A grand report on working capital management

1.1 Introduction:

The foundation of Oil and Gas industry in India was laid by the Industrial policy

Resolution, 1954, when the government announced that petroleum would be the core sector

industry. In pursuance of the Industrial Policy Resolution, 1954, Government-owned

National Oil Companies ONGC (Oil & Natural Gas Commission), IOC (Indian Oil

Corporation), and OIL (Oil India Ltd.) were formed. ONGC was formed as a Directorate in

1955, and became a Commission in 1956. In 1958, Indian Refineries Ltd, a government

company was set up. The government in order to increase exploration activity, had approved

the New Exploration Licensing Policy (NELP) in March 1997 to ensure level playing field in

the upstream sector between private and public sector companies in all fiscal, financial and

contractual matters. This ensured there was no mandatory state participation through

ONGC/OIL nor there was any carried interest of the government. Oil and Gas Industry has a

vital role to play in India's energy security, if India has to sustain its high economic growth

rate.

The growing demand for crude oil and gas in the country and policy initiative of Government

of India towards increased E&P activity, have given a great impetus to the Indian E&P

industry raising hopes of increased exploration.

Oil and Natural Gas Corporation Limited (ONGC) and Oil India Ltd. (OIL), the two National

Oil Companies (NOCs) and private and joint-venture companies are engaged in the

exploration and production (E&P) of oil and natural gas in the country. During the year 2008-

09, crude oil production has been 33.51 million metric tonnes (MMT) with natural gas at

32.85 billion cubic metre (BCM).Natural gas production in 2009-10 is targeted to be about

52.116 BCM.

1.2 Global comparison:

India stands 6th in the global comparison for the production of Oil and Petroleum

which is around 7060000 barrels short of the global leader.

1

1 Saudi Arabia 10,780,000

2 Russia 9,810,000

3 United States 8,514,000

4 Iran 4,174,000

5 China 3,795,000

6 India 3,720,000

7 Canada 3,350,000

8 Mexico 3,186,000

Table 1.1

1.3 OPEC:

The Organization of the Petroleum Exporting Countries (OPEC) was created in 1960

to unify and protect the interests of oil-producing countries. OPEC is a cartel that aims to

manage the supply of oil in an effort to set the price of oil on the world market, in order to

avoid fluctuations that might affect the economies of both producing and purchasing

countries.

This unified front was created primarily in response to the efforts of Western oil

companies to drive oil prices down. The original members of OPEC included Iran, Iraq,

Kuwait, Saudi Arabia, and Venezuela. OPEC has since expanded to include seven more

countries (Algeria, Angola, Indonesia, Libya, Nigeria, Qatar, and United Arab Emirates)

making a total membership of 12 members are responsible for half of the world's oil exports.

2

Chart 1.1

According to current estimates, more than three-quarters of the world's proven oil

reserves are located in OPEC Member Countries, with the bulk of OPEC oil reserves in the

Middle East, amounting to 72% of the OPEC total.

1.4 Reserves:

According to the 2008 BP Statistical Energy Survey, the world had proved oil

reserves of 1237.875 billion barrels at the end of 2007, while consuming an average of

85219.7 thousand barrels a day of oil in 2007. OPEC members hold around 75% of world

crude oil reserves. The countries with the largest oil reserves are, in order, Saudi Arabia, Iran,

Iraq, Kuwait, United Arab Emirates (UAE), Venezuela, Russia, Libya, Kazakhstan and

Nigeria.

According to the 2008 BP Statistical Energy Survey, the world had proven natural gas

reserves of 177.35 trillion cubic metres and natural gas production of 2939.99 billion cubic

metres in 2007.

Although the world has 3,600 billion barrels of unconventional oil reserves, these

require significant energy and water to extract. Wood Mackenzie estimated the world's

unconventional oil reserves as comprising heavy oil (107 billion barrels), extra heavy oil

(457) and shale oil (2,800). The main sources are Canada, Venezuela, Madagascar and Texas.

3

According to the 2008 BP Statistical Energy Survey, the world had a 2007 refinery

capacity of 87913.34 thousand barrels a day.

Chart 1.2

According to current estimates, more than three-quarters of the world's proven oil

reserves are located in OPEC Member Countries, with the bulk of OPEC oil reserves in the

Middle East, amounting to 72% of the OPEC total.

1.5 Exploration and Development:

In June 2007, OPEC announced plans to invest US$ 130 billion in expanded

production between then and 2012. Excluding Iraq, production is forecast to increase from

35.7 million bpd to 39.7 million bpd in 2010. Between 2013 and 2020 OPEC plans to spend a

further US$ 500 billion provided bio fuels doesn't change economics. Saudi Arabia alone is

investing US$ 50 billion to increase crude production capacity from 10.5 million barrels a

day in 2007 to 12 million bpd in 2009 and 15 million bpd after 2025.

Oil companies are looking for oil all over the world

Middle East: 31%

Europe & Eurasia: 21.7%

North America: 16.5%

Africa: 12%

Asia Pacific: 9.8%

S. and Central America: 9%

4

1.6 Major Global Players:

Exxon Mobil Corporation

Petroleo Brasileiro S.A.

BP plc

Chevron Corp

China Petroleum & Chemicals Corporation

OAO Gazprom

Total SA

Rosneft OjSC

ENI SpA

Schlumberger LTD.

ConocoPhillips

2.1 Government Policies:

5

The government announced a New Exploration Licensing Policy in 1997, which

differed from the old one in the following respects.

1) Bidders were to compete on cost recovery – they could ask for up to 100 per cent –

and on their share of profit petroleum.

2) They were free to sell their share of the oil to anyone within the country.

3) Conditions regarding minimum expenditure, required partnership with government oil

companies, and signature, discovery and production bonuses were scrapped.

4) Tax provisions were defined, and their stability promised. There would be a 7-year

income tax holiday, exemption from customs duty on exploration and drilling

equipment, royalty was fixed at 10 per cent except for onshore crude which would

pay 12.5 per cent, 5 per cent royalty on discoveries in water deeper than 400 meters,

and development expenditure could be amortized over 10 years.

5) The licence could be assigned to third parties under conditions.

6) A Conciliation and Arbitration Act passed in 1996, based on the model set by United

Nations Commission on International Trade Law, would apply to disputes.

7) Bidders were required to give the Directorate of Hydrocarbons, which was set up in

1993, the results of their surveys; in case they abandoned the concession, the results

would become available to subsequent bidders

.

2.1.1 Policy of the Government on Disinvestment:

The National Common Minimum Programme, envisages that profit-making companies will

not generally be privatized. All privatizations will be considered on a transparent and

consultative case-by-case basis. The existing “navaratna” companies would be retained in the

public sector while these companies can raise resources from the capital market. It also

envisages that the public sector companies and nationalized banks will be encouraged to enter

the capital market to raise resources and offer new investment avenues to retail investors.

2.1.2 Government initiatives for FDI’s:

The government has taken many progressive measures to create a conducive policy and

regulatory framework for attracting investments.

6

Allowing 100 per cent foreign direct investment (FDI) in private refineries through

automatic route and 26 per cent in government-owned refineries.

A foreign company can setup a project office or an Indian company for undertaking

upstream operations in India.

Abolition of the administered pricing policy.

100 per cent FDI is also allowed in petroleum products, exploration, gas pipelines and

marketing/retail through the automatic route.

2.1.3 Investments and Acquisitions:

Public sector oil companies will spend US$ 11.33 billion in 2010 on expanding

supplies and building new transportation networks for oil and gas.

ONGC will invest US$ 696 million for increasing facilities at its oilfields in Assam

and Western Offshore to boost output. Moreover, it will spend US$ 5.62 billion on

capital expenditure in the next financial year.

State-run gas utility GAIL will invest over US$ 1.54 billion in laying gas pipelines

from Dabhol on the Maharashtra coast to Bengaluru, Kochi and Mangalore.

Reliance Industries has proposed to invest an additional US$ 1.5 billion in bringing to

production four gas discoveries adjoining its prolific gas fields in Krishna-Godavari

basin in the country's east coast

2.1.4 Taxation in Oil & Industry Sector:

India provides a customised tax regime for the upstream sector and non-resident service

providers in relation to Exploration & Production operations.

Income Tax

There is a special mechanism for taxation of income of companies which have entered into a

Production Sharing Contract (PSC) with the Government of India for undertaking exploration

and production activities.

As per these provisions, taxable profits of a tax payer, who has entered into a PSC

with the Government for participation in the business of prospecting, exploration or

production of mineral oil, to be determined in accordance with the special provisions

contained in the PSC

The provisions of the domestic tax law are deemed to be modified to that extent.

Special provision

7

Specific allowances in addition or in lieu of allowances under normal provisions as

specified in the PSC are permitted. The specific allowances relate to.

Expenditure incurred for exploration or drilling activities or services or assets used for

these activities.

Tax Holiday

One hundred percent tax holiday available in respect of profits earned from

production of mineral oils.

Tax holiday is available for seven consecutive years from the year of commencement

of commercial production.

2.2 Impact of Budget 2010 on Oil and Petroleum industry:

The Finance Minister has also increased the Minimum Alternate Tax to 18% from the earlier

15%. Oil exploration and production companies had sought an exemption from MAT. At

present, 15% MAT is applicable on booked profits (16.995% effective). No exemption has

been granted on profits earned from commercial production or refining of mineral oil which

are otherwise fully exempted from income tax for the period of seven years from the levy of

MAT.

2.3 Features of the industry:

The petroleum industry is one of the biggest industries in India. The oil industry is broadly

segmented into upstream and downstream sectors. The exploration and production

exploitation activities comprise the upstream sector, while refining, marketing and

distribution activities come under the downstream sector.

Drilling

Production

Refining

Transportation and Distribution

Research and Development

2.4 Refining in India:

To meet the growing demand of petroleum products, the refining capacity in the country has

gradually increased over the years by setting up of new refineries in the country as well as by

expanding the refining capacity of the existing refineries. As of April, 2009 there are a total

8

of 20 refineries in the country comprising 17 (seventeen) in the Public Sector and 3 (three) in

the Private Sector. The country is not only self sufficient in refining capacity for its domestic

consumption but also exports petroleum products substantially. The total refining capacity in

the country as on 1.10.2009 stands at 179.956 MMTPA. The company-wise location and

capacity of the refineries as on 1.10.2009 is given in Table below.

9

Table 2.1

New Refineries:

New grassroots refineries coming up during the XIth Five Year Plan is indicated in Table

Table 2.2

India is aiming to emerge as a refining hub even as global refining markets have tightened

with the closure of small refineries in North America and Europe mainly due to challenges in

investing in cleaner fuels and high compliance costs. The Government of India has been

providing tax incentives and fiscal incentives to new refineries. The new RPL refinery, for

example, benefited from its Special Economic Zone (SEZ) status. Meanwhile, India does

have several other competitive advantages such as its favourable location, lower construction

and operating costs etc. However, given the current economic crisis, some analysts feel that

export markets for all the products produced by the Indian refineries may be hard to find.

India’s Oil Production and Consumption:

10

Chart 2.1

Chart 2.2

India’s Refining Capacity Growth:

11

As on April 1, 2009, India has a total refining capacity of 178 MMTPA (including the

newly commissioned RIL refinery at Jamnagar)

18 out of the total 20 refineries in India belong to PSUs (with a capacity of a little

over 59%)

In the last few years, the Indian refinery sector has witnessed continuous capacity

additions and the trend will continue in near future also; Projected capacity by 2017 is

302 MMTPA

India’s Oil Exports:

Chart 2.3

India’s Oil Imports:

Chart 2.4

12

Mangalore Refinery and Petrochemicals Limited (MRPL), an organization with an asset base

of over 7,000 cr. It is a subsidiary of ONGC.

MRPL at twilight

3.1 Company Profile:

3.1.1 Ownership:

The ownership pattern of the company is as follows:

Oil and Natural Gas Corporation (ONGC) 72%

HPCL 16%

Equity with public and financial institutions 12%

3.1.2 Genesis of MRPL:

The seeds of this project were sown in the year 1987 when HPCL were looking for a partner

in their venture to start a refinery. Among the many bidders for the deal, Adithya Birla group

was selected.

3.1.3 History:

Before acquisition by ONGC in March 2003, MRPL was a joint venture Oil Refinery

promoted by M/s Hindustan Petroleum Corporation Limited (HPCL), a Public Sector

Company and M/s IRIL and associates (AV Birla Group). MRPL was set up in 1988 with the

initial processing capacity of 3.0 Million Metric tones per annum that was later expanded to

the present capacity of 9.69 Million Metric tones per annum. The Refinery was conceived to

maximize middle distillates, with capability to process light to heavy and sour to sweet Crude

13

with 24 to 46 API gravity. On 28th March 2003, ONGC acquire the total share holding of

A.V. Birla Group and further infused equity capital of Rs.600 cr thus making MRPL a

majority held subsidiary of ONGC. Subsequently, ONGC has required equity allotted to the

lenders pursuant to DRP raising ONGC's holding in MRPL to 71.62 percent. The

implementation of DRP in March 2003 within 4 weeks of acquiring equity in MRPL by

ONGC has changed the credit profile of the company. ICRA has assigned A1+ rating

(indicating highest safety) to the Short Term Borrowing programme of MRPL on a

standalone basis.

3.1.4 Location of MRPL:

The refinery is located in Dakshina Kannada district of Karnataka. It is at a distance

of 22 kms from Mangalore. The organization is spread over an area of about 1404 acres. The

refinery was set up with the view to meet the needs of Southern India. The choice of the

location was based in the proximity to seaport, the New Mangalore Port Trust. The port is at

a distance of 16 km from the site of the company. The port has a dedicated, totally

mechanized jetty for handling the products of MRPL.

3.2 Vision and Mission of the Company:

Vision:

To be a world class Refining and Petrochemicals Company, with a strong emphasis on

Productivity, Customer Satisfaction, Safety, Health and Environment Management

Corporate Social Responsibility and Care for Employees.

Mission:

Sustain leadership in energy conservation, efficiency, productivity and innovation.

Capitalise on emerging opportunities in the domestic and International market.

Strive to meet customers’ requirements to their satisfaction.

Maintain global standards in health, safety and environmental norms with a strong

commitment towards community welfare.

Continuing focus on employee welfare and employee relations.

Imbibe highest standards of business ethics and values.

Sustained enhancement in shareholders value.

14

3.3 Capacity of MRPL:

The work in the project started in the year 1992 and the first phase was commissioned 1996,

which had a processing capacity of 3 MMTPA (Million Metric Ton Per Annum). The work in

the second phase of the project started soon after the commissioning of the first phase. The

same was commissioned in the year 1999, and had a processing capacity of 6.96 MMTPA. It

was later increased to 9.96 MMTPA (Million Metric Ton per Unit) The total capacity of the

plant at present is increased to 11.82 MMTPA from 9.69 MMTPA considering the successful

utilization of design margins available in the units over a period of 4 years. MRPL which

meets roughly 8% of India's refining capacity has been successfully running the refinery at

115% to 130 % capacity utilization over the past 4 years.

3.4 Raw Material/CRUDE:

MRPL has the unique distinction of having processed 38 different types of crude’s, sourced

from west Africa, Saudi Arabia, Kuwait, Iraq, Iran, Sudan, Qatar, Abu Dhabi, Dubai, Yemen,

Kazakhstan, China, Vietnam, Malaysia, Indonesia, Brunei and India (Mumbai High).

Presently, two sweet crude’s Mumbai high and Nile Blend (Sudan) are being regularly

processed, in addition to two sour crude’s – Iran mix and Arab Mix. The raw material is

brought to the port through bulk oil containers. The cargo unloaded at the port is directly

pumped to the storage tanks of the company through a pipeline that is approximately 16 kms

in length. The raw material so stored is again pumped to the different units as per production

schedule. The finished products are also pumped to the respective storage tanks.

3.5 Manufacturing Facilities:

MRPL has the unique distinction in India of having two hydro crackers and two CCR

units, which produce high quality fuels.

1. Crude & Vacuum distillation unit:-

The atmospheric and vacuum distillation units and Naphtha splitter unit designed by EIL

are heat integrated to achieve high energy efficiency there by reducing fuel oil consumption

and in turn reducing air emissions.

15

2. Hydro cracker unit:

The hydro cracker unit in India and first in southern part of India produces high quality

sulphur – free diesel, Kerosene and ATF. The plant is designed for 100% conversion of

heavy low value gas oils to lighter and valuable products. Diesel from hydro cracker unit has

a high cetane number, which facilitates.

3. Visbreaker Unit:

Shell soaker Visbreaker technology under the license of ABB lummus of Holland has

been adopted to upgrade heavy vacuum residue to Naphtha and gas oil. This is the first unit in

India to have vacuum flash column, producing vacuum gas oil, which is used for

supplementing the feedstock to hydro cracker unit.

4. CCR Plat forming unit:

A state of the art unit, the continuous catalytic regeneration type plat forming unit (CCR)

produces lead–free, high octane motor spirit (petrol). Hydrogen produced as a by-product, is

used in the hydro cracker unit.

5. Merox :

LPG and Kerosene Merox units covert mercaptons to disulphide. Reformat with RON

110 is also exported for production of premium grade petrol and also for extraction of P-

xylene, a high value aromatic component used in the production of PTA and polyester.

6. Hydrogen:

The hydrogen plant designed by M/s. KTI, Holland produce hydrogen by steam

reforming of Naphtha Hydrogen purity of 99.9% is achieved through Pressure Swing

Adsorption (PSA) unit the technology for which is given by UOP.

7. Bitumen:

This unit employs the highly efficient Bitumen process given by M/s. Porner of Austria to

produce paving grade asphalt.

16

8. Power Plant:

Keeping in view the power situation in the district, MRPL as installed a 112.5 MW power

plant to meet its entire power requirements, through five turbo generator of 22.5MW each.

There are seven boilers of 140Mt/Hr capacity each.

9. Sulphur recovery unit:

The unit was licensed by KTI Italy and produces 99.9% purity sulphur using the most

modern and sophisticated selectox process. There are three sulphur units to meet and produce

the above said grade sulphur with a capacity of 100 tones for each of unit.

10. Reformer Splitter Unit:

In order to meet the stringent specification of benzene content in motor gasoline, reformer

splitter unit is installed. The unit employs simple distillation process to remove the benzene

from the motor gasoline to the specified levels.

11. Gas Oil Hydro Desulphuriser unit: (GOHDS)

This plant is designed to process high sulphur diesel stream from cdu-1 and cdu-2 to meet

the sulphur spec of diesel 25% sulphur) as stipulated by the government of India.

3.5.1 Product Profile of MRPL:

MRPL is manufacturing the following products by distillation of crude and other secondary

processing facilities:

1. Liquefied Petroleum Gas (LPG):-

The darling of House-wife’s for it’s cleanliness and effective use -(This is used as domestic

cooking gas) and also as auto fuel.

2. Naphtha:-

This is used in fertilizer and Petrochemical industries.

3. Motor Spirit:-

Generally known as petrol, it is in fuel for two wheelers and cars whose consumption has

gone up by leaps and bounds in the past few years MRPL is the only company to produce

unleaded petrol from day 1 of production.

17

4. Kerosene:-

Still the poor man’s electricity in remote places and a part being used as fuel.

5. Aviation Turbine Fuel (ATF):-

This particular product has to undergo\stringent laboratory tests before being dispatched. It is

used as fuel in domestic aircrafts and defence aircrafts.

6. High speed Diesel (HSD):-

This is used in all heavy vehicles, trucks, tankers, railways etc. MRPL has achieved less than

0.25% of sulphur levels in diesel as prescribed by the ministry of petroleum.

7. Fuel Oil:-

This is basically used in Furnace and boilers.

8. Bitumen:-

MRPL produces different grades of bitumen for use in laying roads, highways and airport

runways.

9. Sulphur:-

This is directly dispatched from the sulphur recovery unit by trucks. Before the products are

dispatched, they are subject to blending, sampling, testing and certification to meet the

specification. These products (except sulphur and bitumen) are sold to MSHPCL, who as per

the agreement, are the sole distributors. Sulphur, bitumen and Naphtha are directly marketed

by MRPL.

18

3%

4%

13%

11%

16%

53%

MS

OF

SKO/ATF

LPG

BITUMEN

HSD

Chart 3.1

3.5.2 Safety:

“Safety First “– is M.R.P.L Motto.

Lecturers and Seminars an industrial safety for MRPL staff, contractors and other

industries are regularly conducted.

One of the best equipped live five fighting ground is used for training all staff.

Mock fire drill and on-site emergency plan.

3.5.3 Operations:

The operations of the refinery are divided into the following blocks:

1. File and Safety department is well equipment to meet emergencies

2. Raw Water Pump House situated 45kms from away from the Refinery at Sarpady

supplies water required for the refinery from Nethravathi River.

3. Technical Service Division looks after design, construction, process engineering,

quality control, inspection, documentation, technical training and other related

activities.

4. Engineering and Maintenance Division look after the maintenance related to

Mechanical, Electrical, Instrument, and Civil engineering activities of the refinery.

5. Project Division is at present implementing the expansion of Refinery from 3 to 9

MMTPA (Million Metric Ton Per Annum)

6. Personnel and administration Division is responsible for recruitment, welfare,

transport, land, security, community development and other employee related to the

Refinery.

19

7. Finance AND Accounts Division takes care of finances and accounting requirement

of refinery.

8. Purchase Function looks after purchases and sales of product sulphur and bitumen.

9. Stores Function regulates the receipt and issue of material and disposal of scrap items.

10. Marketing Division keeps track of marketing of company products.

11. Secretarial Function looks after the shareholder services and other secretarial

activities.

12. Liaison Office at Delhi and Bangalore keeps liaison with various Government

agencies.

3.5.4 Production Layout:

Chart 3.2

3.5.5 Awards and milestones:

Received ISO: 9002 certification on December 1999 and was re-certified ISO

9001:2000 on January 2003.

20

Oil Conservation Award from Ministry of petroleum and Natural Gas on January 31,

2003.

The Company has been conferred with the “MINI RATNA” category-1 status in July

2007 by the Government of India.

Ranked 5th among India’s top 500 Companies in terms of total income in the Oil

Refining and Marketing sector for 2006- Dun & Bradstreet India.

MRPL won the prestigious Greentech Safety Gold Award for the year 2004-05 in

Petroleum-Refinery Sector for the outstanding contribution in safety record

maintained at work place.

Business Excellence Award for 2005 – Karnataka Chamber of Commerce.

Commendation Certificate for Large Scale Manufacturing Industry under Rajiv

Gandhi National Quality Award 2006.

MRPL’s performance on Energy Conservation continues to be excellent. For the

fourth year in succession, the Jawaharlal Nehru Centenary Energy Performance

Award was given to MRPL by the Ministry of Petroleum & Natural Gas (20th

September, 2007)

MRPL adjudged the winner in the ‘Most Safe Refinery in last three years’ and

runner up in ‘Refineries’ categories of OISD awards for the year 2008-09.

MRPL has won the Jawaharlal Nehru Centenary Award 2008-09 Joint 1st Prize in

specific Energy Consumption Performance amongst all Refineries in Public Sector.

MRPL secured the Superstar Achiever Award – 2008 for best export performance

from Kanara Chamber of Commerce and also State level Export award for the Year

2005-06 and 2006-07 from Govt. of Karnataka

ICRA has reaffirmed their Issuer rating of “Ir AAA” to MRPL for lowest credit risk.

CRISIL issued rating of “Cr AAA” to MRPL indicating highest safety continues.

3.6 McKenzie’s 7s Model:

These seven elements are distinguished in so called hard S’s and soft S’s. The hard elements

are feasible and easy to identify. They can be found in strategy statements, corporate plans,

organisational charts and other documentations.

21

The four soft S’s however, are hardly feasible. They are difficult to describe since

capabilities, values and elements of corporate culture are continuously developing and

changing. They are highly determined by the people at work in organisation. Therefore it is

much more difficult to plan or to influence the characteristics of the soft element. Although

the soft factors are below the surface, they can have a great impact of the strategies and

system of the organisation.

Chart 3.3

1. Strategy:

Strategy refers to set of decisions and an action and it includes mission objectives, goals, and

major action and policies. MRPL mission is “to produce petroleum products of world class

quality at internationally competitive cost. The quality policy of MRPL is to have a set of

satisfied internal customers, business associates, and society through excellence in quality

products and service and also to achieve safe working conditions and Eco friendly

environment through continuous improvement in the technology and man power skills. Its

strategy is to be committed to the state of the technology, environmental protection and safety

in its operations, social commitment and employee relations.

Another strategy of the company is to upgrade the quality specifications of the products

manufactured. It aims at the maximum use of the raw material and upgrades the crude oil into

value added products.

22

2. Style:

Style is one of the factor from which manager of the organisation can bring

organisation change. The McKenzie framework considers style as more than the “style” of

top management. The management of MRPL, is closely associated with team building,

interpersonal interactions and human skills as the management style at MRPL is domestic in

nature. IT encourages the employees to participate in decision making. The authority and

responsibility of each employee is clearly defined at MRPL.

Efficient employees are recognised and their performance is praised in the form of

quick promotion and attractive incentives. Regarding the style of productions, MRPL has

adapted the policy of TQL, which refers to providing training on various areas such as total

productivity management, total quality management, etc. In MRPL managers spend more

time interacting with various employees in various departments, it can be said to be

democratic wherein the employee are given full freedom to express what they think and

sometime the discussion of the employee with employee are also taken into consideration

while making important decisions.

3. Structure:

Structure describes the hierarchy of authority and accountability in an organisation.

These relations are frequently diagrammed in organisational charts. Most organisations use

same mix of structure pyramidal matrix to accomplish their goals. A structure is a formalising

of relationship roles and responsibility in order to recognise and perform work.

23

Chart 3.4

MRPL has a well built organization structure. Since its activities has grown by

expanding their overall scope of operations through further penetrating existing markets by

introducing similar products in to additional markets it has adopted a functional organization

structure.

The functional structure at MRPL, establishes a formal, lateral channel of

communication that existing hierarchical channel of authority and responsibility. It provides

clearly marked carrier path for their services and it also facilitates the developments of skills

who are working in organization.

24

4. Staff:

People are main asset of the organization. Organization performance mainly depends

upon individual’s performance who are working in the organization. So staffing plays

important role by right person in right job. Staffing is the process of acquiring human

resources for the organization and assuring that they have the potential to contribute to the

achievement of the organizations goals.

The work force at MRPL is very skilled, 97% of the workforce is qualified with minimum

qualification being graduation on the administration side and diploma on the technical side.

The personnel and administration department is responsible for recruiting people for

MRPL. The most eligible candidate is selected and they are trained for a month and

promotion of the employees is based on the performance appraisal undertaken. The

employees of MRPL are paid high salary and MRPL has provided hospital facility, shopping

centres, schools, departmental stores and employees club facility to its employees.

5. Systems:

System means all the rules, regulations and procedures both formal and informal that

compliment the organisation structure. The flow of activities involved in the daily operation

of a business including its core process and its support systems. In MRPL there is a formal

flow of communication in two ways i.e. top level to bottom level and bottom to top. Each

division has its own reporting system which integrates entire organisation into corporate

office. MRPL has proper set of procedure for selecting right candidates to the organisation.

6. Skill:

The MRPL possesses labour force with various skills. The company encourages and

provides training for the developments of skills, depending on the employees at operating

level and management level.

The employees at management level, posses skill for company administration, leadership,

motivation etc. They are also trained under various aspects like skill development,

behavioural department, fire and safety training.

At the operating level the employees possess various skills in relation of their jobs as well as

other aspects like self-development, first aid training fire and safety training, work culture

etc. All the employees are properly trained in order to improve their skills so as to help them

to contribute to maximum productivity.

25

7. Shared values:

Shared values the center case of the framework give raise to a certain spirit among

organizational members regarding “who we are and where we are headed” the spirit

permeating in the organization in term is reflected in the values, attitudes and philosophy it s

members the corporate values define the ideas and belief which guide the organizational

operation they lay down the foundation of the organization management philosophy and give

raise to particular culture.

MRPL gives prime importance to safety aspects in all the activities, it trains and

motivates personnel at all levels continuous so to culture which can be achieved by building

and nurturing work culture which focuses on work ethic commitment in the surroundings

through continuous reactive pollution control measures. Vigorous forestation programmers

have been created in around MRPL. Measures also have been taken to protect the existing

flora and fauna any basic interference

3.7 SWOT Analysis:

Strengths:

1) Competitive edge over other Refineries:

MRPL’s competitive edge due to following reasons.

a) It is the only Refinery where more than 99% recovery of Sulphur is achieved

which makes its products high quality and eco friendly.

b) It can refine 40 different varieties of eco friendly.

c) The large capacities with filled economics of large scale production in the ling run.

d) It has highly skilled and energetic work force.

e) It has many processing units unlike others Refineries in India.

f) It has state of art technology which requires less man power and human

interference.

g) Now being a subsidiary company of ONGC it has got more financial assistance and

a wide market

26

2) Comparison with other Refineries:

a) Performance comparison

MRPL Other refineries

Gasoline yield on crude 18% 8%

Gas oil + jet fuel yield 58% 49%

Table 3.1

b) Cost comparison

Company name Capacity Project cost Cost per MT

1)MRPL 9MMT 6,902Crs 6,770

2)Reliance 27MMT 18,200Crs 6,741

3)Essar 9MMT 8,000Crs 8,800

Table 3.2

c) Production capacities

Units Quality per

1. Crude units 96,90,000 MT

2. Hydro Cracker 2400,000 MT

3. CCR Platform 9,50,000 MT

4. Visbreaker 23,00,000 MT

5. Hydrogen unit 9,00,00,000 SCFD

6. Bitumen unit 2,00,000 MT

7. distillate HDS 30,000 Barrels

8. sulphur unit. 1,10,000 MT

Table 3.3

3) Support Utilities.

27

a) Power Plant :

MRPL has a power plant which generates 112.5 MW using Turbo generators and

steam turbines. It is the heart of the refinery which supplies required power and steam

to the complex for an industry like MRPL uninterrupted power supply is a must to

achieve production targets. A steady supply of power also ensures long life of the plant

as well as safety of the complex.

b) Flare System :

MRPL has flare system which are used for safe disposal of inflammable gasses and

toxic vapour which are produced during startup, shutdown and normal operations. As

well as during emergency like cooling water failures, power failures.

Weakness:

1) The main weakness of MRPL is its financial performance which has been negative

because of higher interest rates and accumulated depreciation.

2) The marketing of main products like Petrol, Diesel, Kerosene, LPG, which are done

by HPCL, has not been able to increase its market share. This has adversely affected

MRPL because of lower domestic sales the plant was being under utilized.

Opportunities :

1) MRPL has plans to invest Rs. 600 Cr upgrading its technology to achieve Bharath III

and Euro III norms

2) Plans to invest Rs. 41.24 Lakhs. In R&D Projects for current year.

3) Setting up of retail outlets for direct marketing.

Threats :

The treats faced by MRPL are as follows:

1) Volatility in International prices of Crude Oil.

2) Government Decisions in the context to privatize HPCL.

3) MRPL would be facing competition form Reliance in the long run

4.1 Introduction:

28

Working capital management is concerned with managing of the current assets, the current

liabilities, and the inter-relationship that exist between them. The working capital

management is a significant part of business decision. It is a major concern to the financial

manager in an accomplishment of value maximization depends essentially on the working

capital decisions.

4.2 Scope of the Study:

This study is based on the working capital management at M.R.P.L. The scope of study

limited to Mangalore Refinery and Petrochemicals Ltd. (MRPL) with reference period from

2005 to 2009.

4.3 Objective of Study:

To compare various managerial aspects of various oil companies with that of MRPL

To evaluate and analyse the operating cycle of MRPL.

To assess the Overall efficiency of working capital of MRPL.

To critically analyze the inventory management of MRPL.

To evaluate the Cash Management at MRPL.

To critically analyze the Receivables Management and their collection at MRPL.

To find future trend of Working Capital.

4.4 Methodology:

A. Type of Study: The study carried out here is basically analytical in nature. This

type of study relies on data which is already available.

B. Type of Data used: The methodology involved for data collection was mainly

through secondary data and was obtained from the company’s financial statements

(from 2005 onwards) and the company’s website (http://www.mrpl.co.in). The

Balance Sheets and the Profit & Loss Accounts for the last 5 years was the source

based on which forecasting was done which was from the company’s archives.

Extreme care was taken in collecting the data from the financial statements and only

relevant data was taken for the analysis based on .

C. Sources of Data: The source of data has been company’s Balance Sheet and Profit

and Loss Accounts over a period of past 5 years.

29

http://www.mrpl.co.in/

D. Tools used for Data Collection: The data has been collected mainly from the

company’s Balance Sheet and Profit & Loss Account for the past 5 years. Interview

schedule was taken to understand how the Finance Department is working and what

are the various policies followed in the Organisation.

E. Tools and techniques used for analysis: Various tools and techniques have been

used to fulfil the aforesaid objectives. A thorough study of the Organisation has been

along with in depth study of the functioning of Finance and Accounts Department of

MRPL. Further for the analysis of Working Capital Management, study of working

Capital cycle / Operating cycle has been made along with Operating cycle of MRPL.

Thereafter analysis of working capital has been done by taking into consideration

past 5 years Current Assets and current Liabilities.

After this component wise analysis has been done, to have in depth view of working

capital requirements and its trend. To find out the efficiency of Working Capital

management, Ratio analysis tool has been used for the evaluation of inventory, Cash

Management and Receivables Management at MRPL. Trend Projection of Working Capital

Requirements has also been done to assess the future requirements of Working Capital. This

has been done till 2015.

5.1 Industry Structure:

Industry Structure is being identified on the basis of following parameters:

30

5.1.1 No. of Players:

There are 17 players in this Industry:

B P C L

Bharat Oman

Bharat Petro JPD

Black Gold Refineries

C P C L

Essar Oil

H P C L

HPCL-Mittal

I O C L

M R P L

Numaligarh Refineries

Raj Lubricants

Raj Petroleum Products

Reliance Inds.

Sah Petroleums

Southern Refineries

Valvoline Cummin

5.1.2 Total Market Size:

The total market size of all the companies in this Industry is being calculated on the basis of

the sales of these companies:

Company Market Share

BPCL 16.24%

HPCL 15.22%

IOCL 37.13%

31

MRPL 4.64%

Reliance 17.19%

Table 5.1

Chart 5.1

It can be seen clearly that the market share of the IOCL is the maximum in the industry

followed by BPCL, HPCL and Reliance. And this is being analysed on the basis of the sales

of the respective companies.

5.1.3 Nature Of Competition:

The nature of competition found here is Oligopolistic Competition this because of the limited

players in this Industry.

5.2 Ratio analysis- 5 Companies:

Here statistics/data presented in the different financial statements do not reveal the true

picture of a financial position of a firm. Properly analyzed and interpreted financial

statements can provide valuable insights into a firm’s performance. To extract the

information from the financial statements, a number of tools are used to analyze such

statements. The most popular tool is the Ratio Analysis.

The following ratios are calculated and interpretations are made based on the results:

Technology orientation

32

16.24%

15.22%

37.13%

4.64%

17.19%

market share

BPCLHPCLIOCLMRPLReliance

In house R & D

Technology imports

Foreign exposure

Export intensity

Import intensity

Productivity

Capital productivity

Labour productivity

Marketing Intensity

Performance

Growth analysis

Profitability trend

Return on Sales

Working Capital ratio

Financial ratios

Debt Equity ratio

Tax Burden Ratio

Current Ratio

Return on Assets

Return on Equity

5.2.1 Technology intensity/orientation:

a) In-House R&D:

33

Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0

0.05

0.1

0.15

0.2

0.25

0.3

HPCL BPCL IOCL RELIANCE MRPL

Chart 5.2

It is seen that Reliance has been expending a lot in the Research and Development, where as

all other companies have been very low in this regard. Especially HPCL and MRPL have

expended nearly nothing for the R&D processes. Reliance is known to be doing exploratory

works in the Krishna Godavari basin and that justifies the high research and development

expenditure.

b) Technological imports%:


0.1

0.2

0.3

0.4

0.5

0.6

0.7


Chart 5.3

Reliance and HPCL have been major importers of the technological advancements in the

globe where as BPCL and MRPL have imported almost nothing in the years in consideration.

IOCL has been a minor importer all through the years.

34

HPCL has collaborated with several academic / research institutions to come up with

innovative results enhancing the production capacity and other industrial parameters. The

details of the projects (particularly the partners in collaboration) are given below:

The Energy and Resource Institute (TERI)

Gandhi Institute of Technology and Management (GITAM),

Central Institute for Mining and Fuel Research .

Research Triangle Institute (RTI), USA:

As HPCL is also getting in to the field of non-conventional energy, it is seen to have made

lots of technological imports in the years in consideration.

5.2.2 Foreign/International Exposure:

a) Export intensity:


10

20

30

40

50

60

70


Chart 5.4

Reliance and MRPL have been major export intense companies where as it may be

seen that all other three companies ,i.e., have relied more on serving the domestic

needs of the country. In 2009, it is seen that Reliance has exported a lot and a

significant phenomenon is seen, HPCL, BPCL, and IOCL have shown the same

export intensity in all the years in consideration.

b) Import intensity:

35


10

20

30

40

50

60

70

80

90


Chart 5.5

Reliance and MRPL have been very intense in terms of imports, shown by the high

percentages in all years. It is worth notice that these two companies were export intense too,

but the export intensity was lesser than the import intensity. The other three companies also

have shown similar trends but to a lower extent, i.e., they also are more intense towards

imports than exports.

The import of crude oil is the reason for high levels of production by all these companies.

Reliance and MRPL make all their exports by processing this crude oil itself, which justifies

the high level of imports.

5.2.3 Marketing/advertising intensity:


0.0002

0.0004

0.0006

0.0008

0.001

0.0012

0.0014

0.0016

0.0018


Chart 5.6

36

HPCL, IOCL, and Reliance have reduced their marketing intensity consistently in all years

from 2005 to 2009. The other two companies, namely BPCL and MRPL have not shown any

interest in marketing or advertising in all years where their expenditures in this regard were

nil, as oil and petroleum are necessities to everyone. Reliance being a private player, has

spent a lot on marketing because of the fact that Reliance petrol pumps are very few in

number and it has to rely a lot on marketing for proper sales.

5.2.4 Productivity:

a) Capital productivity:


1

2

3

4

5

6


Chart 5.7

MRPL is the company which has consistently shown an improvement in it’s capital

productivity. IOCL has shown consistency in it’s productivity, being nearly same for all

years. Reliance also showed consistency but has continually underperformed other

companies. HPCL and BPCL have shown constant reduction in their capital productivity in

all years. Reliance has employed a lot of capital and it is unable to generate sales

corresponding to it. The other companies are seen to be utilising their capital capacity

efficiently.

37

b) Labour productivity:


100

200

300

400

500

600


Chart 5.8

MRPL has remained the highest performer in this regard even though a reduction in later

years of consideration. The second place is held by HPCL though it is very near to other

companies and well below MRPL. All other companies have been low yet consistent in their

performance in terms of labour productivity. MRPL is a small company and relies more on

labour, where as all other four companies are very much capital intensive and that is the

reason for them having a low labour productivity.

5.2.5 Growth:

The growth of the companies in the industry was analyzed on the basis of the

Sales Growth Rate.

Sales Growth Rate

Compounded annual growth rate (CAGR) was used to assess the growth of the company in

terms of its net sales. CAGR is computed as:

Sn = S0 (1 + r) n

Where,

Sn = Net Sales during Year n or the last year considered for analysis.

S0 = Net Sales during Year 0 or the starting year considered for analysis.

r = Compounded Annual Growth Rate.

n = Number of years the company is analyzed.

38

The compounded annual growth rate for the industry is computed to be 22.06%. It is

calculated based on the net sales of the industry for the period of 5 years, that is, from 2004 to

2009.

5.2.6

a) Profitability:


0.5

1

1.5

2

2.5

3

3.5

4

4.5

5


Chart 5.9

MRPL has been the most profitable firm in the years 2005, 2008, and 2009. In 2006 and

2007, IOCL had outperformed MRPL. Both these companies have been very good

performers in profitability terms. The third place is of BPCL which has been better relatively.

HPCL stands fourth and the last place is taken by Reliance which had very low profits

because of high costs. These high costs are arising from the technological advancements that

Reliance has made.

b) Return on sales:


0.05

0.1

0.15

0.2

0.25


Chart 5.10

39

Here it can be seen that Reliance has been a good performer in terms of returns on sales.

Whereas the other companies that is BPCL, IOCL and MRPL have been consistently

performing over the years, but HPCL has the least return on sales which is due to the reduced

PBDIT. Though Reliance had a very low profitability, its return on sales is very good, as the

operating profit is considered here. The profit after tax is low for it. Similar reasons can be

given for the other companies too. The profit before interest, taxes and depreciation is low

comparatively but the PAT is high for the other companies.

c) Working capital ratio:


0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18


Chart 5.11

Reliance has shown a high working capital consistently all through the years when compared

to other companies, though it has reduced from what it was in 2005. This has happened due

to increase in current liabilities. IOCL has shown has been the second best in all years except

in 2009, where MRPL took the third position. HPCL and BPCL have maintained low ratios

in all the years in consideration.

40

c) Return On Equity:


0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8


Chart 5.12

Reliance has the highest ROE in all years except 2006 and 2007 showing its superiority in

respect of other companies, though its market share is not good when compared to others.

Reliance is the second best performer in almost all the years except in 2007. IOCL stands

third in this regard followed by BPCL. HPCL stands last in terms of ROE.HPCL shows such

low ROE because it’s PAT is reducing year after year due to increase in debt of the company,

and increased interest expenditure. Reliance has a high debt capacity which is unutilised as of

now, where as HPCL has a low ROE due to the high level of debts that it has taken for its

new venture into non conventional energy.

5.2.7 Financial Ratios:

a) Debt-Equity Ratio:


0.5

1

1.5

2

2.5


Chart 5.13

41

HPCL is seen to have increasing its debt year after year, and from 2007 it has been the

company with the highest debt among all companies in consideration. The reason for this is

the advancement of the company into the exploration of new sources of energy. BPCL is seen

to have followed HPCL in this regard by having the second highest increase in debt-equity

ratio. IOCL has shown slight increase in its debt in the years, and so is the case with Reliance

too. MRPL, though being a small player in the market, has remarkably been able to reduce its

debt equity ratio in the years in consideration, because of the high profitability that it has

been making in all years.

b) Current Ratio:


0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8


Chart 5.14

All companies have been successful in managing their Liquidity position very well. Reliance

has consistently out shown other companies in all years except 2009 where MRPL out

performed it.

c) Tax Burden Ratio:


0.2

0.4

0.6

0.8

1

1.2

1.4

1.6


Chart 5.15

42

Tax burden ratio for all companies is nearly the same in all years. The reason for this

similarity is the Tax-Rate and sales revenue. The companies’ Debt causes interest payment

which reduces the tax liability of the company. in 2006, HPCL showed very high Tax burden,

because the interest payment in 2005 was very low. This had increased the taxable income

and hence the tax burden. All other companies remain in the same range because of the same

range of debt and interest payments. The tax burden of MRPL is seen to be increasing as it

has reduced its debt, hence lowering its tax shield.

d) Fixed Asset Turnover:


1

2

3

4

5

6

7


Chart 5.16

This ratio tells us how well the company is able to utilise its fixed assets in generating sales.

Higher the turnover the better it is for the companies. With this in mind, it can be inferred that

all companies are performing except for the Reliance. HPCL has consistently performed

better than all other companies in consideration. Followed by BPCL, IOCL and MRPL have

shown constant increase in fixed asset turnover in all years.

43

e) Debtors Turnover Ratio:


10

20

30

40

50

60

70


Chart 5.17

This ratio tells shows us that HPCL is able to collect its money from credit sales at a faster

rate than any other companies. This adds to the liquidity of the company. There is significant

difference shown in HPCL’s Debtors turnover and that of other companies. Reliance follows

it but is yet very far from HPCL. All other companies show a very low Debtors turnover.

This vast difference shows the credit bargaining position of HPCL is much better than that of

other companies.

f) Inventory Turnover Ratio:


2

4

6

8

10

12

14

16


Chart 5.18

44

Reliance has been the lowest performer in terms of inventory turnover showing high levels of

stock maintenance in the company. IOCL is the second lowest player among the companies

in consideration. It can be seen that MRPL and BPCL have been the two companies who

showed the highest turnover. HPCL has shown a very consistent turnover which is nearly

same in all years. It is good for the company which has high inventory turnover ratio because

it reduces the cost involved in holding the stock. If the inventory turnover ratio is high, then

company earns revenue from the sale of goods which it can use to pay the credit purchases at

a faster rate and ultimately results in profits due to high turnover. This mainly depends on the

production cycle. Lower the production cycle better is the ratio.

g) Interest Coverage Ratio:


5

10

15

20

25

30


Chart 5.19

Reliance has shown high levels of Interest Coverage in all years consistently. It has been

followed by MRPL which has not been high in all years but yet they were better than other

companies. HPCL had a very high Interest coverage in 2005, but after that their capacity to

pay their obligations had reduced a lot. BPCL and IOCL were good in 2005, but are

constantly decreasing in the following years. Interest coverage ratio should be higher because

it shows how many times it is able to pay the interest incurred from the loans taken.

Interest expenses affect a company's profitability, so the cost-benefit analysis dictates that

borrowing money to fund a company's assets has to have a positive effect. An ample interest

coverage ratio would be an indicator of this circumstance, as well as indicating substantial

45

additional debt capacity. So if the company goes for higher debt, then at the same time it

should have higher interest coverage ratio.

5.3 Porter’s five forces Analysis:

Threat of New Entrants: A major entry barrier into oil refining and gas is lack of

competition in major markets for refined products. Government dominance of user

industries and the losses it forces them to make limit their capacity to pay

internationally comparable prices. Barriers can vary depending on the area of the

market in which the company is situated. Other areas of the oil business require

highly specialized workers to operate the equipment and to make key drilling

decisions. Companies in industries such as these have higher barriers to

entry than ones that are simply offering drilling services or support services.

Bargaining Power of Suppliers: Even though there are many oil companies in

the world only few companies have become successful. The large amounts of capital

investment tend to weed out a lot of the suppliers of rigs, pipeline, refining, etc. These

companies have significant power over smaller drilling and support companies and

they do not have much competition between them.

Bargaining Power of Buyers: The balance of power is shifting toward buyers.

There is no much difference between one company’s oil or drilling services and of

course oil is a necessary commodity. This leads buyers to seek lower prices and better

contract terms.

Availability of Substitutes: Substitutes for the oil industry in general include

alternative fuels such as coal, gas, solar power, wind power, hydroelectricity and even

nuclear energy. Solar energy, and other non-renewable sources offer strong

competition in a long run because of renewability and pollution matters.

46

Competitive Rivalry: Slow industry growth rates and high exit barriers are a

particularly troublesome situation facing some firms. Strong players, marginal

product differentiation, high exit barriers in the form of significant capital investment

has led to stiff competition in the industry Besides the scrap value of the equipment, a

refinery that does not operate has no value-adding capability.

5.4 Ratio Analysis - MRPL:

5.4.1 Turnover Ratios:

a) Debtors Turnover Ratio:

Mar-09 Mar-08 Mar-07 Mar 06 Mar-050

2

4

6

8

10

12

14

16

18

20

Debtors Turnover

Debtors Turnover

Chart 5.20

MRPL does all sales in credit basis. If you observe the data, debtors turnover ratio is

increasing over the years. It is good for the company because it is able to collect its money at

a faster rate. This ratio shows the liquidity status of the company. Higher ratio indicates that

they are able to get as many times their money from the credit sales.

b) Average Collection Period:


10

20

30

40

50

60

70

80

90

Average Collection Period

Average Collection Period

Chart 5.21

47

This is the inverse of Debtors turnover ratio. Lower the Avg. Collection period better is for

the company. MRPL has benchmarked the collection period to 21 days. Now if we see the

data it is showing a decreasing trend over the years. And in the year 2009 it is able to collect

within the benchmarked time period.

5.4.2 Earnings Ratios:

a) ROE:


0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

ROE

ROE

Chart 5.22

ROE has reduced from the year 2005 and it increased in the year 2007 and 2008 but again it

decreased in the year 2009. This is mainly because of the reduction in the profit from Rs.

1272cr. in the year 2008 to Rs. 1192 cr, in the year 2009. Since the profits decreased and the

company invested more in reserves and surplus the ROE reduced over the years. Higher the

ROE it is good for the company and the shareholders will invest in those companies where

the Roe is high. If the Roe is high then the company can go for leverage because it is able to

get higher returns from equity.

b) ROCE:


0.05

0.1

0.15

0.2

0.25

0.3

0.35

ROCE

ROCE

Chart 5.23

48

This ratio shows the return on long term funds employed in business in pre tax terms. The

ratio is changing slightly over the years except for the year 2006 where it reduced more. The

reason for this is the operating profit decreased from Rs. 2068 cr. in the year 2005 to Rs.

1160 cr. in the year 2006. But after 2006 it has shown a good sign as the ratio has increased

and only in 2009 there is slight decrease in the ratio because of increase in total funds and

there was no proportionate increase in the operating profit.

6.1 Overview:

49

The study has been carried out while keeping in point the objectives of understanding

the dynamics of Organisation, to critically analyze the Finance and accounts department of

Mangalore Refinery and Petrochemicals Ltd. The scope of study was limited to Mangalore

division of the organisation where all the data is collected from various plants and then

compiled together.

6.1.1 An Introduction to Working Capital Management:

Working Capital Management is a significant facet of financial Management. It is

basically the management of Current Assets and Current Liabilities of a firm. This includes

short term finance, negotiating favourite credit terms, controlling the movement of cash,

administering accounts receivables and monitoring the investments in inventories. All this

consume a great deal of time of finance managers.

The basic goal of Working Capital Management is to manage Current Assets and Current

Liabilities in such a way that a satisfactory level of working Capital is maintained i.e. neither

inadequate nor excessive.

6.2 Concept of Working Capital:

There are two concepts of working capital – Gross and Net

Gross Working Capital refers to the firms investments in Current Assets (current

assets are the assets which can be converted into cash within an accounting year or

within an operating cycle) and include cash short term securities, debtors and stock.

Net working capital can be defined in two different ways:

a. It is the excess of current assets over current liabilities.

b. It is that portion of a firm’s current assets which is financed by long-term

funds.

Net working capital can be positive or negative. A positive working capital arises

when current assets exceed current liabilities. A negative working capital arises when

current liabilities are in excess of current assets.

The Gross working capital concept focuses on two aspects of current assets

management:

a. How to optimize investment in current assets?

b. How should current assets be financed?

50

6.2.1 Need for Working Capital:

The need for working capital arises due to the time gap between production and

realisation of cash from sales. There is time gap between purchase of raw materials and

production, sales and realization of cash. Hence, the working capital is needed for following

purposes:

i. For the purchase of raw materials, components and spares.

ii. To pay wages and salaries

iii. To incur day-to-day expenses and overhead costs.

iv. To meet the selling costs such as advertising, etc.

v. To meet inventories of raw materials, work-in-progress, and finished stock.

6.2.2 Policies and Practices of Working capital:

The company follows the policies of working capital management according to

Reserve Bank of India (RBI) instructions. As far as practices of Working capital are

concerned, the company gives a credit period of 21 days to its customers.

6.2.3 Estimation of Working Capital Requirement:

There are four major methods of calculating working capital requirement of s firm.

They are listed below:

Based on Current Assets Holding Period: In this method the working capital

requirement is determined on the basis of average holding period of current assets and

relating them to costs based on the company’s experience in the previous years. This

method is essentially based on operating cycle concept.

Based on Ratio of Sales: This method estimates working capital requirements as a

ratio of sales on the assumption that current assets change with sales.

Ratio of Fixed Investment: This method uses a simple technique of estimating

working capital requirements as a percentage of fixed investment. The working

capital is taken as a fixed percentage of fixed investments and the ratio is determined

on the basis of previous years.

Estimation of components of Working Capital Method: Since working capital

is the excess of current assets over current liabilities, an assessment of the working

capital requirements can be made by estimating the amounts of different constituents

51

of working capital. For example: Inventories, accounts receivables, cash accounts

payable, etc.

6.2.4 Working Capital Cycle / Operating Cycle:

Operating Cycle is the time duration required to convert sales after the conversion of

resources into inventories, into cash.

Working Capital is required because of the time gap between sales and their actual

realization in cash. The time gap is technically termed as “Operating Cycle” of the business.

The amount of working capital differs from time to time and frm business to business

depending upon the operating cycle in each case. The shorter the operating cycle, the quicker

the realization of sales and hence lesser the amount of working capital needed.

It has three stages:

1) Acquisition of Resources such as raw material, labour, and fuel etc.

2) Manufacture of product which includes conversion of raw materials into work-in-

progress, into finished goods.

3) Sale of Product and recovery of proceeds either for cash or on credit. Credit sales

create account receivable for collection.

There are two elements in the business cycle that absorb cash – inventory (stocks and

work-in-progress) and receivables (debtors owing you money). The main sources of cash are

Payables (your creditors) and Equity and Loans.

A Typical operating cycle of a Manufacturing firm, a on Manufacturing firm or a

Trading firm and a Service or Financial firm is given below:

Operating cycle of a Manufacturing Firm:

52

Chart 6.1

Each component of working capital (namely inventory, receivables and payables) has

two dimensions: TIME and MONEY. If you can get money to move faster around the cycle

(e.g. collect money due from debtors more quickly) or reduce the amount of money tied up

(e.g. reduce inventory levels relative to sales), the business will generate more cash or it will

need to borrow less money to fund working capital. As a consequence, you could reduce the

cost of bank interest or you will have additional free money available to support additional

sales growth or investment. Similarly, if you can negotiate improved terms with suppliers e.g.

get longer credit or an increased credit limit; you effectively create free finance to help fund

future sales.

6.2.5 Determinants of working capital:

1) General nature of business

Working capital requirements of the firm depend on the general nature of the

business. The small company requires less working capital, because of their limited

transaction. Big firm like public utilities require more of working capital because of

huge transactions.

2) Production Cycle

53

Production cycle is the time taken to convert raw material into finished goods. Longer

the production cycle higher the working capital required. Shorter the production cycle

lower the working capital required.

3) Business Cycle

The working capital requirements are higher when the boom conditions prevailing in

the economy and lower when economic activity is marked by decline.

4) Production Policy

If the company sales are on the seasonal basis, more working capital is required

during seasonal sales and less working capital during off seasons. If the company’s

sales are throughout the year a uniform working capital is required.

5) Credit Policy

i. Credit allowed to customers

Higher the credit allowed higher the need for the working capital. Lower the credit

allowed lower the need for working capital.

ii. Credit got from the suppliers

If the supplier gives more credit the working capital required is less. If the supplier

grants less credit the working capital required is high.

6) Growth Expansion

As the company grows, higher is the need for working capital.

7) Tax Level

Higher the tax liability higher is the need for the working capital, lower is the tax

liability lower is the need for the working capital.

8) Dividend Policy

54

The payment of the dividend consumes cash. Thus, if the company declares a

dividend, higher is the working capital required is that year.

9) Depreciation

Higher the depreciation there will be reduction in the disposable profit and the

dividends. Thus, the cash is preserved and lower working capital required.

10)Price Level Changes

Higher the prices, higher will be the need for the working capital. This is because

rising prices necessitates the use of more funds for maintaining an existing level of

activity.

11)Operating Efficiency

The management can contribute to a sound working capital position through operating

efficiencies. If the company efficiently operates its operation, then lower working

capital is required.

12)Profit Level

Higher the profit will lead to have more internal funds which in turn will reduce the

need for the working capital.

13)Change in Technology

Technological developments related to the production process have sharp impact on

the need for working capital.

6.3 Working Capital in MRPL:

55

Operating Cycle of MRPL:

Chart 6.2

6.3.1 Calculation of Operating Cycle of MRPL:

Definition of operating Cycle: Operating Cycle is the time duration required to convert

sales, after the conversion of resources into inventories into cash.

It has three stages:

Acquisition of resources

Manufacture of Product

Sale of the Product and recovery of proceeds

Operating Cycle = Raw Material / Inventory conversion period + Debtors conversion

period – Payables Deferral Period.

Raw Materials Conversion Period:

Raw MaterialConversionPeriod= Rawmaterial inventoryRawmaterial consumed duringt heday

∗360

Mar-09 Mar-08 Mar-07 Mar-06 Mar-05

RM inventory 882.9 2,020.40 1,011.76 1,208.60 958.31

56

Raw Materials which includes Crude

Storage

Cash

Sales

DebtorsCreditors

Finished Product

RMC 94.5553425 82.42203 74.26647 62.55186 44.54948

RMCP 9.33738885 24.51286 13.62338 19.32157 21.51114

Table 6.1


5

10

15

20

25

30

RMCP

RMCP

Chart 6.3

If we observe the data the Raw Material Consumption Period is decreasing over the years

except for the year 2008. It is been lowest in the year 2009 which is 9 days and this is good

for the company as the conversion period is low and therefore the cost involved is also less.

In the year 2008 the value of raw materials in inventory was Rs.2020 cr. which is almost

twice of Rs.1011 cr. which was in 2007. So when there was almost 100 % increase in value

of raw materials in the inventory there was only 10 % increase in the raw material

consumption per day. This resulted in higher raw material consumption period in the year

2008. Now if we consider the data of 2009 there is decrease in value of raw material in the

inventory and also there is increase in daily consumption which has increased from 82days in

2008 to 94 days in 2009.

Work-in-Progress Conversion Period:

Work−¿−progressConversionPeriod=Work−¿−ProgressinventoryCost ofProduction

∗360


WIP inventory 69.28 147.33 148.01 82.93 127.07

COP 97.9857 84.5094 76.02992 64.14721 46.26085

57

WIPCP 0.707043 1.743356 1.946734 1.292808 2.746815

Table 6.2


0.5

1

1.5

2

2.5

3

WIPCP

WIPCP

Chart 6.4

If we observe the data in the table we see that the work in progress holding days is decreasing

over the years. In the year 2009 it is less than 1 day which is good for the company. It is

mainly because of the latest technology it has implemented in refining mechanism. The cost

of production is increasing over the years because of various reasons like inflation, buying of

latest technology machines, etc. The value of work in progress inventory is fluctuating over

the years and it is less in year 2009 which is Rs. 69cr. which is good for the company as it is

not blocking its money in the intermediate stage.

Finished goods Conversion Period:

Finis hed GoodsConversion Period= Finis hedGoods InventoryCost of Goods Sold

∗360


FG inventory 858.3 1,377.11 1,271.63 537.79 787.64

COGS 100.337233 88.2823 79.51384 65.6206 48.41877

FGCP 8.55415259 15.59894 15.99256 8.195444 16.26725

Table 6.3

58


2

4

6

8

10

12

14

16

18

FGCP

FGCP

Chart 6.5

If we observe the data the finished goods conversion period is fluctuating over the years. It is

lowest in the year 2006 and highest in the year 2007. Here the cost of goods sold is increasing

over the years because of various external factors. The value of finished goods inventory was

lowest in the year 2006 which was Rs. 537cr. and highest in the year 2008 Rs. 1377cr. In the

year 2009 it again reduced to Rs. 858 cr. which is better for the company. The reason behind

this is company needs different tanks to store different products like crude and which is of

different types based on sulphur content, then intermediate products and then finished goods.

Now if the value of finished goods inventory is less, then it can utilise those for storing

intermediate products and crude.

Debtors Conversion Period:

Debtors conversion Period=Debtors (Closing Debtors )

Cost of Sales∗360


Debtors 1,286.98 2,204.70 1,194.87 1,153.02 960.8

COS 100.643068 88.91932 80.28044 66.92638 49.25948

DCP 12.7878178 24.79439 14.8837 17.22818 19.50488

Table 6.4

59


5

10

15

20

25

30

DCP

DCP

Chart 6.6

If we observe the data debtors conversion period is showing a decreasing trend except for the

year 2008. The reason for this is the economic downturn and other external factors. This tells

us that how fast the company is able to get back the money from the credit sales. Here it is

good for the company because in the year 2009 it is able to get back the money which is

blocked within 12 days. Company usually follows a credit sales policy.

Payables Deferral Period:

Payables deferral Period=Creditors ( closing)Credit Purc hases

∗360


Creditors 2,970.25 4,556.59 2,804.48 2,131.73 2,222.61

credit purchases 92.13643 76.88668 71.49452 59.24063 41.92397

CDP 31.047517 59.26371 39.2265 35.98426 53.01525

Table 6.5

60


10

20

30

40

50

60

70

CDP

CDP

Chart 6.7

If we observe the data it is highest in the year 2008 and lowest in the year 2009. It is better

for the company if this period is less because then the people who give the raw materials on

credit will have belief in the company as it pays back the money at a given time duration.

Gross Operating cycle:

GrossOperating cycle=R+W +F+D


RMCP 9.33738885 24.51286 13.62338 19.32157 21.51114

WIPCP 0.707043 1.743356 1.946734 1.292808 2.746815

FGCP 8.55415259 15.59894 15.99256 8.195444 16.26725

DCP 12.7878178 24.79439 14.8837 17.22818 19.50488

GOC 31.3864028 66.64955 46.44637 46.038 60.03007Table 6.6


10

20

30

40

50

60

70

GOC

GOC

Chart 6.8

61

If we observe the data gross operating cycle reducing over the years except for year 2008

where it has seen an increase. Gross operating cycle is nothing but the time from the purchase

of the raw materials till the collection of money from credit sales. It is better for the company

if it is less because it can invest those cash in some other projects. If this cycle is less then the

company can buy raw materials and produce it and sell the goods and get back the money

from sales and pay for raw materials purchased at a faster rate and this result in the

profitability of the company.

Net Operating Cycle:

Net OperatingCycle=GrossOperatingCycle−Creditor Deferral Period


GOC 31.3864028 66.64955 46.44637 46.038 60.03007CDP 31.047517 59.26371 39.2265 35.98426 53.01525

NOC 0.339142 7.385838 7.21987 10.05375 7.014822Table 6.7


2

4

6

8

10

12

NOC

NOC

Chart 6.9

If we observe the data it is reducing over the years and it is least in the year 2009. Net

operating cycle is nothing but the time period between the collection of money from credit

sales and the payment for resources acquired by the firm. It shows how quickly the company

turns its inventories into sales and sales into cash which is then used to pay the suppliers for

the raw materials purchased It is better for the company if the net operating cycle is less. If it

62

is less then company is able to utilise its funds to the maximum and it get generate more

revenue at a faster rate. This is sometimes looked by the investors to find out the status of the

company’s conversion cycle. As a whole, a shorter CCC means greater liquidity, which

translates into less of a need to borrow, more opportunity to give price discounts with cash

purchases for raw materials, and an increased capacity to fund the expansion of the business

into new product lines and markets.

An increasing trend in Inventory conversion period could mean decreasing demand for a

Company’s products. Decreasing Debtors conversion period could indicate an increasingly

competitive product.

6.3.2 Analysis of Working Capital of MRPL:

Working Capital is the Excess of Current Assets over Current Liabilities.

Working Capital is computed as follows:

NetWorkingCapital=Current Assets−Current Liabilities

Working Capital is considered to be effectively circulated when it is having a faster turnover.

The table below shows the working Capital for the past five years.

Mar 09 Mar 08 Mar 07 Mar 06 Mar 05

Total Current Assets 6,007.556,793.3

2 4,461.323,844.4

5 3,687.86

Total Current Liabilities 3,438.565,173.1

6 3,131.002,537.1

0 2,649.01

Working Capital 2,568.991,620.1

6 1,330.321,307.3

5 1,038.85Table 6.8

Mar 09 Mar 08 Mar 07 Mar 06 Mar 05 0.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

Working Capital

Working Capital

Chart 6.10

63

If we observe the above data we see that the working capital is continuously increasing over

the years. This is mainly due to the increase in the cash and bank and loans and advances.

6.3.3 Component Wise Analysis of Working Capital:

Particulars Mar 09 Mar 08 Mar 07 Mar 06 Mar 05Inventories 31.61% 53.46% 56.10% 49.17% 51.83%Sundry Debtors 21.42% 32.45% 26.78% 29.99% 26.05%Cash and Bank 29.48% 5.98% 2.97% 0.13% 0.24%Loans and Advances 17.47% 8.09% 14.12% 20.69% 21.86%

100% 100% 100% 100% 100%Table 6.9


20

40

60

80

100

120

Loans and AdvancesCash and BankSundry DebtorsInventories

Chart 6.11

If we observe the above chart we see that inventories has been the major portion in the

working capital in all the years. In the year 2009, percentage of cash and bank has also

increased in a big amount. But if we see from the other side the percentage of inventories is

reducing and there is increase in the percentage of cash and bank balances. This helps the

company to meet its short term obligations.

6.3.4 The overall efficiency of working Capital Management:

The financial position and performance of the company as revealed by its working capital

management can be analysed, and evaluated by making use of financial ratios. Financial

Ratios helps in analysis and interpretation of the company’s working capital position and also

in determining whether there has been an improvement or deterioration in the financial

condition of the firm over a period of time.

64

In this study the following financial ratios have been computed to study the working capital

conditions of MRPL.

Current Ratio:


0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

Current Ratio

Current Ratio

Chart 6.12

Current Ratio is higher in the year 2009 compared to the other years. Ideal current ratio is

1.33:1. Here the company is able to meet its short term obligations as it is able to maintain the

current ratio above 1.33 but having higher current ratio indicates company is having high

current assets which is idle and involves higher opportunity cost.

Quick Ratio:


0.2

0.4

0.6

0.8

1

1.2

1.4

Quick ratio

Quick ratio

Chart 6.13

Quick Ratio gives a better picture about the liquidity status of the company as all current

assets cannot be converted to cash very fast such as the inventories. The thumb rule is quick

65

ratio should be 1:1. Here we observe that in the year 2009 the quick ratio is higher compared

to all the other years considered. It is because the current liabilities have reduced from

Rs.5173cr. in the year 2008 to Rs. 3438 cr. in the year 2009. Also the inventories have also

reduced from Rs. 3632cr. in the year 2008 to Rs. 1899 cr. which resulted in the increase in

quick ratio.

6.4 Inventory management at MRPL:

The term Inventory refers to the stockpile of the products of a firm is offering for a sale and

the components that make up the product. In other words. Inventory is composed of assets

that will be sold in future in the nominal course of business operations. The assets which firm

store as inventory in anticipation of need are:

i) Raw Material

ii) Work-in-Progress

iii) Finished Goods

6.4.1 Objectives

The aim of Inventory Management is to avoid excessive and inadequate levels of inventories

and to maintain sufficient inventory for the smooth production and sales operations. Efforts

should be made to place the order at the right time with the right source to acquire the right

quantity at the right price and quality. An effective Inventory Management should:

1) Ensure a continuous supply of raw materials to facilitate uninterrupted production.

2) Maintain sufficient stocks of raw materials in periods of short supply and anticipate

price changes.

3) Maintain sufficient finished goods inventory for smooth sales operation and efficient

customer service.

4) Minimize the carrying cost.

5) Control investment in inventories and keep it at an optimum level.

6.4.2 Evaluation of Inventory Management at MRPL:

For the purpose of evaluation of how the working capital is managed at MRPL, I have

calculated three ratios all taking into consideration the inventory. The ratios calculated are as

follows:

66

1. Inventory to Net Working Capital Ratio

2. Inventory to Current assets Ratio

3. Inventory / Stock Turnover Ratio

Inventory to Net Working Capital Ratio: This ratio has been calculated to find how much

does the inventory occupies the part of working capital or in other terms how much has

been invested as a part of working capital.

Inventory ¿NWC Ratio= InventoryNetWorkingCapital

∗100

Mar-09 Mar-08 Mar-07 Mar-06 Mar-05Inventory 1,899.40 3,632.33 2,503.21 1,890.70 1,911.62NWC 2,568.99 1,620.16 1,330.32 1,307.35 1,038.85Ratio 73.9% 224% 188% 144% 184%

Table 6.10


0.5

1

1.5

2

2.5

Inventory to NWC

Inventory to NWC

Chart 6.14

If we observe the above data we find that the ratio is varying over the years. It was highest in

the year 2008 and lowest in the year 2009. This reducing trend in the ratio is better for the

company. The company is reducing its investment in inventories and increasing its cash and

bank balances. The increase in cash balances makes it easier for the company to meet its

short term obligations. The company has increased its cash balances at a higher rate from Rs.

9 cr. to Rs. 1770 cr.

Inventory to Current Assets Ratio: This ratio has been calculated to find the in-depth

analysis of working Capital Management there at MRPL. Current assets itself is a part of

67

Working Capital and the ratio of inventory to Current Assets will bring out the minute

details.

Inventory ¿Current Assets Ratio= InventoryCurrent Assets

∗100

Mar-09 Mar-08 Mar-07 Mar-06 Mar-05Inventory 1,899.40 3,632.33 2,503.21 1,890.70 1,911.62Current Assets 6,007.55 6,793.32 4,461.32 3,844.45 3,687.86Ratio 31.6% 53.4% 56.1% 49.18% 51.83%

Table 6.11


0.1

0.2

0.3

0.4

0.5

0.6

Inventory to Current Assets

Inventory to Current Assets

Chart 6.15

If we observe the data, we see that it is decreasing over the years except for the year 2007

where it has seen an increase. It is lowest in the year 2009 which is better for the company.

The reason behind this is it is investing less on inventories out of the total current assets it is

holding. It has reduced investment in inventories and increased its cash balances because it

can meet its short term obligations like payment for the credit purchases it has made.

Inventory / Stock Turnover Ratio: Also called as Inventory Turnover Ratio. This ratio

denotes the speed at which inventory will be converted into sales or receivables through

sales. This ratio reveals how many times finished stock is turned over during a given

accounting period. It therefore, explains whether investment in inventories is within

proper limits or not.

Inventory turnover Ratio= COGSAverage Inventory

68

Table 6.12


2

4

6

8

10

12

14

Inventory turnover Ratio (times)

Inventory turnover Ratio (times)

Chart 6.16

If we observe the data, it is higher in the year 2009 which is better for the company. The

reason behind this is company is able is convert the inventories into finished goods so that it

can increase its sales and reduce the shortage of finished products. However if it has very

high ratio then also it is not favourable to the company because there may be shortage in

inventory when the sales rate is very high. Having a very less ratio is not good for the

company because inventory is kept idle and this inturn reduces the liquidity of the company.

6.4.3 Crude oil:

Crude is the major raw material in M.R.P.L. Crude imported are stored in the customs

bonded warehouse tanks. Depending upon the requirement it is transferred for home

consumption through pipeline directly from NMPT. The crude stored is measured as Metric

Tons.

Different crude processed by MRPL is as follows:

High sulphur Low sulphur

Iran mix Quaibae

Suez blend Escravous

Dubai blend Labuan

69

Mar-09 Mar-08 Mar-07 Mar-06 Mar-05Cost of goods sold 36623.09 32223.04 29022.55 23951.52 17672.85Avg Inventory 2765.865 3067.77 2196.955 1901.16 1550.485Ratio (times) 13.2411 10.50373 13.21035 12.59837 11.39827

Kuwaiti Minilight

Lavan blend Bombay High

Upper zakum Nile

Arab mix

Ordering quantity of crude:

In M.R.P.L., it is done under Linear Programming Model (L.P.P.) whereby each crude’s

different properties, prices, yield, crude availability, freight charges, unit constraints all are

fed into the Model and which gives maximum profits and rank them according to the profits

they earn or yield.

This system is known as “Pecking Order”. These are of 2 types, i.e., one is monthly pecking

order, and the other is yearly pecking order. The yearly pecking orders are done for those

crude, where availability of crude is abundant like Iran mix, Saudi, Kuwait etc. which are

arrived in huge. They are fixed. It is done in terms of contract basis.

The other is monthly pecking order. It is done for those that are available in cheap, whereby

the other companies reject the crude may be given for lesser price. It is done on spot basis.

So accordingly crude is purchased in the market. After choosing which crude to be

purchased, question arises what is the quantity to be purchased. Quantity ordered is mainly

affected by 2 factors in MRPL they are as follows:

International crude – There are 2 matters relating to international crude, one is vessel

size and the other jetty constraints for unloading. Larger is the vessel then it is

economical. Thus there should be a balance. Therefore one parcel should be 80-95

TMT.

Indian crude – As it holds less quantity, i.e., smaller ship, it should hold 35-50 TMT

Placing of an order:

Marketing companies like HPCL; BPCL and IOCL, place a proportionate order for finished

goods of M.R.P.L. There will some percentages (%) of finished goods those are pre-

determined in throughput of crude. If the existing throughput crude does not hold the

percentage of finished products, then the order is placed two months earlier this is because

procurement of stock takes a long process or it is less predictable.

70

The placing of proportionate order for finished products to M.R.P.L. by marketing companies

through Petroleum Planning cell. They will do it under past or present scenario. The excess is

proportionately distributed among different refineries including M.R.P.L.

Forecasting:

Forecasting is done by taking into consideration the order placed before in hand by marketing

companies like HPCL, BPCL and IOCL. As some proportionate of finished products are pre-

determined in crude oil accordingly if there is any deficit in crude with regard to finished

product then there is a requirement of crude. Then scheduling for whole month is done taking

into consideration of the above with respect to its throughput.

Average time taken for obtaining a fresh delivery:

Crude is brought in two ways into the refinery:

Term basis – purchased annually

Spot basis – purchased according to requirement and availability of crude.

E.g.: Crude from Western African = 45 days

Crude from Middle East = 15 days

6.5 Cash Management at MRPL:

Cash is an important component of Working Capital, although the concept of Cash

Management is not new. It has assumed greater importance in the modern business world due

to important changes in the conduct of business and ever increasing difficulties and cost of

borrowings and the same applies to MRPL.

Chart 6.17

71

6.5.1 Managing of Collections and Disbursement:

Funds flow is undertaken between collections, cash, disbursements. Information flow

is undertaken between collections control through information reporting and disbursements.

M/S Mangalore Refinery and Petro Chemicals Limited do not maintain excess money.

So, it can’t be able to invest in marketable securities. So, there is no chance of surplus funds

investment in different options.

If company is facing deficit in Working Capital, they follow some actions to avoid that. They

are:

1) Advance from Customers

2) Short-Term Loan

3) Temporary Overdraft

4) Reduction in Stock Holding.

5) Unsecured Loan from Directors, etc.

Collection Techniques:

The firm’s objective is not only to stimulate customers to pay their accounts as promptly

as possible but also to convert their payments into a spendable form as quickly as possible.

Some important techniques used by M/S Mangalore Refinery and Petro Chemicals Limited to

minimize collection float are:

1) Concentration Banking

It is used to reduce float by shortening the mail and clearing float components. Mail

float is reduced because regionally dispersed collection centers bring the collection point

closer to the point from which the cheques are sent. Clearing float should also be reduced,

since the Payee’s Regional Bank is likely to be in the same Federal Reserve district or the

same city as the bank on which the cheque is drawn; it may even the same bank. A reduction

is clearing float will, of course, make funds available to the firm more quickly.

2) Lock Boxes

Another method used to collections by Mangalore Refinery and Petro Chemicals

Limited is Lock Box System. Here instead of mailing payment to a collection center, the

Payer sends it to a post office box that is emptied by the firm’s bank. One or more times each

business day, the bank opens the payment envelopes, deposits the cheques in the firm’s

72

account an sends a deposit slip (or under certain arrangements, a computer tape) indicating

the payments received along with any enclosures, to the firm.

3) Direct Sends

Rather than depositing these cheques in its collection account, the firm arranges to present the

cheques to the bank on which they are drawn and receive immediate payment. The firm can

express merit or private express services to get the cheques into a bank in the same city or to

a sales office.

4) Wire Transfers

Firm also frequently use wire transfers to reduce collection float by quickly

transferring funds from one bank account to another. Wire transfers are telegraphic

communications that a book keeping entries remove funds from the payers bank and deposit

them into the payee’s bank. This can eliminate mail and clearing float and may provide

processing float reductions as well.

Disbursement Techniques:

The firm’s objective related to accounts payable is not only to pay its accounts as late as

possible but also to slow down the availability of funds to suppliers and employees once the

payment has been dispatched. Some important techniques followed by M/S Mangalore

Refinery and Petro Chemicals Limited are:

1) Controlled Disbursing

It involves the strategic use of mailing points and bank accounts to lengthen mail float

and clearing float, respectively when the date of post mark is considered the effective date of

payment by the supplier, the firm may be able to lengthen the mail time associated with

disbursements. This is due by paying payments in the mail at locations from which it is

known they will take a considerable amount of time to reach the supplier. This scheme is

developed by widespread availability of computers and data on check clearing time allows

firm to maximize clearing float on their payments.

2) Playing the Float

It is a method of consciously anticipating the resulting float or delay associated with

the payment process. Firm often play the float by writing cheques against funds not currently

in their checking accounts. They are able to do this because they know a delay will occur

between the receipt and the deposit of cheques by suppliers and the actual withdrawal of

funds from their checking accounts. It is likely that the firms bank account will not be drawn

73

by the amount of the payments for a few additional days. Although the effective use of this

practice could result in problems associated with balanced cheques any firm’s use float to

stretch but their accounts payable.

3) (a) Overdraft Systems and Zero Balance Accounts

Firm that aggressively manage cash disbursements will often arrange for some type of

overdraft system or a zero balance account. Under an overdraft system, if the firm’s checking

account balance is insufficient to cover all cheques presented against the account, the bank

will automatically lend the firm enough money to cover the amount of the overdraft. The

bank, of course, will charge the firm interest on the funds lent and will limit the amount of

overdraft coverage.

(b)Firm also use zero balance accounts

Checking accounts in which zero balances are maintained. Under this arrangement,

each day the bank will notify the firm of the total amount of cheques presented against the

account. The firm then transfers only that amount, typically from a master all. Once the

corresponding cheques have been paid, the account balance reverts to zero. The bank, of

course, must be compensated for this service.

M.R.P.L. has centralized cash management with regard to cash outflows and cash inflows at

its corporate office in Mumbai. Any excess collection at branches in Mangalore and

Bangalore will be transferred to corporate office and whenever shortfall arises in the branches

funds are transferred from the corporate office. Here cash refers to cash and cash equivalents.

Maximum limit is fixed based on the past experience and number of transactions in

the previous year. Further there is a restriction in the Income Tax for cash payment exceeding

Rs. 20,000. As far as possible all payments are made through bank and only in some

exceptional cases cash payments are being made. Payments such as travel advances to

employees, petty cash expenses, reimbursement of expenses are made through cash. In case

of pending vouchers with the cashier requires further funds and the required amount will be

drawn from the banks (Bank branches are situated in site). M.R.P.L. Mangalore has cash

holding of Rs. 50,000 and Mumbai corporate office holds Rs. 50,000. Any excess in the

office will be transferred to the bank and any shortfall cash will be withdrawn from bank.

Again Chief Resident Manager in Bangalore and Delhi office has an imprest balance of Rs.

15,000 to meet petty cash expenses. Petty cash imprest are with regard to following reasons:

Purchase – local purchase – Rs. 15,000/-; Fire and safety – petty repairs – Rs. 500/-;

74

Materials – petty clearing charges – Rs. 500/-; G.M. (T/S) – petty expenses – Rs. 500/- ; P &

A (guest house – petty expenses – Rs. 5,000/-.

Corporate office Mumbai deals with major funds management. They deal with high

value transactions like receipt – sales from HPCL, borrow out of working Capital limits, Bills

Discounted, loans to NMPT, NMPT interest remittance of Phase II once in a quarter to

Mumbai corporate office and interest of Phase I is remitted to M.R.P.L., Mangalore. Crude

payments, loan repayments, interest on loans, interest, tax payment etc. They have to closely

monitor interest rates, i.e., C.C. accounts whereby daily cash flow requirement is dealt

through Opening Accounts in banks, withdrawal should be high when interest rates are low

and withdrawal should be low when interest rates are high.

One important aspect noticed in the Cash Management System is that, outstation party

used to send their DD by courier, which delayed realization to the extent of transit time. To

avoid this delay in transit time, currently many banks are offering excellent cash management

services whereby collection at various locations are pooled in customers account at one place

and disbursement can be made from there. Corporation Bank services MRPL this service.

This service in Corporation Bank is known as “CAPS” (Collection And Payment Service).

The company needs to explore the options of availing similar services from a bank that has

got wide network so that it will benefit both the customer and the company.

Based on MRPL’s request 2 banks from consortium of lenders have allocated Rs. 150

lakhs (Corporation Bank) and Rs. 25 lakhs (SBI) as CC limit to their Mangalore branch for

the utilization of MRPL Mangalore site office. Thus MRPL Mangalore gets total cash credit

limit of Rs. 175 lakhs. Payment to customs and Wharfage are done through SBI and all the

payment is done through Corporation Bank. Cash receipts are receipts from Mumbai, receipts

from NMPT, LC receipts and receipts from sales other than major receipts from sales viz.,

HPCL.

6.5.2 Evaluation of Cash Management:

For the purpose of evaluation of Working Capital Management, I have done a keen study on

the working capital by evaluation of the cash management at MRPL. For this purpose I have

calculated two ratios:

1. Cash and Bank Balances to Current Assets ratio

2. Sales to Cash and Bank Balances Ratio

75

Cash and Bank Balances to Current Assets ratio: The ratio has been calculated to

find out that how much liquidity is there in Current Assets. Cash is the most liquid

assets as compared to others. Holding cash in huge amount is not advisable because of

the concept of “TIME VALUE OF MONEY”

Cash∧Bank Balances ¿Current Assets ratio=Cash∧Bank BalanceCurrentAssets

∗100

Mar 09 Mar 08 Mar 07 Mar 06 Mar 05Cash and Bank 1,771.12 406.66 132.9 5.19 9.16Current Assets 6,007.5 6,793.3 4,461.3 3,844.4 3,687.8Current Assets to Cash and Bank Ratio 0.29 0.059 0.029 0.001 0.002

Table 6.13


0.05

0.1

0.15

0.2

0.25

0.3

0.35

Current Assets to Cash and Bank Ratio

Current Assets to Cash and Bank Ratio

Chart 6.18

If we observe the data we observe that over the years the ratio has been increasing. This is not

good for the company because this cash can be invested in some other projects as this can

increase company’s profits. They can also invest in new technologies so that company can

reduce the cost of production which in turn can increase profits.

Sales to Cash and Bank Balances Ratio: This ratio brings out that how much of

cash is being held out of the yearly sales at MRPL. This ratio clearly brings out that,

how the cash is being regulated as and when it is received.

Sales¿Cash∧Bank Balances Ratio= Yearly SalesCash∧Bank

∗100

76

Mar-09 Mar-08 Mar-07 Mar-06 Mar-05 Net Sales 38,279.20 32,565.85 28,394.75 24,997.52 18,490.36 Cash and Bank 1,771.12 406.66 132.9 5.19 9.16Net sales to Cash and bank Ratio 21.61299 80.08127 213.655 4816.478 2018.598

Table 6.14


1000

2000

3000

4000

5000

6000

Net sales to Cash and bank Ratio

Net sales to Cash and bank Ratio

Chart 6.19

If we observe the data the ratio is decreasing over the years but the cash balance is showing a

increasing trend. This is good for the company as the sales depends on the market since the

prices keep varying. As the prices of the refined product is increasing over the years the sales

amount is also increasing which results in the increase in cash and bank balances. Cash and

balances also include the short term deposits in bank kept for 30 days.

6.6 Receivables Management:

Receivables Management is also known as Management of Trade Credit. The term

receivables are defined as debt owed to a concern by customers arising from sale of goods or

services in the ordinary course of business. It represents an extension of credit of customers

allowing them a reasonable period for the goods which they have received. The two basic

liquidity factors in receivables management concentrate on:

Prospect of collecting receivables when they become due and,

Prospect of shortening future receivables maturities.

77

6.6.1 Objectives:

The main objectives of Receivable Management are:

1) To obtain the optimum volume of sales.

2) To control the cost of credit and keep it at the maximum.

3) To maintain the optimum level of investment in receivables.

4) To keep down the average collection period.

6.6.2 Credit Policy of the Company

Credit policy provides guidelines for determining whether to extend credit to a customer, and

how much credit to extend, the firm must establish credit standards to use in making these

decisions.

Appropriate sources of credit information and methods of credit analysis must be developed.

Each of these aspects of credit policy is important to the successful management of accounts

receivable.

Terms of payment followed by M/S Mangalore Refinery and Petro Chemicals Limited

New Customers – 100% Advance.

Export – Letter of Credit and criteria followed is pricing, quantity, volume of order, requisite.

So it offers limited credit.

6.6.3 Important Dimensions of Firms Credit Policy

1. Credit Standards

2. Credit Period

3. Cash Discount

4. Collection Effort.

1. Credit Standards:

The firm’s credit standards are the minimum criteria for the extension of credit to a customer.

MRPL consider the key variables while contemplating, relaxing or tightening its credit

standards, will give a general idea of the kinds of decisions involved.

78

Key Variables

a. Sales Volume

Changing credit standards can be expected to change the volume of sales. If credit standards

are released, sales are expected to increase. If credit standards are tightened, sales are

expected to decrease. Generally, increases in sales affect profits positively, whereas decreases

in sales affect profits negatively.

b. Investment in Accounts Receivables

Carrying or maintaining accounts receivable involves a loss to the firm. This cost is

attributable to the forgone earnings opportunities resulting from the necessity to tie up funds

in accounts receivable. Therefore, the higher the firms investment in accounts receivable, the

greater the carrying costs and vice versa.

Cost of Marginal Investment in Accounts Receivable can be calculated as follows:

Average investment in Accounts Receivable =

Cost of annual Sales ÷ Turn of Accounts Receivable

Average investment in Accounts Receivable =

360 ÷ Average Collection Period

c. Bad Debt Expenses

The probability or risk of acquiring a Bad Debt increases as Credit Standards are released.

The increase in Bad Debts associated with relaxation of Credit Standards raises bad debts

expenses and impacts profits negatively. The opposite effects on Bad Debt Expenses and

profits result from a lightening of a Credit Standards.

The basic changes and effects on profits expected to result from the relaxation of credit

standards are tabulated as follows:

Direction of Change Effect on Profits

Sales Volume Increase Positive

Investment in Accounts

Receivable

Increase Negative

Bad Debts Expenses Increase Negative

If credit standards were lightened the opposite effects would be expected.

2. Credit Period:

The credit period refers to the length of time customers are allowed to pay for their

purchases.

79

Credit period allowed by M/S Mangalore Refinery and Petro Chemicals Limited is

Export - 45 days

Local - 30 days

Lengthening of the credit period pushes sales up by inducting existing customers to purchase

more and attracting additional customers. This is however, accompanied by a larger

investment in debtors and a higher incidence of bad debt loss. Shortening of the credit period

would have opposite influence. It tends to lower sales, decreases investment in debtors, and

reduce the incidence of bad debt loss.

3. Cash Discount

Firms generally offer cash discounts to induce customers to make prompt payments. The

percentage discount and the period during which it is available are reflected in the credit

terms (Cash Discount offered by M/S Mangalore Refinery and Petro Chemicals Limited is

5%). When a firm initiates or increases a cash discount the following changes and effects on

profits can be expected.

4. Collection Period:

The collection programme of the firm, aimed at timely collection of receivables followed by

M/S Mangalore Refinery and Petro Chemicals Limited may consist of the following:

1. Maintaining the state of receivables

2. Telegraphic and telephonic advice to customers around the due date

3. Threat of legal action to overdue accounts

4. Legal action against overdue accounts

5. Dispatch of letters to customers whose due date is approaching

6.6.4 Control of Receivables:

Firms can control its receivables by:

Monitoring and controlling of accounts receivables.

The measures commonly employed for judging whether accounts receivables are in

control are:

i. Bad Debts losses

ii. Average Collection Period

iii. Ageing Schedule

80

6.6.5 Receivables Management at MRPL:

Cash flow can be significantly enhanced if the amounts owing to a business are collected

faster. Every business needs to know who owes them money, how much is owed, how long it

is owing, for what it is owed. Slow payment has a crippling effect on business in particular on

small businesses who can least afford it. If you don’t manage debtors, they will begin to

manage your business as you will gradually lose control due to reduced cash flow and, of

course, you could experience an increased incidence of bad debt.

HPCL

M.R.P.L. major products are sold through HPCL. It sells products like High Speed Diesel,

Motor Spirit, LPG, and SKO.

HPCL is given 21 days of credit. In a very rare and exceptional case HPCL fails to pay the

amount due to M.R.P.L., within due date. If it is so, then they are liable to pay interest of 18%

(Interests rates are subject to variation with respect to products and periods).

IOCL

Recently, M.R.P.L. also started to sell its products directly to IOCL. Previously, the products

were sold through HPCL, through whom the products have been sold to IOCL. M.R.P.L

grants 3 days credit to IOCL in case of direct sales.

BPCL

M.R.P.L. do not sell its products to BPCL directly. MRPL sells its products to BPCL through

HPCL and invoice is raised on HPCL as “BPCL A/C HPCL”.

Exports:

M.R.P.L.’s products are exported. Except LPG and kerosene and all other products like

Naphtha, Motor Spirit, High Speed Diesel, Fuel Oil and ATF at international prices are

exported to Vitol Asia, B.P. Singapore, TRAFIGURA PTE Ltd., Marubeni International,

Itochu Petroleum, Sumitomo Corporation, Chevron Texaco, Projector U.K., B.B. Energy.

These are some of buyers amongst many. Among these most of the exports is done to Vitol

Asia.

First, M.R.P.L. floats a global tender for a particular product whereby it contains quantity,

date, price, payment, lay days, lay time and demurrage. Interested buyers will participate in

the tender and give their offer. The buyer stipulates some terms and conditions with regard to

the price, payment, lay days, lay times and demurrage while offer. Then M.R.P.L. will

analyse the offer and the best offer will be awarded with the tender.

81

All the buyers deal with Letter of Credit except B.P. Singapore, they are provided with 30

days of direct payments and rest of the buyers’ deal with Letter Of Credit. Terms and

condition of the Letter Of Credit will differ from each of the buyers, product and price. It is

agreed at the time of payment and after co-ordinating with buyer. M.R.P.L. will analyse

Letter of Credit and seek any amendments if required. After confirmation of receipt of valid

Letter Of Credit, they give clearance for loading. M.R.P.L. discounts letter of credit in the

bank and the buyer pays it to respective banker.

6.7 Trend Projection of Working Capital of MRPL from 2010 to 2016.

82

To have a clear view of Working Capital I have shown here the trend of Working Capital

over the period of 6 years. The projection has been done by taking into consideration the

trend of working capital from 2004 to 2009. The graph clearly shows the Working Capital

requirement of MRPL from 2010 to 2016.

Profit and Loss Account (Audited):

83

Table 6.15

Profit and Loss Account (Projections)

84

Table 6.16

Balance Sheet (Audited):

85

Table 6.17

Balance Sheet (Projections)

86

Table 6.18

Raw material conversion period, work in progress conversion period and the finished

goods conversion period is decreasing over the years.

87

The firm is able to collect their money from customers within 30 days.

The working capital is increasing continuously over the years because of the increase

in the cash and bank balance

It has more percentage of inventories compared to other items of current assets in all

the years under consideration. But the percentage is reducing over the years, which is

a positive development for the company.

Increase in sales volume has created positive impact on Cash and bank balance.

The company follows a credit policy. Accordingly It provides a credit period of 30

days for local sales and 45 days for export sales as against the findings of 21 days

(average).

Cost of production and Cost of sales both are increasing over the years when

compared with the gross sales.

Company is having moderate profit, which enables them to reduce term loans over the

years.

Working capital requirements can be financed from internal as well as external

sources. The following banks provide Cash Credit facility to MRPL – Punjab

National Bank, SBI, UBI, Corporation Bank, Canara Bank, Bank of Baroda.

MRPL is being provided 30 days credit by suppliers, which also acts as the source of

working capital.

The present study ‘Analysis of working Capital Management at MRPL, is undertaken through the

ratio analysis. This gives an image of the quantitative aspect of the company’s financial aspect. Ratios

88

are calculated from current year numbers and are then compared to previous years, and industry

standards

MRPL a major unit in refining industry has been generating continuous profits as compared to

previous year with current year. To summaries, working capital at a plant level, this mainly involves

forecasting and monitoring of various components, which is done systematically. Whereby major

portions of receivables are managed by central marketing organization for all plants level. Other

important components of working capital are bill payables and borrowings of funds monitored by

corporate level.

Inventory is monitored differently for raw materials, work in progress, finished goods and stores.

Monthly inventory report is sent to chairman through the finance department to corporate office, but

the major portion of debtor are dealt by central marketing organization.

The two main ratios we used for our analysis were the quick ratio or the acid test ratio and the current

ratio, both of which have been explained earlier. Post observing the ratios for the last five years it can

be observed that the ratio in nearly all cases is more than one which indicates that MRPL always has

enough money to meet up its obligations.

Doing internship in MRPL gave me a good exposure to the corporate world. It was a good

experience for me in MRPL Ltd. for eight weeks. Employees at MRPL , were very co-

operative and resourceful who helped me in getting the required data.

89

Being in the organization for eight weeks, I came to know the following:

How the finance dept. actually works and how they are divided into various

categories.

Facilities provided by the company to the employees.

Nature in the factory premises

What is the exactly happening in MRPL i.e they import crude and refine it into

petroleum and same time they get many intermediate products while refining.

MRPL gives credit to customers and they use letter of credit as the means of security.

I came to know about the different modes by which the customers do their payments.

I came to know how exactly petrol and diesel is actually priced, i.e. the different

components involved in the price.

Finally I came to know the work culture of MRPL.

90

A grand report on working capital management

Documents

oil oil india

production of oil

day of oil

heavy oil

shale oil

price of oil

foundation of oil

oil prices