wcm project (working capital management)

EXECUTIVE SUMMARY

The need for working capital to run the day-to-day business activities cannot be

overemphasized. One can hardly find a business firm, which does not require any amount

of working capital. Indeed, firms differ in their requirements of the working capital.

A firm should aim at maximizing the wealth of its shareholders. In its endeavor to

do so, a firm should earn sufficient return from its operation. Earning a steady amount of

profit requires successful sales activity. The firm has to invest enough funds in current

asset for generating sales. Current asset are needed because sales do not convert into cash

instantaneously. There is always an operating cycle involved in the conversion of sales

into cash.

The primary objective involves the collection of the data regarding the financial

statements for five years (2002-2006). It was collected from the annual reports of the

company.

The secondary objective involves analyzing the working capital management and

to determine efficiency in cash, inventories, debtors and creditors. Further, to understand

the liquidity and profitability position of the firm.

These objectives are achieved by conducting time series analysis and then

arriving at conclusions, which are important to understand the efficiency/ inefficiency in

the use of working capital.

1

TABLE OF CONTENTS

ACKNOWLEDGEMENT EXCECUTIVE SUMMARY

Details Page No.

1. INTRODUCTION 1.1 Introduction 7-8 1.2 Statement of problem 9 1.3 Objectives of study 10 1.4 Research Methodology 11 1.5 Limitations of study 12

2. PROFILE 2.1 Industry profile 14-23

2.2 Company profile 24-282.3 Product profile 29-30

3. REVIEW OF LITERATURE 3.1 Working capital management 32-36

4.ANALYSIS & INTERPRETATION 37-54

5. SUMMARY OF FINDINGS, SUGGESTIONS &CONCLUSIONS

5.1 General findings 56 5.2 Specific findings 57-58

5.3 Suggestions 59-60 5.4 Conclusions 61

6. APPENDICES 6.1Bibliography 63

2

Chapter I

Introduction

3

1.1 INTRODUCTION

The Oil and Gas sector shares an equal importance worldwide. In the past decade

the Indian Petroleum Industry has risen to great heights to occupy a prestigious position

in world of petroleum. India has very high-energy import dependence and efforts are

being made to bridge the growing gap between the indigenous productions and likely

demand which is expected to reach 244MMT in 2011 and around 370 MMT in 2025.

Ministry of Petroleum and Natural Gas is following four-prong strategy for enhancing

indigenous crude supply-exploration in frontier areas including deep-water exploration,

intensive exploration in the proven areas, strengthening oversea exploration and initiation

of exploration for non-conventional hydrocarbon resources.

New exploration licensing policy has been operative since January 1999 with

many fiscal incentives. Initial results of this are encouraging and fifth round is expected

to take off in January 2005. The important successes achieved are Natural Gas find in KG

Basin and crude oil discovery in Rajasthan. Deep water drilling is now being pursued

vigorously. Upstream sector has been price regulated and the profitability of the

companies has improved.

Downstream sector has made considerable growth by way of capacity build up

and crude import have replaced product imports of earlier days. Capacity utilization of

Indian Refineries compares favorably with the utilization capacity of refineries in the

developed world. Auto fuel policy has provided a clear cut road map for changes in

vehicular technology and corresponding fuel quality for whole of the country.

Administered price mechanism has been disbanded and companies have been allowed to

operate in the free price regime but for few fuel products. There exists opportunities for

future growth in this sector a regulatory body is being put into position to regulate the

growth of Petroleum Industry.

The oil and gas sector shares an equal importance worldwide. It contributes to

foreign exchange reserves through exports. For countries like Russia, nearly half the

currency earnings come from crude oil exports. In our country oil accounts for over 30%

4

of India's total import bill and contributes over 20% to the exchequer through customs

and excise taxes. Oil on account of it multiple application has a significant impact on the

economy. Natural gas (NG) utilization is finding increasing focus both in manufacturing

industry and transportation thus making it a very useful segment of economy.

The era of keeping abreast has made way to the era of forging ahead. There is

now a new sense of direction and destination enshrined in the policy documents

"Hydrocarbon Vision 2025" which broadly defines the goals to be attained by the

industry within a given time frame. These goals have served as the basis for the

formulation of strategies both for upstream and downstream sectors of the industry.

India has very high-energy import dependence and imports 70% of its crude oil

requirement. The Government of India (GoI) is taking steps to enhance indigenous crude

production to bridge the growing gap between indigenous production (32 Million tones

(MMT) at the end of 2003) and likely demand which is expected to reach 244 MMT in

2011 and around 370 MMT in 2025. The demand for oil and natural gas, which together

make up about 42% of energy requirement, is likely to grow at the rate of 5.6% per year

in the case of oil.

The growth in consumption of natural gas is expected to increase from the current

level of 65 MMSCMD to 231 MMSCMD in 2006-07 and would approximately be 391

MMSCMD by 2025, indicating that dependency on natural gas would also increase in the

future. The sector has witnessed gradual liberalization since 1991. Until the early 1990's

the oil and gas exploration and production industry was a monopoly of the National Oil

Companies (NOC's), Oil India Ltd. (OIL) and the Oil and Natural Gas Corporation Ltd.

(ONGC). Currently about 8% of the total recoverable oil reserves of about 4,800 million

barrels (MMBLS) and 22% of the total recoverable gas reserves of about 22 trillion cubic

feet (TCF) are owned by the private sector.

5

1.2 STATEMENT OF THE PROBLEM

The need for working capital to run the day-to-day business activities cannot to

overemphasized. We will hardly find a business firm that does not require any

amount of working capital. Thus the study was to determine the working capital

management of BPCL Kochi Refinery. The study covers a period of 5 years from

2002-2006.

6

1.3 OBJECTIVE OF THE STUDY

To determine efficiency in cash, inventories, debtors and creditors

To understand the liquidity and profitability position of the firm

To conduct a time series analysis to understand the efficiency/ inefficiency in the

use of working capital.

7

1.4 RESEARCH METHODOLOGY

Research design:

The research design used is that of an analytical study. An analytical study is the

researchers use facts or information already available, and analyze these to make a

critical evaluation of the material.

Sources of data:

The data required for the study was collected from primary and secondary

sources.

Primary data:

The primary data regarding the various financial information was collected

directly from the finance and accounts department staff of BPCL Kochi refinery.

Secondary data:

The secondary data for the analysis was collected from the annual report of BPCL

Kochi refineries for the period 2002-2006.

Data analysis tool:

The data analysis tools used to analyze and interpret the data is listed below: Bar charts Line chart Percentage analysis Ratio analysis

8

1.5 LIMITATIONS OF THE STUDY

Current ratio only quantitative not qualitative

Price level changes made interpretation of ratio varied

The period of the study limited to 5 years

9

Chapter II

Profile

10

2.1 INDUSTRY PROFILE

The Indian petroleum refining industry is now over a century old. Its growth was

not very significant till independence. The subsequent 25 years witnessed the emergence

of several new refineries in both private and public sectors. The nationalization of oil

companies in 1976 saw all Indian refineries coming under the government fold.

The core competency for running the industry was in processing and process

technologies. When the world stepped into the new millennium the oil-refining sector in

India was also busy getting ready to take on the emerging new business environment and

business optimization became the buzzword instead of process optimization thus

corporate strategies and business approaches have assumed greater significance.

The Oil and Gas sector plays a very important role in the economic and political

scenario of the world. The limited number of oil and gas reserves increasing energy

requirements across the globe and geo-political tensions in oil producing nations,

particularly in the middle east and Africa has led to spiraling of prices resulting in supply

related concerns for countries around the world.

The high economic growth in the past few years increasing industrialization

coupled with a burgeoning population has created a lot of concern for India's energy

scenario. India has 0.5% of the oil and gas resources of the world and 15% of the world

population. This makes India heavily dependent on import of crude oil and natural gas.

India's crude oil production has also been practically flat over the last 10 or more years

whereas its refining capacity has grown by 20% over the last 5 years. Petroleum product

consumption is growing at 3.7% per year and natural gas consumption at 6-8% per year.

The fact that India has yet to make many major break-through in the field of renewable

sources of energy, oil and natural gas would continue to hold a place of key importance

in India's economy.

The Ministry of Petroleum and Natural Gas (MoPNG) oversees the entire chain of

the oil and gas industry- exploration and production of crude oil and natural gas, refining,

distributing and marketing of petroleum products and natural gas, and exports and

11

imports of crude oil and petroleum products. This report hereafter present an analysis of

the current and emerging status of Indian Refining Industry, after making a brief mention

of global refining scene.

The global refining scene:

Refineries have been enjoying high margins in the last few years. The oil industry

has correctly predicted that the world crude oil state was getting both heavier and sour. At

the same time petroleum products specifications have been becoming more stringent in

terms of emissions, especially in Europe and the U.S. but also in some developing

countries like India. Timely investment by major refineries to process heavy and sour

crude oil to meet new product specifications while taking advantage of lower priced

heavy and sour crude oil helped to raise margins.

If history were any guide, with high refining margins and increasing global

demand pushing global refining utilization rate close to 90% there would be enough

capital flowing into building refining capacity worldwide perhaps with the exception of

Western Europe. In fact according to industry commentates $150 billion dollars are

expected to be invested between 2003 until 2015, most of its North America ($40 billion)

and Asia ($50 billion) and mostly for hydro processing and coking to handle heavier and

sour crude oil.

In the US, the congress has taken steps to promote the construction of new

refineries. Besides, brown field investment has been keeping the US refining capacity

expanding and this is expected to continue. Current US refining capacity is about 17

million BD (around 800 MMTPA) operating very consistently at 92-93% over the last 10

years.

The demand for petroleum products in Western Europe has been more or less

stagnant, around 15.5 million BD during the last few years. Environment regulations are

stringent and public oppositions to green field refineries is strong. Accordingly, any

refinery expansion or green field refinery is likely to be built in former Soviet republics

and Eastern European countries, especially those on the Black sea. Crude oil is readily

available in the region and oil flow from the Caspian is expected to increase. Also,

environmental regulations in the region, though perhaps as stringent as those in Western

12

Europe are not as strictly implemented. Nevertheless, the investment in refining capacity

by 2015 is expected to be only about $20-25 billion in all of Europe and former Soviet

republic. This is probably not surprising given that refinery utilization in 2004 was only

83% in Europe and Eurasia despite rising from a low of 72-73% in 1994.

Structure of Indian Petroleum Industry

The Indian Petroleum sector

Upstream Sector Downstream sector

Oil and Gas Exploration

Refining and Marketing Natural Gas Distribution

ONGC, OIL, RIL

IOC, BPCL, HPCL, ONGC, RIL GAIL, RIL

CPCL, BPRL, KRL, NRL, MRPL

13

Indian refineries and their capacities as on 1st July 2005

S.NO. Name of the company Location of the refinery Capacity (MMTPA)*1. IOCL Guwahati 1.002. IOCL Barauni 6.003. IOCL Koyali 13.704. IOCL Haldia 6.005. IOCL Mathura 8.006. IOCL Digboi 0.657. IOCL Panipat 6.008. HPCL Mumbai 5.509. HPCL Vishakhapatnam 7.5010. BPCL Mumbai 6.9011. CPCL Manali 9.5012. CPCL Nagapattnam 1.0013. KRL Kochi 7.5014. BRPL Bongaiaon 2.3515. NRL Numaligarh 3.0016. MRPL Mangalore 9.6917. ONGC Andhra Pradesh 0.07818. RPL Jamnagar 33.00

TOTAL 127.37*Million Metric Tonnes per

Annum

Prominent Players

At present there are 18 refineries operating in the country (17 in the public sector

and 1 in the private sector) with a total refining capacity of about 134 million tones per

annum (MMTPA). Among the 17 public sector refineries, seven are owned by the Indian

Oil Corporation Limited (IOCL), two each by Chennai Petroleum Corporation Ltd (a

subsidiary of IOCL) and Hindustan Petroleum Corporation Ltd (HPCL), one each by Oil

and Natural Gas Corporation (ONGC), Bharat Petroleum Corporation Ltd (BPCL), Kochi

Refineries Ltd (a subsidiary of BPCL), Numaligarh Refinery Ltd (a subsidiary of BPCL),

Mangalore Refinery and Petrochemicals Ltd (MRPL) (a subsidiary of ONGC) and

Bongaigaon Refineries and Petrochemicals Ltd (BRPL) (a subsidiary of IOCL).The

private sector refinery belongs to Reliance industries Ltd (RIL). MRPL, which was a

joint sector company, became a PSU subsequent to acquisition of its majority share of

ONGC.

14

The refinery at Jamnagar in Gujarat of Reliance Industries Ltd is a modern and

the single largest refinery capable of handling variety of crudes and is designed for

producing petroleum products, meeting the domestic and international standards.

Two more refineries in the private sector, one at Jamnagar in Gujarat by Essar Oil

Ltd (EOL) and the other at Cuddalore in Tamil Nadu by Nagarjuna group, are under

construction. In addition, grass root refineries are planned at Bina in MP, Bhatinda in

Punjab and Paradeep in Orissa by the public sector petroleum enterprises.

Refinery capacity and imports

The domestic refining capacity is adequate to cater to the demand for all products

except liquefied petroleum gas (LPG) in fact products like petrol, diesel, naphtha and

aviation turbine fuel are in excess of domestic requirements and increasing quantities of

these products are been exported for the last 5 years. The excess capacity is likely to

continue till March 2012. However, some products like LPG are imported to tide over the

deficit during certain period.

Challenges

The refinery sector, exported to a competitive environment is now facing a host of

challenges such as stringent environment rooms, vintage technology, uneconomic size of

operation, narrow range of crude processed, need to develop alternative fuels and slow

growth of demand.

Awareness and articulation of environmental concerns have increased globally in

recent times. The agencies, both governmental and voluntary bodies, monitoring the

environmental impact are prescribing very stringent norms that call for up gradation of

petroleum products. In India, the quality of petrol and diesel had been upgraded to BS-III

and time bond plans are in place to upgrade this specification to more stringent Euro-IV

equivalent norms stated to come into force from 2010.Further, there is a vehement

campaign to switch over to greener fuels and non conventional and renewable energy

options from petroleum products.

15

Crude Types And Sources

Today the focus of the refineries has shifted to gross margin from capacity

utilization. Hence, the pressure on the refinery is to process more of heavier crude's to

take advantage of the price differential vis-à-vis the lighter processing high viscous

crude's to exploit the price differential available vis-à-vis low viscous crude's. However,

the constraints in infrastructure play a major role in deciding such options.

Another important parameter is the extent of sulphur content crude. Processing of

high sulphur crude also has its own constraints due to the quantum of fuel oil that is used

as fuel within the refinery without having any adverse effect on the surrounding

environment, with different types of crude available with their price differences, the

location of crude source and available transportation logistics also play a crucial role in

the selection of the most suitable crude mix to exploit the price advantage potential

however small it may be.

West Asian countries which hold 65% of the worlds oil resources are major

source of crude for India, the other suppliers being Africa, East Asian and far eastern

countries. The cost of transportation of crude is key factor in the landed cost of crude and

deciding the Pascal size of the crude imports that is significant to reduce transportation

cost. However the availability of infrastructure of large storage tanks at the refineries,

huge cash flows on account of large crude purchases, inventory carrying cost and the

anticipated effect on the crude price trend are important factors that are to be carefully

evaluated in tandem while deciding the crude Pascal size for import. With most of the

components of the refinery operating cost being generally steady, the volatility in crude

price in international markets weighs heavily on the crude type selection and its volume

at a given point of time.

Operational Excellence

Though the Indian refining sector is already facing a surplus in domestic capacity,

there is the paradoxical situation where surplus and shortage coexist. In other words,

when capacity is nodded to meet the shortage in some products, the accompanying

surplus in other products becomes a challenge. Thus, the oil refineries are in an

unenviable situation today.

16

The demand supply gap in the Indian context does not really encourage new

investments in grass root refineries or capacity addition. Nevertheless the enhanced

product quality norms and the economics of scale do call for modernization of process

technologies augmentation of production capabilities and capacities. Under the

circumstances order refineries are disadvantaged as compared to more recent ones in

terms of refining capacity, operating cost, absolute technology and high manpower even

though there is an advantage of depreciated book value. The most favored option left for

such refineries is to construct a new refinery unit near the old refinery that will allow

integration of process units and stream sharing of intermediate product in addition to the

economies of scale and partial or full up gradation of technology.

Another important operational factor of concern is the internal energy

consumption and loss in processing and storage. With the high competition in place, a

penny saved is a penny earned. There is a competition for refineries to minimize their

energy consumption level and "loss" in operation. Constant awareness for efficient

operation and meticulous effects to minimize internal energy consumption and losses are

required to be on a par with world-class refineries. In order to achieve this, greater care

needs to be exercised even while selecting the process technology.

The key to successful refinery operations hence lies in converting the entire

bottoms to premium products through cutting edge technologies and optimizing refinery

operations on a real time basis by means of processing difficult crude among and wide

range of available crude's to derive the maximum margin.

Market and Price

The price of the raw material, crude oil, is highly unpredictable, being controlled

by a handful of oil producers in the world. However, the price of petroleum products is

market driven based on supply demands. Hence, there are wide fluctuations in refinery

margins internationally. In India, earlier, the price of petroleum products was

administered through a pricing mechanism by the government and the product margin

was assured to some extent. Now, with the market driven pricing mechanism in place for

most petroleum products, the margin are wafer thin for the refineries.

17

With spiraling crude prices, the standalone refinery's margin remains buoyant

while the profit of oil marketing companies continues to be under pressure because of

their inability to increase retail prices for major products such as petrol and diesel in line

with market prices and the burden of subsidies on cooking fuels like LPG and kerosene.

With surplus production in the domestic market and strong presence of several players,

one cannot rule the possibilities of a price war. This will in turn bring more pressure on

refinery margins. Hence the regulating authority may have a greater role, especially is

pricing in the future.

With accelerated growth of the economy the domestic demand for fuel products is

on the increase, of course along with competition. As far as the fuel products are

concerned, with improved competition in the retail market, branding of fuel products is

becoming common to retain market share. This calls for additional infrastructure

requirements towards storage and handling at the refinery end also. Export of surplus fuel

products is another option that will have to be considered by the oil companies which

again will call for the creation or augmentation of infrastructure and logistics facilities at

the refinery, marketing entities and post, and hence its investments.

Growing Role For Natural Gas

Natural gas is poised to play a dominant role in the total energy supplies in the

day to come, as it is clean environment friendly and cost effective. Petronet LNG Ltd, a

joined venture promoted by GAIL, ONGC, IOCL and BPCL has already set up its first

LNG terminal at the Dahej in Gujarat and is in the process of setting up another terminal

at Kochi in Kerala. Development of import facilities and large gas reserves will replace

the conventional refinery products in the fuels and the feedstock segments. Advantages of

natural gas as auto fuel for outweigh those of conventional fuels like petrol and diesel. As

it happened in Delhi, all metros and major cities may be compelled to switch over to

natural gas in the near future. The growth of natural gas availability will pose a serious

threat to naphtha and fuel oil.

With energy cost using higher and higher, the emergence of alternatives energy

becomes increasingly viable. Technologists are delivering new processes to meet the

energy needs. The emerging fuel options are compressed natural gas (CNG), liquefied

18

natural gas (LNG), hydrogen, coal gasification, bio-diesel, renewable energy through

solar, wind and biomass. The stages of development in each field are unique with their

own merits and demerits are progressing in different faces. However, a few of these are

certain to come out with a face-changing impact on the future energy scenario. The

refineries and oil marketing companies need to gear up to face this challenge. Today it

appears that developed nations are inclined to concentrate more on developing the

technologies on hydrogen/fuel-cell alternatives after the brittle experience with persistent

increase in the price of fossil fuels. However, developing countries appear to be

concentrating more on non-conventional energy forms such as wind, solar, biomass in

addition to looking into the possibilities of gas as an alternative energy source. Ultimately

these will be the real threats for the refineries.

Regulatory Mechanisms

With the onset of liberalization and participation of more private players in the oil

industry, competition has become intense. The infrastructure created by the public sector

companies over the years are not available to the private players who are putting up their

own infrastructure.

Sharing of infrastructure facilities based on overall economy of operation among

PSU's and private players has not become fully functional. There is slope for a common

regulator in the oil industry with regard to utilization of infrastructure sharing in addition

to monitoring of the parties in the sector, this will ultimately result in the markets being

fed by any where within India at minimum cost to the customer.

From the business perspective of refineries, they should be capable of supplying

products at the least cost to anywhere in India, which implies that, the cost per Tonne of

crude processed should be absolutely minimal. Further, the government as a regulator of

the economy also decides on certain subsidies based on social obligation and imposes

decision on the oil sector to share their burden, which erodes profits of the oil industry.

Unless refineries are geared up on their own improvement plan and change their working

methodology and allow even the thin margins now available to refineries are likely to

vanish.

19

Options Available

Value addition is the slogan charted by the refineries but this is not sufficient in

the present context. Further enhancement in value addition through all possible options to

optimize operational efficiencies including new projects and synergising with current

operations can bestow benefits. Since natural gas is likely to replace Naphtha and fuel oil,

avenues of forward integration of the refinery with petrochemical processing with help

creates large value addition to products. Integration of a refinery with a petrochemical

complex comprising an Ethylene cracker, downstream derivatives units and an aromatics

complex is a viable option.

There is a good market demand for petrochemicals such as polypropylene;

LLDPE, HDPE, styrene and MEG likewise there are good demand for aromatics

chemicals such as paraxylene. Conversions of surplus Naphtha to such high value added

products therefore will be a very attractive option. However, care must be taken to ensure

that learning the nuances of petrochemical business is part of the integration initiatives

with this approach, the situation of surplus Naphtha can best be tackled and the profit

margins but also include petrochemical margins.

Operational improvements can be achieved by upgrading the secondary

processing facilities that will help in realizing higher distillation yields, which are high

premium products. Diversification into other related areas like gas processing and

marketing, which are the emerging field in India, would be another business option for

the refineries. Development of alternatives fuels and entering into their business also will

look attractive in the larger perspective. Acquisition and merger options are also available

towards restructuring the business to enhance the capabilities.

20

2.2 COMPANY PROFILE

Vision Statement

To be globally competitive integrated energy and petrochemical company focused

towards achieving excellence in national priority areas with a strong conscience towards

protection of environment and progress of society.

Mission Statement

To strengthen the presence in petroleum refining and marketing of

petroleum products and to grow into the energy and petrochemical sectors.

To realign orientation of thinking and philosophies to become a market

driven and customer friendly organization with focus on total quality

management.

To enhance shareholder values and maximize returns through the best way

of resources.

To recognize employees as the most valuable asset of the organization and

faster a culture of participation and innovation for employees growth and

contribution.

To achieve global standards of excellence through R&D efforts

technology up-gradation safety management and environmental

protection.

To be a major contributor towards community development and welfare of

the society of the large.

Kochi refineries ltd. formerly known as Cochin refineries ltd, was incorporated as

a public ltd company on 06-09-1963 by the government of India (having major

shareholders) with technical collaborations and financial participation of Philips

petroleum co., USA and Duncan Brothers Calcutta, India. Subsequently Duncan brothers

and Philips Petroleum Company disinvested their shares in 1969 and 1988 respectively.

21

The company's name changed to KRL in may 2000. In the year 2001, Bharat

petroleum company ltd (BPCL) acquired the government of India's stake and KRL

became a subsidiary of BPCL. The company has marketing offices at Mumbai and

Chennai and project / Liaison office at New Delhi. BPCL, the parent company markets

92% of KRL products and canalizes sales of controlled and decontrolled products to

other subsequent levels in the supply chain. Since September 2003, KRL has started

directing marketing of some of the decontrolled industrial and commercial products.

The co's manufacture facilities at Ambalamugal were commissioned in 1966,

with an initial capacity of 2.5 million metric tones per annum (MMTPA). It has

undergone several expansions to the present manufacturing capacities. The capacities

have been expanded from 2.5 MMTPA to 7.5 MMTPA.

The company continued its HR effect of providing development inputs to the

employers through learning programs and through other learning opportunities to develop

their knowledge, skills and attitudes. The co believes that transparency and teamwork

improved productivity at all level.

The success of the company is built on the excellence of cutting edge capacities

of its employees and the company recognizes that the employees constitute the primary

source of sustainable competitive advantage as a frontline energy co. To facilitate these

goals the co's HR system has been continuously geared up towards developing an

appreciation of the organizational challenges among employees at all levels. Specific HR

initiatives were undertaken during the year towards building a performance-oriented

culture and to strengthen the HR systems and practices. The co establishes common

values and working philosophy so that its personal could perform to achieve the co's goal

with greater alignment.

In order to live up to the dreams and visions of the organization and to meet with

increasing demands, the capacity of the refinery was augmented in different phases. The

products range has grown more than 20 products, which includes LPG, Petrol, Diesel,

Kerosene, Naphtha, Benzene, Aviation turbine fuel, Jet propulsion fuel, Furnace oil,

LSHS, Sulphur, Bitumen and Natural rubber modified bitumen, Special boiling point

spirit, Toluene, Textile grade and paint grade Mineral turpentine oil.

22

A penchant for excellence has taken KRL a long way with better technologies and

products. To cope with globalization and the advent of new technologies, KRL upgrades

its technology constantly setting new standards in the process. Three decades since

inception, KRL has become one of the most technologically advanced and safe oil

refineries in India. For instance, KRL is the first oil refinery in the country to install

'Digital Distribute Control System' to optimize plant operations, in all of its process units.

KRL enjoys an unrivalled reputation in project implementation capabilities. All the major

projects taken up, in the last decade, were completed successfully and ahead of schedule.

The facilities installed in KRL include two crude distillation units; a secondary

processing unit namely fluidized catalytic cracking unit, an aromatic recovery unit, a poly

isobutylene unit and a bitumen-blowing unit. For producing environment- friendly diesel,

meeting the Euro II (BS II) emission standards, the company has installed a diesel hydro-

desulphurization (DHDS) units with sulphur recovery and allied facilities.

Advanced top-of-the-line facilities adorn KRL's process plants. KRL is capable of

refining more than fifty kinds of crude oils from all over the world. The origins of these

ranges from Bombay High to Middle East and Nigeria. To meet the growing needs, more

facilities are being ushered in, keeping operating costs at the minimum.

Excellence Fuelled By Innovation

Research and Development activities form one of the core competencies of KRL.

The R&D facility at KRL, with single-point dedication, engages in developing value-

added products from various refinery streams. Innovative plant technology, up gradation

methods, carrying out exploratory research for growth and diversification, are the

hallmarks. The facility also works in close association with reputed research organization

to develop value-added products.

The R&D facilities has contributed significantly to the industry as well as to the

society at large. Desulphurization of fuel gas, development of rubberized bitumen and

FCC pilot plant form some of the significant contribution.

23

Globally Reputed Safety Standards

Industrial safety is a prime concern at KRL. KRL has been graded level seven, in

the international safety rating system (ISRS) by the independent foundation of Det

Norske Veritas (DNV) this rating places the organization among talk companies and

industrial units audited by DNV. At KRL industrial safety assumes pivotal concern. The

company follows stringent parameters for safety on par with global standards. A

competent fire crew supported by sophisticated fire safety equipment demonstrates

emergency preparedness. This dedication, has won KRL many safety awards - national

and international. The Sword of Honour and the Four Star grading of the British Safety

Council, Award of Honour from the National Safety Council, USA, and Award from the

Oil Industry Safety Directorate are some of them.

The Spirited Teamwork Rewarded

KRL understands the value of Human Resources. A commendable team of

trained, committed, and talented employees helps the company to be head and shoulders

above the set standards on quality and productivity.

Continuous years of surpassing 100% capacity utilization, is a unique

achievement of KRL. KRL is the only organization in Kerala with an annul turnover

exceeding Rs.10, 000 Crore.

As a responsible corporate citizen and an ISO 14001 certified company, KRL

stands for a clean environment. Being one among the pioneers to have a comprehensive

environment policy, KRL believes that technological advancements should aim to

achieve a clean environment. This deep commitment is reflected at all levels at KRL.

Low Sulphur fuels used by KRL, reduce particulate matter emission and minimize

Sulphur dioxide emissions. The state of art effluent treatment plants and ambient air-

quality monitoring stations installed at KRL keeps constant vigil against pollution.

Not limiting itself to this, KRL promotes environment awareness activities,

instilling in society the importance of a balanced ecosystem and a clean environment.

This passion has won KRL many laurels to its credit.

Today, for KRL, the challenges and opportunities are no longer the same. The

whole concept of oil refining has become an entirely different ball game. Realizing this

24

early, KRL has realigned itself to emerge as a globally competitive, fully integrated

refining and petrochemical company.

The Future

One of the greatest challenges that the refining industry is facing today is the need

for large capital investment for meeting increasingly stringent product quality

requirements. The demand for residual fuels like Fuel Oil and low Sulphur Heavy Stock

(LSHS) is dwindling on one hand, while the price differential between heavier and lighter

crude oil is widening. Keeping this in view, BPC is embarking upon projects to produce

Euro-IV quality transport fuel and is also examining the feasibility of upgrading the

residue at the two refineries to enhance profitability.

The strategic alliance with the Bharat Petroleum Corporation Ltd., helps both

organization. Close on the heels of KRL's Bharat II fuel quality, is the much awaited

Euro III. Meanwhile, KRL is focused on pursuing its ambitious Single Buoy Mooring

facility being installed in the offshore Arabian Sea. This will add a competitive edge to

the company by reducing crude and transportation costs.

Taking a historic leap forward, KRL is entering into the direct marketing of

petroleum products. Continuing its tradition of excellence, KRL is dedicated to launch

exclusive branded 'green' fuels.

To realize its vision of becoming a globally competitive integrated organization,

KRL has revitalized, automated and networked its operations by successfully

implementing SAP in all areas, at an unequalled pace.

With this bird's eye view, KRL is being beckoned to carve a niche in the temple

of fame.

25

2.3 PRODUCT PROFILE

The collected crude oil and gas are of little use in their raw state, their value lies

in what created in them: fuels, lubricating oils, waxes, asphalt, and petrochemicals. The

refining world is highly technical. To the layman, a refining appears to be a strange

conglomeration of illuminated towers and walls at night and an equally strange maze of

pipes and tanks during the day. In reality a refinery is an organized and coordinated

arrangement of manufacturing processes designed to produce physical and chemical

changes in crude oil and natural gas. These changes result in salable products of the

quality and quantity desired by the market. A refinery also includes non-processing

facilities required to store crude oil and products, maintain equipment and ensure

continuous operation.

As crude oil comes from the well, it contains hydrocarbon components are

relatively small quantities of other materials such as oxygen, nitrogen, sulphur, salt and

water- plus traces amount of certain metals. In the refinery non-hydrocarbon substances

are removed from the crude oil. The oil is broken down into various components. Some

of the components are chemically changed to give them more desirable qualities. The

resulting substances are blended into useful products.

Some of the products of the company are:

Natural rubber modified Bitumen

Liquified petroleum gas and Kerosene for household and industrial use

Petrol and Diesel for automobile

Naphtha the major raw material for fertilizer and petrochemical industries

Benzene for manufacturing of caprolactum, phenol, insecticides and other

chemicals

Furnace oil and low sulphur heavy stock for fuel in the industry

Aviation turbine fuel (ATP) for aircrafts

Bitumen and natural rubber modified bitumen for road paving.

Special Boiling point spirit used as a solvent in tyre industry.

26

Toluene for manufacturing of solvents and insecticides, pharmaceuticals and

paints.

High speed Diesel (HSD)

Low aromatic naphtha / High aromatic naphtha (LAN/HAN)

Supreme Kerosene oil (SKO)

Aromatic Turbine fuel (ATF)

Mixed Aromatic solvent (MAS)

Motor spirit (MS)

Light diesel oil (LDO)

Low sulphur heavy stock (LSHS)

Mineral turbine oil (MTO)

MTO (textile grade) MTO (paint grade) for use in textile and industry.

These products are produced from the crude oil through the various processes of

crude distillation, isomerisation, alkylation, catalytic cracking, hydro cracker etc.

27

Chapter III

Review of literature

28

3.1 WORKING CAPITAL MANAGEMENT

By definition working capital is the excess of current assets over current

liabilities, computed by subtracting current liabilities from current assets. It provides an

index of financial soundness of current creditors and is one of the primary indicators of

short run solvency for a business. When a financial analysis is performed a measurement

of a working capital should be considered in conjunction with the liquidity ratios. In

today's dynamic and tough competitive business environment, sound working capital

management has become an indispensable pre-condition for corporate success.

The accounting principles board of the American institute of certified public

accountants, USA, has defined working capital as follows:

"Working capital, sometimes called net working capital, is represented by the

excess of current assets over current liabilities and identifies the relatively liquid position

of total enterprise capital which contributed a margin or buffer for maturing obligations

within the ordinary operating cycle of the business."

The working capital management refers to management of the working capital, or

to be more clearly it includes efficient handling of current assets as well as current

liabilities. Working capital consists of firm's investment in current assets, which normally

includes short-term assets such as cash and bank balances inventories, debtors,

receivables and marketable securities. So working capital management implies in

determining the required amount, economic procurement and efficiency in utilization of

these current assets.

The need for working capital management arises from two considerations. Firstly,

maintaining the working capital at a reasonable level is essential in any firm. The fixed

assets which usually requires a huge quantity of investments, can be used at an optimum

level only if it supported by sufficient quantity of working capital and secondly, the

working capital involves investment of firms of the firm. If working capital level is not

properly maintained and managed, then it may result in unnecessary blockage of scarce

resources of the firm. On the other hand the insufficiency of working capital, cause

different hindrances in smooth operations of the firm. Therefore proper management of

working capital is utmost importance for all corporate houses.

29

Effective working capital management includes one prime objective to determine

the optimal size of working capital. If size more than optimal, liquidity will be greater but

profitability will be eroded, as a part of current asset will remain unutilized and non-

paying. If it is less than optimal, then it will surely affect the day-to-day operations of the

business and the firm will fail in meeting its regular obligations. This means a clear-cut

trade-off between liquidity and profitability is imperative that helps determine the

optimal size of current assets. Other objective is to see that these should be an optimal

mix of long term and short-term fund utilized for financing the current asset. Because

long term and short term funds have different liquidity and their cost is also different. So

again it is the question of a perfect trade off between profitability and liquidity.

Some basic strategic issues

Working capital can be analyzed from the angles of free cash flows, economic

value added and the Dupont analysis. If working capital needs can be reduced, this will

free cash position. It may be recalled that free cash flow refers to the amount obtained by

subtracting the increased annual capital requirement from the net profits. If working

capital is reduced, the increased capital requirements come down and this results in more

free cash flow. A higher level of free cash flow results in higher valuation for a

company's shares.

In the same way, a reduced investment in working capital means that the overall

capital employed by the company is lower. Economic Value Added (EVA) is a measure

of valuing economic profits by deducting the expected return on capital employed from

the actual profits to see whether any value addition has taken place. Since freeing

working capital means a reduction in capital employed, EVA goes up in the process.

Basically, companies follow any of the following three policies towards working

capital:

o Relaxed policy involving sufficient cushion for all expected requirements and a

position for the unexpected.

o Restricted policy involving a stringent estimate of requirements and forcing the

organization to adhere to this estimate, and not providing for any unexpected

event.

30

o Moderate policy involving availability of funds at a level in between the above

two extremes.

Concepts of working capital:

There are two concepts of working capital, namely gross concept and net concept.

Gross working capital:

According to this concept working capital refers to a firms investment in current

asset. The amount of current liability is not deducted from the total of current asset. This

concept views working capital and aggregate of current asset as two interchangeable

terms. This concept is also referred to as "current capital" or "circulating capital"

Net working capital:

The net working capital refers to the difference between current asset and current

liability are those claims of outsiders which are expected to mature for payment within an

accounting year and include creditors dues, bills payable, bank overdraft and outstanding

expenses. Net working capital can be positive or negative. A positive working capital will

arise when current assets exceed current liabilities. A negative working capital occurs

when current liabilities are in excess of current asset.

Kinds of working capital:

Working capital is classified into two categories:

Fixed, regular or permanent working capital and

Variable, fluctuating, seasonal, temporary working capital

Fixed working capital:

The need for current assets is associated with the operating cycle. The magnitude

of investment in current asset however may not always be the same. The need for

investment in current asset may increase or decrease over a period of time according to

the level of production. Nevertheless, there is always a certain minimum level of current

asset, which is essential for the firm to carry on its business respective of the level of

operations. This is the irreducible minimum amount necessary for maintaining the

circulation of the current asset. The minimum level of investment in current asset is

permanently locked up in business and is therefore referred to as fixed or regular or

31

permanent working capital. It is permanent in the same way as investment in the firms

fixed asset is.

Fluctuating working capital:

Depending upon the changes in production and sales the needs of working capital,

over and above the permanent working capital, will fluctuate. The need for working

capital may also vary on account of seasonal changes or abnormal or unanticipated

conditions. Any special advertising campaign organized for increasing sales other

promotional activities may have to be financed by additional working capital. the extra

working capital needed to support the changing business activity is called fluctuating

working capital.

Importance of working capital management

The level of current assets changes constantly and regularly depending upon the

level of actual and forecasted sales. This requires that the decisions to bring the

levels of current assets to be desired levels of current asset should be made at the

earliest opportunity and as frequently as requested.

The changing levels of current asset may also require review of the financing

pattern. How much working capital needs to be financed by different sources of

financing must be periodically reviewed.

Inefficient working capital management may result in loss of sales and

consequently decline in the profits of the firm.

Inefficient working capital management may also lead to insolvency of the firm if

it is not in a position to meet its liabilities and commitments.

Current assets usually represent a substantial portion of the total assets of the firm,

resulting in the investments of large chuck of funds in the current asset.

There is an obvious and inevitable relationship between the sales growth and the

level of current asset. The target sales level can be achieved only if supported by

adequate working capital and thus the financial manager must be able to respond

quickly in providing and arranging additional working capital.

32

Working capital- Monitoring and Control

There are different analytical tools:

Monitoring the operating cycle- Total working capital need depends upon the

length of the operating cycle. The lengthier the operating cycle, the greater would

be the working capital need.

Working capital ratio- It includes the

o Current ratio

o Liquid ratio

o Current asset to total asset ratio

o Current asset to total sales ratio

Monitoring the liquidity- Sufficient liquidity can be obtained by efficient

management of different elements of working capital. The liquidity problem can

be solved in two ways.

o By raising additional funds from different sources

o By following ways to ease the liquidity problem.

Thus, the need for working capital to run the day-to-day business activities cannot

be overemphasized. One can hardly find a business firm, which does not require any

amount of working capital. Indeed, firms differ in their requirements of the working

capital.

33

Chapter IV

Analysis and interpretation

34

ANALYSIS AND INTERPRETATION

From the data collected, the following tables are formed and analysis and interpretation

are made accordingly.

TABLE 4.1

WORKING CAPITAL TURNOVER RATIO

Year Sales Net Working Capital Ratio2001-2002 67620.79 7954.54 8.52002-2003 104895.03 12558.79 8.352003-2004 98639.05 12239.31 8.052004-2005 131450.64 20441.82 6.432005-2006 147178.77 17234.39 8.53

Source: Annual report

Table 4.1 shows that the working capital turnover ratio is highest in 2005-06. Further

both sales and working capital has increased simultaneously. Thus, it is clear from the

table that the liquidity of the firm is greater.

35

TABLE 4.2

CURRENT RATIO

Year Current assets Current liabilities Ratio

2001-2002 14794.84 6840.29 2.16

2002-2003 23785.1 11226.32 2.11

2003-2004 23632.83 11393.52 2.07

2004-2005 33517.51 13075.64 2.56

2005-2006 35868.94 18634.55 1.92Source: Annual report

Table 4.2 shows a slight decrease in the ratio from 2003-04 but has increased to 2.56 in

2005. However it has again decreased in 2006 to 1.92 because of the increase in current

liabilities due to increase in the income tax payment, higher crude credit, sales tax and

excise liability.

36

TABLE 4.3

QUICK RATIO

Year Quick assets Current liabilities Ratio

2001-2002 8681.93 6840.29 1.27

2002-2003 15411.21 11226.32 1.37

2003-2004 14922.59 11393.52 1.31

2004-2005 19686.64 13075.64 1.5


From table 4.3 it is clear that the ratio was highest in 2004-05 with 1.5 and has decreased

to 0.89 in 2005-06. Whereas from 2002-2004 it was more or less constant with ratio

ranging from 1.37-1.27.

37

TABLE 4.4

CURRENT ASSET TURNOVER RATIO

Year Net sales Current assets Ratio

2001-2002 67620.79 14794.84 4.57

2002-2003 104895.03 23785.1 4.41

2003-2004 98639.05 23632.83 4.17

2004-2005 131450.64 33517.51 3.92


Table 4.4 shows a highest ratio in 2001-02, which shows efficient use of current asset.

The basic reason for this was decreased loans and advances outstanding. After that

decrease in ratio is because of increase in current assets. But again there is an increase in

the ratio to 4.1 in 2005-06.

38

TABLE 4.5

CURRENT ASSET TO TOTAL ASSET RATIO

Year Current assets Total assets Ratio

2001-2002 14794.84 30159.02 0.5

2002-2003 23785.1 38811.75 0.61

2003-2004 23632.83 38287.65 0.61

2004-2005 33517.51 49285.15 0.68


Table 4.5 infers that the ratio is increasing from 2002-2005 because of low profitability.

But overall profitability is satisfactory. Further, it shows that in 2006 the ratio has

decreased to 0.65.

TABLE 4.6

39

NET WORKING CAPITAL TO CAPITAL EMPLOYED RATIO

Year Net working capital Capital employed Ratio

2001-2002 7954.54 11379.01 0.7

2002-2003 12558.79 14377.07 0.87

2003-2004 12239.31 18053.37 0.68

2004-2005 20441.82 25593.42 0.79


From table 4.6 it is clear that the ratio was highest in 2002-03 with 0.87 and lowest with

0.6 in 2005-06. Further the ratio was 0.7 in 2001-02 and 0.68 and 0.79 in 2003-04 and

2004-05 respectively.

TABLE 4.7

40

LONG TERM LIABILITIES TO WORKING CAPITAL RATIO

Year Long term liabilities Net working capital Ratio2001-2002 7108.36 7954.54 0.892002-2003 6061.66 12558.79 0.482003-2004 4697.65 12239.31 0.382004-2005 3874.8 20441.82 0.192005-2006 3051.95 17234.39 0.18


Table 4.7 clearly shows the decreasing trend in the ratio over five years from 0.89 to 0.18

from 2001-02 to 2005-06 respectively. The ratio is decreasing because of increasing in

working capital and also the long-term liabilities are not repaid proportionately.

TABLE 4.8

41

CASH TURNOVER RATIO

Year Operating expenses Average cash Ratio

2001-2002 54553.6 705.69 77.31

2002-2003 85064.94 2043.76 41.62

2003-2004 86833.4 2946.47 29.47

2004-2005 120484.58 3086.63 39.03


From table 4.8 it is clear that the ratio, which had a decreasing trend from 2002-2005, has

risen from 39.03 on 2004-2005 to 89.93 on 2005-2006. This shows that there is decrease

in average cash because of low cash credit balance account.

42

TABLE 4.9

CASH RATIO

Year Cash in hand and bank Current liabilities Ratio

2001-2002 1247.63 6840.29 0.005

2002-2003 2839.89 11226.32 0.006

2003-2004 3053.04 11393.52 0.249

2004-2005 12239.31 13075.64 0.152


From table 4.9 it is clear that the ratio was highest in 2003-40 with 0.249 but has come

down tremendously to 0.00037 due to decrease in cash credit account balance, decreased

crude credit, excess liability and sales tax. Since ratio is showing a decreasing trend,

liquidity level comes down possessing unsatisfactory results.

TABLE 4.10

43

CASH FLOW COVERAGE RATIO

Year EBDIT Interest Ratio

2001-2002 34447.44 11497.24 3

2002-2003 90696.1 9492 9.56

2003-2004 10597.28 397.67 26.64

2004-2005 13608.27 350.23 38.86


Table 4.10 shows a increasing trend during 2002-2005 which was mainly due to the

increased EBIT and depreciation, this shows the companies ability to service outside

liability there by maintaining their by maintaining their liquidity position. However, the

ratio has decreased to 11.94 in 2005-06. Thus measures should be taken to maintain a

better coverage ratio.

TABLE 4.11

44

CASH CYCLE

Year Days in years Cash turnover ratio Ratio

2001-2002 360 77.31 5

2002-2003 360 41.62 9

2003-2004 360 29.47 12

2004-2005 360 39.03 9

2005-2006 360 89.93 4Source: Annual report

Table 4.11 infers that the cash cycle had a maximum period of 12 days in 2003-04 and

the lowest of 4 days in 2005-06. Thus it can be inferred that the cash cycle has a

decreasing trend and therefore minimum period is required for the process. Hence the

cash cycle is showing a satisfactory position.

TABLE 4.12

45

DEBTORS TURNOVER RATIO

Years Net credit sales Average debtors Ratio

2001-2002 67620.79 2592.23 26.09

2002-2003 104895.03 6636.6 15.81

2003-2004 98639.05 8526.75 11.56

2004-2005 131450.64 9639.59 13.63


From table 4.12 its clear that the ratio is showing a decreasing trend, that is from 26.09 in

2001-02 it have decreased to 11.92 in 2005-06. This was due to the increased sundry

debtors because of high price of product fixed as per recent government policies. Hence

showing the inefficiency in credit management in the company.

TABLE 4.13

46

AVERAGE COLLECTION PERIOD

Years Days in years Debtors turnover ratio Period2001-2002 360 26.09 142002-2003 360 15.81 232003-2004 360 11.56 312004-2005 360 13.63 262005-2006 360 11.92 30


From table 4.13 its clear that the average collection period has increased from 14days in

2001-02 to 30 days in 2005-06 and further showing the highest period of 31 days in

2003-04 and thus confirming the companies inefficiency in managing debtors.

TABLE 4.14

CREDITORS TURNOVER RATIO

47

Years Credit purchases Average creditors Ratio2001-2002 52030.88 5870.82 8.862002-2003 83702.98 7259.21 11.532003-2004 86003.27 8232.17 10.542004-2005 117121.21 8983.25 13.032005-2006 143033.7 12770.64 11.2


Table 4.14 infers that the highest ratio was on 2004-05 with 13.03, which was due to

increased total purchases because of highest production compared to previous year.

Further there is only a slight decrease in 2005-06 with 11.2 which means the accounts are

to be settled rapidly. Thus the creditors turnover ratio of the company reveals an

unsatisfactory position.

TABLE 4.15

AVERAGE PAYMENT PERIOD

48

Years Days in years Creditors turnover ratio Period

2001-2002 360 8.86 41

2002-2003 360 11.53 31

2003-2004 360 10.54 34

2004-2005 360 13.03 28

2005-2006 360 11.2 32Source: Annual report

From table 4.15 it is clear that the highest average payment period 41 days on 2001-02

and the lowest are on 2004-05 with 28 days. Further the period is 32 days in 2005-06.

Thus, shorter the period stronger the liquidity position.

TABLE 4.16

DEBT EQUITY RATIO

49

Years Long term debt Shareholders equity Ratio2001-2002 13558.61 11379.01 1.192002-2003 15613.21 14377.07 1.092003-2004 13872.05 18053.39 0.772004-2005 15933.5 25593.42 0.622005-2006 21214.81 28686.56 0.74


Table 4.16 shows that the highest ratio was 1.19 on 2001-02 and shows a decreasing

trend till 2004-05 with a ratio of 0.62. However, the ratio was 0.74 in 2005-06. The lower

ratio shows the satisfactory risk to creditors and high margin of safety and protection

against shrinkage of assets. This was due to reduced long-term debts and increased net

worth. So, the debt equity ratio reveals a good sign to the company.

TABLE 4.17

INVENTORY TURNOVER RATIO

50

Years Sales Average inventory Ratio

2001-2002 67620.79 6088.45 11.1

2002-2003 104895.03 7243.4 14.48

2003-2004 98639.05 8540.2 11.55

2004-2005 131450.64 11270.5 11.66


Table 4.17 infers a highest ratio in 2002-03 due to increase in sales and minimum level of

inventory held on stock. A high ratio is good from the viewpoint of liquidity. However,

the ratio has decreased from 11.66 in 2004-05 to 8.89 in 2005-06, which has to be

considered.

51

Chapter V

Summary of findings, suggestions & conclusion

5.1 GENERAL FINDINGS

BPCL Kochi refineries ltd. formerly known as Cochin refineries ltd, was

incorporated as a public ltd company on 06-09-1963 by the government of India

52

(having major shareholders) with technical collaborations and financial

participation of Philips petroleum co., USA and Duncan Brothers Calcutta, India.

The board of directors of Kochi Refinery and BPCL considered a proposal of

merger of the company with BPCL and accorded in- principle approval on 26

October 2004 and 29 October 2004 respectively. On 17 January 2005,approved

the scheme of Amalgamation with a swap ratio of 1:2.25.

Kochi Refinery achieved a crude oil throughput of 6.94 MMT as compared to

7.92 MMT in the previous year.

The gross refinery margin of the year stood at Rs.7, 153.98 million that works out

to USD 3.2/bbl as compared to USD 5.9/bbl in the previous year.

Kochi refinery's laboratory was accredited with ISO/IEC: 17025 certification by

the National Accreditation Board of Testing.

It was awarded the International Safety Rating System (ISRS) Level 8 by M/s Det

Norske Veritas AS.

The Kerala Chapter of National Safety Council has awarded the refinery the

'runner up' trophy for outstanding performance in industrial safety among large

size chemical industries in Kerala.

The refinery also maintains an eco-park covering an area of 5.5 acres of land in

which varieties of plants and trees where planted and maintained.

During the year, the refinery was conferred with the following awards:

a) Three Star Export house status from Joint Director General of Foreign

Trade.

b) Jawaharlal Nehru Centenary award for Energy Performance of

Refineries.

c) OISD award for overall performance in safety.

d) FACT MKK Nayar memorial productivity award.

In order to benefit from Refinery- Petrochemical synergies, Kochi Refinery is

setting up a Chemical Grade propylene recovery unit.

5.2 SPECIFIC FINDINGS

The working capital turnover ratio is showing a satisfactory position in the

company.

53

The current ratio shows a declining trend in 2005-06. Thus, showing an

unsatisfactory position.

The quick ratio has also decreased to 0.89 in the current year from 1.5 in the

previous year.

Current asset turnover ratio has increased in the current year and therefore shows

an efficient use of current assets.

Current asset to total asset ratio shows an increase due to the low profitability.

However, the overall profitability is satisfactory.

Net working capital to capital employed ratio shows a decrease in the current year

when compared to the previous year with 0.79.

The long-term liabilities to working capital ratio shows a decreasing trend

because of the increase in working capital and also because the long term

liabilities are not repaid proportionately.

The cash turnover ratio showed a good sign in the period 2002-04 but again there

is a rise in the ratio during the period 2005-06, which indicates that the firm

doesn’t posses sufficient cash to provide for emergencies.

The cash ratio has decreased tremendously during 2005-06 when compared to the

rest of the period, which shows the decrease in cash credit account balance.

Cash coverage ratio showed an increasing trend during the period 2002-2005

showing the ability of the firm to serve the outside liability thereby maintaining

the liquidity position. But the period 2005-06 shows a decrease in the ratio from

38.86 to 11.94, which need to be considered.

Cash cycle had a maximum period of 12 days in 2003-04 and the lowest of 4 days

in 2005-06. Thus cash cycle has a decreasing trend and therefore minimum period

is required for the process. Hence the cash cycle is showing a satisfactory

position.

The debtor's turnover ratio is showing a decreasing trend. This was due to the

increased sundry debtors because of high price of product fixed as per recent

government policies. Hence showing the inefficiency in credit management in the

company.

54

The average collection period has increased from 14days in 2001-02 to 30 days in

2005-06 and further showing the highest period of 31 days in 2003-04 and thus

confirming the company's inefficiency in managing debtors.

The highest creditors turnover ratio was on 2004-05 with 13.03, which was due to

increased total purchases because of highest production compared to previous

year. Further there is only a slight decrease in 2005-06 with 11.2 which means the

accounts are to be settled rapidly. Thus the creditors turnover ratio of the

company reveals an unsatisfactory position.

The highest average payment period 41 days on 2001-02 and the lowest are on

2004-05 with 28 days. Further the period is 32 days in 2005-06. Thus, shorter the

period stronger the liquidity position.

The lower debt equity ratio shows the satisfactory risk to creditors and high

margin of safety and protection against shrinkage of assets. This was due to

reduced long-term debts and increased net worth. So, the debt equity ratio reveals

a good sign to the company.

A highest inventory turnover ratio was found in 2002-03 due to increase in sales

and minimum level of inventory held on stock. A high ratio is good from the

viewpoint of liquidity. However, the ratio has decreased from 11.66 in 2004-05 to

8.89 in 2005-06, which has to be considered.

The overall working capital position of the company is commendable.

5.3 SUGGESTIONS

55

The working capital turnover ratio, which showed a decreasing trend during 2002-

2005, has shown an increase in the current year, which is in favor of the company.

Thus this is to be maintained.

The current ratio in BPCL Kochi Refinery is not so good as it shows a decreasing

trend in 2005-06. It is therefore suggested that the concern should check the

reducing trend and should try to improve the current ratio.

Current asset to total assets position reveals that there is an increasing trend in

ratio due to greater utilization of current asset, which reduces profitability of the

company. This can be improved by reducing current asset utilization in order to

earn profit to the company.

Long term liabilities to working capital ratio during the period indicates bad

position of the co, since long term liabilities cannot be paid fully out of working

capital. It is therefore, suggested that working capital is to be arranged in such a

way that the company could be able to pay long term liabilities fully out of

working capital.

The cash ratio has decreased tremendously during 2005-06 when compared to the

rest of the period, which shows the decrease in cash credit account balance. Thus,

measures should be taken to maintain an appropriate cash account balance.

Cash cycle reveals that maximum period had taken by the company for the

processes dealing with cash. So it is suggested that the company can do better by

reducing the period for all the cash processes by some means.

The debtor's turnover ratio reveals that the debts are not being collected rapidly

and declining trend in ratio amounts to congestion of funds in accounts

receivable, which increases the chances of bad debt losses. The decreasing trend

in the ratio shows undesirable credit and collection policies. Therefore, it is

recommended that the company should tighten collection effort and immediate

steps are to be taken to check the downward trend of turnover of accounts

receivable.

The higher debt collection period reduces liquidity position of the company.

Therefore, it is suggested that efficiency of staff employed for the collection of

debts should be checked.

56

5.4 CONCLUSION

57

The working capital position of BPCL- Kochi Refinery Ltd is commendable. From

the analysis it was found that the company is maintaining a good liquidity position and

hence met all the current obligations. The analysis also projects the adequate cash in

running through business indicating a good position in BPCL- Kochi Refinery Ltd. The

study reveals that the company has the ability to meet all outside liabilities and is having

capacity to handle fixed charges liabilities. Average payment period exhibits stronger

liquidity potion of the company. It is found that the company is having high margin of

safety and protection against shrinkage of assets and also expose creditors to lesser risk.

The inventory management of the company indicates satisfactory results by holding

minimum amount of inventory and by utilizing minimum period for converting raw

material into petroleum products and finally reaching the hands of ultimate customers.

But in the area of receiving management, debtors turnover and average collection period

were not found so applicable due to inefficient debt collection.

The proper working capital management requires both the medium term planning

and also the immediate adaptation to change arising due to fluctuation in operating levels

of the firms.

58

Chapter VI

Appendices

6.1 BIBILIOGRAPHY

59

BOOKS

C.R Kothari, Research methodology methods and techniques, Second edition

I.M Pandey, Financial management, Vikas publishing house pvt Ltd.

M.Y Khan- P.K Jain, Management accounting, Third edition, Tata Mc Graw-Hill

Publishing co. Ltd

Dr. S.P Gupta, Management accounting, Published & printed at: Sahitya Bhawan

Agra

JOURNAL

The Management Accountant - January 2007- Vol 42, No.1

Oil Asia 2007- Vol 26, No.6

World wide petroleum industry outlook, Fourteenth edition, 1998-2002-

projection to 2007

The Indian Industry Survey - 2007

WEBSITE

www.bpcl.com

60

wcm project (working capital management)

Documents

crude import

gas sector

crude oil exports

crude oil discovery

crude oil requirement

working capital management

industry profile

growth of petroleum