Capital Structure Analysis of Indian Oil

Corporation Limited (IOCL)

SUBMITTED BY AMIT SARDANA

ANUPAM SHARMA

ARVIND GUPTA

OBJECTIVES OF THE STUDY

To examine the Capital Structure policy and pattern of IOCL.

To understand the capital structure of Indian Oil Corporation

To identify the share capital and debt of the company.

To Find out the earnings per share

To Find out the leverage

Evaluate the contents of IOCL Debts and Equity.

CAPITAL STRUCTURE

A mix of a company's long-term debt, specific short-term debt, common equity and preferred equity . The capital structure is how a firm finances its overall operations and growth by using different sources of funds.

Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings. Short-term debt such as working capital requirements is also considered to be part of the capital structure. But the IOCL does not issue the preference shares and debenture to the public of the company

COMPONENTS OF CAPITAL STRUCTURE:

CAPITAL STRUCTURE

Shareholder s fund s

Borrowed funds

-equity capital

-preference capital (Nil)

-debenture (Nil)

-Term loan

2SHARE CAPITAL

6000

5000

4000

3000

2000

Authorised Capital(CR)Issued Capital (CR)

1000

02014 2013 2012 2011 2010

AUTHORISED CAPITAL: The maximum equity capital a company can

raise, which is mentioned in the Memorandum of Association and Articles of Association of the Company. However, share premium is excluded from the definition of authorized capital.

SSUED CAPITAL: Issued capital is the amount of nominal value of share held by the shareholders. It is the face value of the shares that have been issued to the shareholders. Issued share capital and share premium represent the amount invested by the shareholders in the company. It is also known as the subscribed capital or subscribed share capital.

Analysis: But here, IOCL issued very less share capital IN Previous years if I compared to Authorized capital. IOCL is only issued the limited share to the shareholdersPaid up capital

From - To

Instrument

Shares(nos)

Face value

Capital

2013 2014Equity share2427952482102427.95

2012 2013Equity share2427952482102427.95

2011 2012Equity share2427952482102427.95

2010 2011Equity share1192374306101192.37

2009 2010Equity share1192374306101192.37

2008 2009Equity share77867480910778.67

Paid up capital:

The amount of a company's capital that has been funded by shareholders, Paid-up capital can be less than a company's total capital because a company may not issue all of the shares that it has been authorized to sell. Paid-up capital can also reflect how a company depends on equity financing.

Here, from 2011 to 2013, the companys Paid up capital remain same. Its means the IOCL collected average funded by shareholders and they have to issue more share capital to shareholders in future periods.TOTAL DEBT

The IOCL has only two debts:

Secured loan

Unsecured loan

Total debt means here included debenture, Bonds, Long term loans, short term loan etc. But Indian Oil Corporation limited (IOCL) did not issued debenture, bonds etc.

Secured loan:

Secured loans are those loans that are protected by an asset or collateral of some sort. The item purchased, such as a home or a car, can be used as collateral, and a lien is placed on such item. The finance company or bank will hold the deed or title until the loan has been paid in full, including interest and all applicable fees. Other items such as stocks, bonds, or personal property can be put up to secure a loan as well.

Secured loans are usually the best (and only) way to obtain large amounts of money. A lender is not likely to loan a large amount with assurance that the money will be repaid. Putting your home or other property on the line is a fairly safe guarantee that you will do everything in your power to repay the loan.Secured loans usually offer lower rates, higher borrowing limits and longer repayment terms than unsecured loans. As the term implies, a secured loan means you are providing "security" that your loan will be repaid according to the agreed terms and conditions. It's important to remember, if you are unable to repay a secured loan, the lender has recourse to the collateral you have pledged and may be able to sell it to pay off the loan.

Unsecured loan:

On the other hand, unsecured loans are the opposite of secured loans and include things like credit card purchases, education loans, or personal (signature) loans. Lenders take more of a risk by making such a loan, with no property or assets to recover in case of default, which is why the interest rates are considerably higher. If you have been turned down for unsecured credit, you may still be able to obtain secured loans, as long as you have something of value or if the purchase you wish to make can be used as collateral.When you apply for a loan that is unsecured, the lender believes that you can repay the loan on the basis of your financial resources. You will be judged based on the five (5) C's of credit -- character, capacity, capital, collateral, and conditions these are all criteria used to assess a borrower's creditworthiness. Character, capacity, capital, and collateral refer to the borrower's willingness and ability to repay the debt. Conditions include the borrower's situation aswell as general economic factors.

SECURED LOAN

25000

20000

15000

10000

(CR)

5000

02014 2013 2012 2011 2010

(CR) 17866 13046 20380 18292 17565

Analysis:

In 2014 the secured loan proportion is high than 2013. The India oil corporation limited (IOCL) has try to reduce the secured loan because secured loan effect the assets of the company and it will be effect on future periods so the IOCL Increasingly firms are moving from secured debt to unsecured debt in order to free their assets.

Secured loans have the largest positive impact on Companys credit when

they are repaid. If company have never taken a secured loan, companys

credit may be low despite your good record of repayment.

UNSECURED LOAN

70000

60000

50000

40000

30000

20000

10000

0

(CR)

Analysis:

Here unsecured loan is constantly high from 2010 to 2013. Indian oil corporation limited ( IOCL).Unsecured loan is more better than secured loan Because secured loan will be affect the assets of the company in future period of time so the IOCL has increasing the unsecured loan for reducing the risk of the company . Most of the company has preferred the unsecured debt which will not affect any assets of the company.

In some cases, IOCL may be able to reduce IOCL unsecured debts by negotiating with creditors for a lower balance. Either IOCL can talk tocreditors on IOCL own, or IOCL can solicit the help of a credit counseling

organization. In some cases, credit counselors can negotiate with creditors better than debtors can. However, if IOCL choose to work with a credit counselor make sure the organization is reputable.

EARING PER SHARE (EPS)

Earnings per share represent a portion of a company's profit that is allocated to one share of stock. Therefore, if you were to multiply the EPS by the total number of shares a company has, you'd calculate the company's net income. EPS is a calculation that many people who watch the stock market pay attention to.

When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of-the-period.

Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number.

EPS of IOCL Shareholders from 2010 to 2014:

50

40

30

20 (Rs)

10

0

Analysis:

In 2014, IOCL shareholders earned per share of Rs 28.91. But in 2010, EPS was Rs 42.1. At that time shareholders of IOCL was earned more than last year. So constantly decreasing the earning capacity of shareholders of the IOCL, But still there EPS is good if I compared to other companies.

IOCL is to increase earnings or decrease the number of shares. In order to increase earnings, a business has to increase revenues, reduce expenses or both. In order to decrease the number of shares, do a share buyback fromshareholders.

LEVERAGE

The degree to which an investor or business is utilizing borrowed money. Companies that are highly leveraged may be at risk of bankruptcy if they are unable to make payments on their debt; they may also be unable to find new lenders in the future. Leverage is not always bad, however; it can increase the shareholders ' return on investment and often there are tax advantagesassociated with borrowing. Components of leverage are:

LEVERAGE

Financial leverage Operating leverage

Financial leverage:

Financial leverage is a leverage created with the help of debt component in the capital structure of a company. Higher the debt, higher would be the financial leverage because with higher debt comes the higher amount of interest that needs to be paid. Leverage can be both good and bad for a business depending on the situation. If a firm is able to generate a higher return on investment (ROI) than the interest rate it is paying, leverage willhave its positive effect shareholders return. The darker side is that if the said

situation is opposite, higher leverage can take a business to a worst situation like bankruptcy. the Degree of Financial Leverage (DFL) can be calculated with the following formula:

DFL = % Change in EPS / % Change in EBIT

Where EPS is the Earnings per Share and EBIT is the Earnings before interest and Taxes.

Operating leverage:

Operating leverage, just like the financial leverage, is a result of operating fixed expenses. Higher the fixed expense, higher is the operating leverage. Like the financial leverage had an impact on the shareholders return or say earnings per share, operating leverage directly impacts the operating profits (Profits before Interest and Taxes (PBIT)). Under good economic conditions, due to operating leverage, an increase of 1% in sales will have more than 1% change in operating profits.

The formula used for determining the Degree of Operating Leverage or DOL

is as follows:

DOL = % Change in EBIT / % Change in Sales

So, Indian oil corporation limited (IOCL) need to be very careful in adding any of the leverages to your business viz. financial leverage or operatingleverage as it can also work as a double edged sword.

Degree Financial leverage of IOCL:

2

1.5

1

0.5

(Ratio)

0

Analysis:

In 2014 degree of financial leverage of Indian Oil Corporation limited (IOCL)

ratio is 1.61 and it has constantly higher than previous years.

By borrowing funds, the IOCL incurs a debt that must be paid. But, this debt is paid in small installments over a relatively long period of time. This frees funds for more immediate use. Indian Oil Corporation limited that successfully uses leverage demonstrates by its success that it can handle the risks associated with carrying debt. This can become an important factor when additional financing is needed. Not only will loans more likely be available, but they will be available at more attractive interest rates. Likeindividuals, companies with solid financials.

Degree of Operating leverage of Indian Oil Corporation

limited (IOCL):

1.15

1.1

1.05

1 (Ratio)

0.95

0.9

Analysis:

In 2014 Indian oil corporation limited has degree of operating ratio is 1.12

.which is constantly almost same from 2011 to 2014. According to this chart IOCL having a good position in future period of time. The more operating leverage a company has, the more it has to sell before it can make a profit. IOCL with a high operating leverage must generate a high number of sales to cover high fixed costs, and as this sales increase, so does the profitability of the company. Conversely, a company with a lower operating leverage will not see a dramatic improvement in profitability with higher volume, because variable costs, or costs that are based on the number of units sold, increasewith volume.

Total leverage of Indian Oil Corporation limited:

3

2.5

2

1.5

1

0.5

0

(Ratio)

Analysis:

Combined or total leverage measures total risk of the Indian oil corporation limited (IOCL). In this year Indian Oil Corporation has minimum risk than last year which ratio was 2.43. In this diagram is measured by percentage change in earning per share (EPS) due to percentage change in sales.

IOCL ask their existing shareholders to issuing common stock rights. Stock rights allow existing shareholders to purchase additional shares at below- market prices, in order to raise equity. While this practice does improve a companys financial strength, it also dilutes the current shareholderspercentage of ownership.

FINDINGS

IOCL has issued less shares capital to the shareholders, constantly from

2010 to 2014. IOCL does not fulfill the of authorized share capital which is mention in memorandum of association.

IOCL, Preference share and Debenture not existent in the industry.

The return on investment ratio of IOCL is the lowest among its competitors which imply that the degree of efficiency of IOCL in utilizing the funds entrusted by shareholders and long term creditors is lower than its competitors.

IOCL has maximum no of total debts in the period of 2014, if I compared with previous years.

In 2014, unsecured loan is constantly higher than previous years.

In 2014, IOCL has maintained the secured loan amounts. Which is mostly remain same with previous years.

In 2014, earning per share (EPS) value is Rs 28.91, which is higher than 2013 but overall five years, IOCL shareholders has earned minimum EPS in 2014.

IOCL has Degree of operating leverage almost same with last five years.

IOCL having a good position in future period of time.

In 2014, degree of financial leverage is very high than previous years, IOCL incurs a debt that must be paid. But, this debt is paid in small installments over a relatively long period of time.

The overall efficiency of IOCL is higher than those of its competitors in previous years of comparison.