preparation of Budget Estimate (BE) and Revised Budget Estimate (RBE)
The sanctity of the budget process as a tool of financial control hardly needs to be emphasized. As we already know, the budget finalization in a complex organization like ONGC is a detailed and voluminous exercise involving each and every work centre.
The exercise relating to preparation of Revised Budget Estimate (RE) for the financial year 2009-10 and Budget Estimate for the financial year 2010-11 for all the various projects, institutes, regions, and then the corporation as a whole has to be accomplished in two stages:
Stage-I – Submission of the physical targets by the projects, institutes, and regions etc. to corporate budget section and corporate planning department.
Stage-II – The submission of financial revised and budget estimates.
The most salient feature of the ongoing budget exercise is to include the commitment budget for the financial year 20011-12 along with the mandatory requirements of formulating RE 2009-10 and BE 2010-11.
The approval process for the financial budget is carried out by the project budget committee and thereafter the regional budget committee, before submitting to the corporate budget section. It may be noticed here that the physical targets submitted by the projects and various regions to the corporate budget section and approved by the board has to be approached again for changes in relation to the physical targets, after the financial budget was approved. In other words, the physical targets need to be firmed up in consultation with the competent authority and the financial budget should reflect such approved physical programme.
The physical programme always needs to be submitted in two parts:
Part-I – It should present a comparative table of last financial year’s Budget Estimates and the actual ones. It should also be supported by appropriate explanatory statements explaining the highlights of last year’s working and the reasons for under establishments, if any.
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Part-II – IT should present the budgeted and the revised physical targets for the current year (RE 2009-10), and physical targets for the next year (BE 20010-11). It should also be supported by explanatory statements defining the main features, major assumptions and how the various targets would be met.
In order to fulfil the overall corporate objective, the various projects/regions are likely made available with respect to resources as well as the targets fixed in the MoU with the government of India, and the eleventh plan projections for RE 2009-10 and BE 2010-11). The physical targets, duly approved by the PBC shall be submitted by the project groups to the regional offices. The regional offices shall submit the same, duly approved by the RBC to the corporate budget section. Subsequent to the receipt of the information from all the regions, the same will be compiled and circulated to all heads of MSGs for the comments and approval of respective functional directors.
6.2.3 Fund Center – Cost Center Concept
In the budgeting process of ONGC, the entire budgeting, starting from the preparation of Budget Estimate (BE) and Revised Estimate (RE), to the allocation of funds, each and everything revolves around the Fund Center – Cost Center concept.
Fund Centers are bigger fund houses where all the funds are kept. At the same time, there are various Cost Centers under every Fund Center. These cost centers extract the funds from the upstream fund centers, whenever required. Once the funds get distributed to the cost center, they get transferred to the appropriate destination.
At the time of preparation of BE and RE, data is accumulated from the cost centers by the
corresponding fund centers which pass it on to their respective upstream for further proceedings.
In the same manner, once the budget gets approved, the funds are allocated to the fund centers
which further distribute them to their downstream cost centers.
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Fund Center
Cost Center
Cost Center
Cost Center
Fund centers structure as operated by Head Quarter Finance, Dehradun
6.2.4 Types of budget in ONGC
The different types of budget that exists in the organization are:
1. General Budget
2. Performance Budget
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ONGC Budget
Head Quarter Finance Budget
DDNSCSHRER Chief-ER Chief-HRD
DDNSCSSSP Support Services
DDNSCSHSE Health, Safety & Environment
DDNSCSSCS Security
DDNSCSMED Hospital & Medical
DDNSCSCTS Chief Technical Services
DDNSCSVIG Vigilance
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Budget
General budget
Perform-ance
budget
Procure--ment budget
Operatio-nal
budget
Cash budget
Income budget
Expend-iture
budget
Plan expendit
-ure
Non-plan
expendit-ure
Capital Contract
-ual
Stores and
spares
Man- power
Other charges
6.2.4.1 General budget
The general budget is further divided into three components:
Procurement budget
Operational budget
Cash budget
6.2.4.1.1 Procurement budget
Procurement budget is planned for capital, stores & spares and contractual services, whereas the operational budget is prepared for manpower, other charges consumption of stores & spares which will enable to plan the activity cost more precisely. It may be clarified that contractual budget though planned in the procurement budget, is shifted to the operational budget while uploading the budget in the systems as the procurement and consumption of contractual services is assumed to be the same.
The budgeting process envisages that the procurement budget is prepared at the fund center level, which is akin to a business group. The consumption however, which forms part of the accrual budget are planned at cost centre level which is a smaller cost centre while receiving and collecting entities within a fund centre. The cost centre receives the costs either directly or through allocations from other cost centers, services or fund centre.
6.2.4.1.2 Operational budget
While preparing the accrual or operational budget, the estimated consumption of stores & spares, manpower, other charges, contractual and capital needs to be budgeted. In other words, the budgeting exercise takes into account the opening stocks, procurement during the financial year, consumption and the closing stocks. Without these details, it may not be possible to prepare a budget on accrual basis and arrive at cash outgo component of the budget. The finance officers therefore commence this exercise in right earnest from this stage itself and compile relevant details.
The expenditure which is likely to be incurred during the budgetary period needs to form part of the operational budget. The payment against the expenditure may be made in the budgetary period or it may be carried over to the next year. To explain this aspect more clearly, if an item has been provided in the budget and the purchase action against the same has been completed, or ownership of the goods has been passed to the company, the payment pertaining to the goods may not have been made against them, but the liability has been created. In such cases, the budget is deemed to be utilized under accrual concept for which the budget need to be carried over to the next year. Likewise, the items which exist in the budget but no action could be initiated against them, needs to be considered afresh and budgeted in the next budgetary period. The item in which the budget is in the advance stage like tender invited, such cases can be considered as throw forward in the revised budget.
6.2.4.1.3 Cash budget
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While arriving at the cash outgo component of the budget, the cash payment made for the last year’s accruals and this year’s accruals, payments for which may shift to next accounting years, need to be factored into. This is primarily the working capital change, which forms par of the cash budget. Besides, the procurements of material and services for which payments are being made during the year, irrespective of consumption shifting to the next year shall have to be accounted for. To elaborate it further, the change in working capital due to discharge of past liabilities and creation of fresh liabilities at the end of current accounting year will affect cash budget, and hence this needs to be factored accordingly.
To meet the management requirement of having element wise expenditure details (estimated budget are compared with the actual figure), it becomes imperative that budget is exactly in synchronization with the books of accounts.
Cash budget can be further classified into:
Income budget
Expenditure budget
6.2.4.1.3.1 Income Budget
ONGC revenue accrues mainly from the sale of crude oil, natural gas, LPG, NGL condensate etc. The revenue budget is prepared on the basis of sales program based on the production program finalized by the board. Both accruals and cash figures are prepared for sales on the basis of likely rate of billing and the amount of debtors to be kept at year end.
6.2.4.1.3.2 Expenditure budget
ONGC’s expenditure budget is grouped under two broad heads:
Planned expenditure
Non-planned expenditure
6.2.4.1.3.2.1 Planned Expenditure (Capex)
Planned Expenditure is an investment made by the organization, the benefit of which will be derived over a period of time in future. Planned expenditure consists of all activities under survey, exploration, development, research areas which enhances the capacity of the organization to grow. In other words, all activities/expenses related to growth of the organization in terms of the additional resources are to be taken under planned expenditure. It includes:
Survey expenditure
Exploratory drilling expenditure
Development drilling expenditure
Research and Development (R&D) expenditure
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Expenditure on Acquisition of Fixed Assets
Expenditure on Schemes/ Lump Sum Turn Key (LSTK) Capital Projects
Expenditure on any new projects (Non E & P Ventures) undertaken by Company including Equity participation in other Projects/JV’s
Thus the planned expenditure is that part which is incurred with the objective of increasing long term revenue earning capacity of the organization.
6.2.4.1.3.2.2 Non-planned expenditure (Opex)
Non-planned expenditure is the expenditure on operation and maintenance of facilities, and wells for production/distribution, the benefit of which are likely to be accrued within the same financial year. The major components of non-planned expenditure are:
Production Expenditure
Manpower cost
Consumption of stores, spares and consumables
Insurance costs
Power & fuel
Repairs & maintenance
Contractual payments including hire charges
Workover operations
Water injection desalting and demulsification
Pollution control
Transportation expenditure
Idle rigs
Project Administrative Expenses (to the extent unallocated)
Regional Administrative Expenses
Headquarters Administrative Expenses
Other expenditure
6.2.4.2 Performance budget
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Traditionally, budgets are being prepared for different elements of cost like manpower, material etc. This cannot help in determining the efficiency of various activities and cannot even be used as performance indication. To overcome this and make the budget more determined and purposeful, item wise budget is prepared under natural heads that is rehabilitated into activity wise allocation, e.g. survey, drilling etc. This budget is compared with actual performance, taking into account the actual physical achievement with planned level of activity so that the financial implication, performance and productivity can be easily measured.
ONGC’s performance budget contains the following:
Review of actual performance of proceeding years with reason for variations, if any.
Budget Estimates and Revised Estimates of physical activity for the current years and reasons for variation, if any.
Budget estimates of physical activities for next year.
Budget is prepared for the elements which are required for executing plans of action and is grouped primarily under the following heads:
Capital
Contractual
Stores and spares
Manpower
Other charges
Capital
Primarily the estimates for capital are done by the technical officers in consultation with the stores and Purchase Officer and Finance Officer, keeping in mind the plan and norms.
Contractual
In this case, each and every contact has to be analyzed to see whether the introduction or continuance of the same is having proper executive authority and justification from the concerned execution of the contract.
After this, the actual expenditure to be incurred on the services availed/utilized is worked out considering the likely date of mobilization of the services and the rates as per the contract. As the budget at present is on the accrual basis, no adjustment for opening and closing liabilities is made.
Stores and spares
For stores and spares budget, both the consumption and purchases have to be kept in mind. This is because, although budget is essentially on cash basis and consequently related to purchases of stores and spares, the purchase is fixed only after the consumption is firmed up. There is no
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standard guideline for making estimation. This method will depend upon the nature of the particular item.
First, the consumption budget for stores and spares is formed upon the basis of past consumption levels. These are likely to increase/decrease in the level of activity. Once the consumption budget for each item is formed up, procurement budget for each item is worked out, considering the opening stock, lead time and buffer stock (as per norms) requirement of each item. The procurement budget is calculated on the basis of
Procurement budget = The likely consumption + closing stock – opening stock
Manpower
The forecast for manpower has to be made, keeping in view the actual manpower for the proceeding period and the likely changes in the level of activity, likely pay revision, if any, annual promotion, price index changes, VRS etc., and any other factor which is having direct bearing on the likely manpower cost.
6.2.5 Driving factors for Budget
Below are the prime factors on the grounds of which the entire budget is prepared:
Cost
Inventory
Profitability
Cost
The unit cost of the activities is to be taken as the guiding factor for working out the budgetary outlays for each project/regions. The benchmark/standard unit of cost of various activities such as drilling, survey, production etc., should be worked out based on last three years’ actual cost of those activities. The approved/proposed physical targets for the project should be multiplied with these standard costs to arrive at bench mark Budget Estimates of these activities. These benchmark budget estimates duly adjusted for special features, if any and the levels of opening inventory work as guiding factor for preparing item budget for stores & spares, contractual payments, manpower and other charges. The total item wise expenditure by the projects for the above five main budget heads should not exceed the benchmark budget estimates arrived at, on the basis of standard costs and physical targets.
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Inventory
The inventory management is essential to optimize the inventory holding carrying cost. Inventory built up leads to increase in non-performing assets (NPA), which has direct impact on bottom line of the corporation. While preparing/approving item wise budgets for stores and spares, the available item in stock is kept in view. Inventory variation statements are prepared invariably and made available by each location to the head quarters before budgets are approved. All efforts are put in to bring the targeted/closing inventories to minimum prescribed. A target needs to be fixed by each business group to bring down the existing inventory levels by about 25% through proper planning and budgeting.
Profitability
For years, ONGC has enjoyed the privilege of being number one profit making company in the country. This position would come under challenge unless conscious efforts are made to improve the profitability. While framing the budget estimates, it must be kept in view that not only the physical targets set in MOU are to be achieved, but the financial parameters of gross margin, net profit/capital employed and net profit/net worth indicated therein are also to be achieved. It may be made clear that the financial parameters carry more weight (60%) as compared to physical targets (14%) in the MOU. Hence, profitability of the projects rather than cash outflows, assumes greater importance. The projects/regions are therefore expected to prepare Budget Profit Margin and contribution of each location and lay emphasis on the achievement of overall efficiency/productivity and cost effectiveness.
From the past trends, it has been observed that expenditures are on the rise, specifically in the non-planned category, due to which the bottom line of the firm is getting affected. If these unproductive expenditures are not controlled, then this will lead the organization into difficult situation. Therefore, cost reduction should be imbibed as inbuilt philosophy to meet the growing challenges in the near future.
6.2.6 Structure of Budget in ONGC
All kinds of budgetary proposals are made in the following natural heads: Plan Non-Plan Capital Contractual
Stores & Spares
Other Charges
Manpower
The budget for Capital, Contractual, Stores & Spares and Other charges are proposed by the corresponding Fund centres. For Manpower, the budget is prepared by the Finance department.
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6.3 Budgetary processThe budgetary process is carried out by keeping the following points in mind:
I. Estimates are made for 2 years on rolling basis.II. Budgetary process starts every year in May
III. Current year BE (Budget Estimate) is Revised to RE (Revised Estimates)IV. Next year’s budget is estimated BE (Budgetary Estimates)6.3.1 Time schedule
Budget Circular is issued by the Director Finance during the First week of April.
Detailed Proposals with proper justifications along with quantitative basis are to be prepared by respective Fund Center Heads and the same to be submitted to finance by respective Budget coordinators to be finalized for both RE and BE from April to May.
Budget coordinators are required to submit final proposals after obtaining due approval/concurrence from competent authority to be submitted to F&A duly reviewed by Heads by 15th June.
Finalized budget as received from budget coordinators within the cutoff date are consolidated/compiled, formatted by Finance in the budget software and submitted to Corporate Budget by 15th July.
Corporate budget consolidates the budgetary figures received for all work centers of ONGC between August to September.
Budget Agenda is put up to the Board & PAC for approval by the end of September.
The budget is approved by the Board with a moderation in Plan & Non plan figures by October end.
It is then communicated by Corporate Budget to all work centers including HQFduring October – November.
HQ Finance, after aligning the approved figures, communicates it to the Fund Center Heads/Budget coordinators for factoring in the moderation on their priority needs during November.
After receiving the response the, Budgetary Data is loaded in the system and then the approved figures are communicated to the Fund Center Heads/Budget Coordinators during November to December.
6.3.2 Operating the budgetAll expenditures require Budgetary Provisions in the Fund Centre level. All expenditures take one of the following two routes:
PR/ PO route in which accounting is done in the background by the system.
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Earmarking route in which earmarking number is generated through the system which is to be used for preparing FI documents for budgetary control.
Following points should be kept in mind before proceeding for any of the above two routes: All Capital Procurement needs to be routed through PR/PO route. Contractual expenses greater than Rs 10000 needs to be routed through PR/PO route
excluding few G/L Heads which have been earmarked by the ERP system for Earmarking Route.
All stores & spares above Rs 5000 needs to be routed through PR/PO Route excluding few G/L heads which have been earmarked by the ERP system for Earmarking Route.
6.3.3 Routing / Flow chart of making Expenditure
Expenditure PR / PO
Online Earmarking
Offline Earmarking Manpower (HR)
No expenditure is possible unless budgetary provisions exist
Budgetary provisions exists, but strict control is not exercised
6.3.4 Purchase Requisition (PR)Purchase Requisition is a document created by the indenter when he/she wants to utilize budget for any expenditure. The person associated, has to mention the Fund Centre from which he/she wishes to draw the funds and the corresponding commitment item. PR is to be prepared and
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released by the indenter in consultation of Budget Coordinator for fund availability and also ensuring correct codes for Cost Centre/Fund Centre/relevant BDP clause and Commitment Item.
PR in the next stage is to be released by the MRP Controller after performing the laid down checks. Thereafter AA needs to be obtained. PR then comes to Finance for release. Finance checks the fund availability and the comments of budget coordinator. PR is then released by finance after ensuring required relevant checks. PR then goes to competent authority for release as per BDP clause. Only after PR is released at all levels, PO (Purchase Order) can be made in the system. On the creation of purchase order, the funds get automatically blocked for the purpose. After purchase order is made, if it is a capital item GRV is made in the system. All items related to procurement of capital, and all payments in contractual greater than Rs 10,000, and stores and spares greater than Rs 5,000, have to be routed through the Purchase Requisition route.
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PR Flow Chart
Indenter creates the PR
Released by Indenter
Released by MRP controller
Checked in Finance for Budget and Concurrence
Checked in finance at appropriate level C1 / C2 / C3
Released by appropriate level as per BDP
Purchase Order made by MM dept. Funds get blocked
Capital / Stores & spares Contractual
Goods receipt voucher Service entry sheet / QAD
Logistic invoice verification
Budget gets consumed
6.3.5 Service Entry Sheet For contractual payments Service Entry Sheet (SES) needs to be filled in by the indenter
monthly. With the entries as above, liability provision is automatically booked in Financial Books. The responsibility of timely entering the service entry sheet is on the indenters, and non
filling of the above leads to wrong liability provisions which distorts Corporate Balance Sheet and Profit & Loss account.
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6.3.6 Role of MRP ControllerMRP (Material Requirement Planning) controller is the planner for material procurement and controller of inventory. This dual role assigned to one person is to facilitate inventory control by proper planning at the time of procurement. The responsibility of procurement planning for each material in a plant is assigned to him. Typically, this role is to be performed by executives looking after Material planning and procurement.
The MRP controller prior to release of Indent shall perform the following checks:
View inventory position of the materials for which PR is created, in all the locations including his own location and across all plants in ONGC.
Then a judicious decision is to be taken whether material should be purchased afresh or it can be made available from other location of ONGC. If it is found that it is economical to transport the materials from other locations of ONGC, he shall co-ordinate the release and transport of the material from the source plant.
Past consumption data of the materials can be viewed in the PR print layout. He shall also ensure that the same material is not a non-moving/slow-moving item at
other locations of ONGC. The MRP controller has to ensure that all requirements in the plants are consolidated so
that purchasing process time is reduced and all quantity discounts are availed. If the alternate material exists for the materials which are being purchased, then he shall
check such materials also.
6.3.7 Role of Budget Coordinator Budget Coordinators for respective areas on advice of head operates the budget for sections under his/her supervision. They ensure proper usage of Fund Centre/Cost Centre and commitment item codes. The following are the key roles which have to be taken care of, by the budget coordinator:
All PR issued and files having budgetary implication needs to be routed through Budget Coordinator so that he/she can track the utilization and availability of Budgetary provisions.
Commitment item re-appropriations can be initiated by budget coordinators whenever there is fund shortage in a particular commitment item.
Time to time reconciliation with Finance and Budget Coordinators needs to be carried out for correction of aberrations if any.
6.3.8 Re-appropriation Re-appropriation is shifting of budget from one head where it has been budgeted to another head where there is shortfall or which has not been budgeted. It can be done only with the approval of Centre Head. Re-appropriation is not allowed between Plan and Non plan budget heads.
6.3.9 Online EarmarkingEvery item to be spent through G/L needs a unique number (Earmarking number) generated by the system without which payment vouchers cannot be made. This number is system generated and is given by finance after the proposals come and if the budget does not exist for that CI-G/L
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combination, then the system does not generate the Earmarking number thereby keeping a check on the budget.
6.3.10 Offline Earmarking
Strict budgetary control is not exercised and payments can be made in these even without Budgetary Provisions. However the budgetary provisions give an indicative check on the actual booked for these items of expenditure.
6.3.11 Manpower (HR)
This route is similar to the offline route. Here, the payments can be made even without budgetary provisions. However in some G/L heads falling under this category budgetary control has been activated in which, if the budgetary values are crossed, the system stops all the payments unless budget exists.6.4 Analysis of Budgetary Figures as approved by the board of Head Quarters Finance, Dehradun
BE 2008-09 RE 2008-09 BE 2009-10 RE 2009-10
PLAN 18256.64 28420 18259.2 25036
NON PLAN 8349.1 5708.6 9661.65 8893
All figures are in Rs. Lacs
Detailed view on budgetary figures
BE 2008-09 RE 2008-09 BE 2009-10 RE 2009-10
CAPITAL 19007.28 26398 18259.2 25036
CONTRACTUAL 5531.25 5276 7566.46 6917.8
STORES 2070.21 2454 2095.19 1975.2
&
SPARES
All figures are in Rs. Lacs
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6.4.1 Detailed Analysis
1. Difference between BE 2009-10 and BE 2008-09 Plan expenditure = 2.56 lacs
The little difference observed here shows that the planned expenditures are always well known at
the time of budget preparation, and the nature of the expenses incurred is almost the same.
2. Difference between BE 2009-10 and BE 2008-09 Non Plan expenditure = 1312.55 lacs
The huge difference among the two bars shows that Non Planned expenditure can never be
determined before hand, and therefore there are variations that may arise at any time in these
expenditures. Thus the company plays safe over here.
3. Difference between RE 2009-10 and RE 2008-09 Plan expenditure = -3384 lacs
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The negative difference here shows that the final values of the revised estimates may trigger
upwards or downwards irrespective of the values that were there in the previous fiscal year.
4. Difference between RE 2008-09 and RE 2007-08 Non Plan expenditure = 3184.4 lacs
The positive difference here shows the spurt that occurred in the revised estimates of non plan
expenditure in 2008-09. This shows that the RE for non plan expenditures are decoupled for
different fiscal years.
5. Difference between RE 2008-09 and BE 2008-09 Plan expenditure = 10163.36 lacs
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The huge difference here shows the significance of RE. If there would have been no revisions in
BE, then it would have been very difficult for the organization to comply with its BE.
6. Difference between RE 2009-10 and BE 2009-10 Plan expenditure = 6776.8 lacs
The difference here shows the inefficiency of BE along with the significance of RE.
7. Difference between RE 2008-09 and BE 2008-09 Non Plan expenditure = -2640.5 lacs
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The negative difference here shows the degree of unpredictability of the non plan expenditures.
It further shows that RE is of utmost importance. Here, because of RE, the organization has
escaped from dumping the extra amount of money which would have been the case if it would
have solely relied on the BE only.
8. Difference between RE 2009-10 and BE 2009-10 Non Plan expenditure = -768.65 lacs
The difference here shows the importance of RE, as already stated above.
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07REPORT WRITING
I started off with my internship in the very first week of June. The total duration was set to eight weeks. This was my very first management corporate experience in which I really felt that yes, I am a person at managerial position. The behaviour of each and every person at ONGC was indeed very nice and unforgettable for me. Here is the roadmap of what all I did during the entire period of eight weeks.
In the very 1st week of my internship, I was given a number of project topics by my corporate supervisor, from which I was required to choose one. My corporate supervisor told me that I am supposed to work on the project chosen by me for the entire duration of eight weeks of my summer internship. I picked up the budget topic, and thus I was placed in the budget section at Tel Bhavan, ONGC, Dehradun. My corporate supervisor gave me a brief introduction of the working of the entire finance department of ONGC, Dehradun. I was assigned a project on budget analysis under which I was required to do a complete research on the budget process of Tel Bhavan.
In the 2nd and the 3rd week, my supervisor gave me all the required details on the working of the budget section starting from the preparation of the budget, and then the approval of the proposed budget and then allocation of funds to different departments. He taught me the entire procedure of how funds are withdrawn from the allocated budget under different heads.
In the 4th and the 5th week of my internship, they provided me a working terminal through which I was required to practice those things which have been taught to us. I was required to assist my corporate supervisor in giving concurrence or earmarking as required, to the documents which were supplied to him.
In the 6th week, my corporate supervisor gave me some data on budget of previous 2 financial years, and I was supposed to do its financial analysis. I did the work along with one other intern who was also pursuing a project on budget. During the 7th week, I was placed in the voucher section of finance, where my corporate supervisor taught me how to prepare different vouchers against whom the payments to different vendors were made.
During the 8th week, I took a summary of all the activities done by me with the assistance of my corporate supervisor. In the meanwhile, I also worked upon all the other financial details of the organization which were required to complete my internship report. As of now, I have successfully completed my research work assigned to me by the organization along with the other things which are a part of the work which has to be submitted to the University for the Fulfilment of my BBA degree.
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08MY TAKEAWAYS – KEY LEARNING
Practical applications of ratio analysis. I got a fair idea about the application
of various ratios and thereby analyzing the health of the organization.
Comparison of two competitors with respect to their balance sheet. I learnt
how to compare two peer companies by looking at their balance sheets.
I learnt how the budget is prepared and thereafter deployed, in Public Sector
Undertakings.
I got a very clear idea of how to study a sector in the economy. In my
internship, I carried out a study on the oil and gas sector of India.
I learnt how to analyze various things in an organization with a managerial
viewpoint.
ANNEXURES & REFERENCES
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LIST OF ABBREVIATIONS
APM – Administered Pricing Mechanism
ATF – Aviation Turbine Fuel
BBL / D – Billion Barrels Per Day
BDP – Book of Delegated Powers
CGD – City Gas Distribution
CI – Commitment Item
G / L – General Ledger
MMSCMD – Million Metric Standard Cubic Metres per Day
MMTPA – Million Metric Tonne Per Annum
MRP – Material Requirement Planning
OGJ – Oil & Gas Journal
PR / PO – Purchase Requisition / Purchase Order
Tcf – Trillion cubic feet
REFERENCES
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1. ONGC Annual Reports 2005-06, 2006-07, 2007-08
2. ONGC Activity Report 2007-08
3. ONGC Energy Review 2007-08
4. http://www.ongcindia.com/
5. http://www.ongcreports.com/
6. http://www.moneycontrol.com/
7. http://investing.businessweek.com/
8. http://www.globalinsight.com/
9. http://petroleum.nic.in/
10.http://www.investopedia.com/
11.http://www.bizminer.com/
12.http://www.gasandoil.com/
13.http://www.usitc.gov/
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