Manoj_InternshipReport_MRPL

Report on

“Working Capital Management of MRPL”

Prepared by

Manoj M.

Registration No:

09PG084

Under the Guidance of

Dr. Mihir Dash

In partial fulfillment of the Course-Industry Internship

Programme (IIP) in Term – IV of the Post Graduate

Programme in Management (Batch: Aug. 2009 – 2011)

Bangalore

Post Graduate Programme

Post Graduate Programme in Management: Aug.2009 – 2011

Term – IV: Industry Internship Programme (IIP)

This is to declare that the Report entitled “Working Capital Management of

MRPL” has been made for the partial fulfillment of the Course: Industry Internship

Programme (IIP) in Term – IV (Batch: Aug. 2009-2011) by me at “Mangalore Refinery

and Petrochenicals Ltd.(MRPL)” under the guidance of Dr.Mihir Dash

I confirm that this Report truly represents my work undertaken as a part of my Industry

Internship Programme (IIP). This work is not a replication of work done previously by

any other person. I also confirm that the contents of the report and the views contained

therein have been discussed and deliberated with the Faculty Guide.

: MANOJ M.

09PG084 :

DECLARATION

Post Graduate Programme in Management

This is to certify that Mr. Manoj M. Regn. No. 09PG084 has completed the Report

entitled “Working Capital Management of MRPL” under my guidance for the partial

fulfillment of the Course: Industry Internship Programme (IIP) in Term – IV of the Post

Graduate Programme in Management (Batch: Aug. 2009 – 2011).

Dr. Mihir Dash

The satisfaction and euphoria that accompanies the successful completion of any

task would be incomplete without mentioning the people who made it possible. Success is

the epitome of hard work and encouraging guidance.

I am greatly indebted to my esteemed lecturer and guide Dr. Mihir Dash, for his

timely and valuable guidance. I am grateful to him for the time he devoted in the

completion of the project work. I express my gratitude to him, without his help and

valuable suggestion this report would not have been a success.

I would also like to extend hearty thanks, appreciation and also my deep gratitude

to Ms. Alpna Dosaj (Deputy Mgr. – Fin) M.R.P.L. for her valuable suggestions and

guidance which helped me to complete this project.

My heartfelt thanks to Mr. R. Subramanian (Gen. Mgr – Fin), MRPL for their

guidance and timely information.

Sincere appreciation is extended to Mr. M.V.Nayak (DGM – Training.),

Mr.Raman S. (Officer – Personnel) for their encouragement during the training period.

My deep gratitude to Mr. Dayananda Prabhu for his recommendation for

obtaining the Summer internship Programme.

I also thank our friends and family for their altruism and stoical support in

helping me fulfill this project.

Manoj M.

Acknowledgement

Working Capital Management of MRPL

Alliance Business School

Executive Summary

Working Capital is the most important funds required for running the business. 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.

This report contains the Working Capital Management of Mangalore Refinery and

Petrochemicals. MRPL was set up in the year 1988 and then in 2003 ONGC acquired it

73% stakes. This report contains an overview of Oil and Petroleum Industry in India and

across the globe. Then five companies namely, HPCL, BPCL, IOCL, MRPL and

Reliance Petroleum has been taken into consideration and a industry wise comparison has

been done so as to find out their performance over the years. Then the analysis of

Working Capital of MRPL is done by taking into consideration the four important parts

of working capital management. They are Operating cycle, inventory management,

receivables management and cash management. Then a trend analysis is done where the

projections of Profit and Loss A/c and the Balance sheet has been done.



Table of Contents

Chapter Serial No. Particulars

Page No.

1 Overview of the Oil and Petroleum Industry 1

1.1 Introduction 1

1.2 Global comparison 2

1.3 OPEC 2

1.4 Reserves 3

1.5 Exploration and Development 5

1.6 Major Global Players 6

2 Oil and Petroleum Industry in India 7

2.1 Government Policies 7

2.2

Role of Oil and Natural Gas Industry in India GDP-

Investments Abroad 11

2.3 Impact of Budget 2010 on Oil and Petroleum industry 11

2.4 Features of the industry 11

2.5 The New Exploration Licensing Policy (NELP): 12

2.6 Outlook for E&P activity in India 13

2.7 Refining in India 13

2.8 Status & Size of the Refining Sector 15

3 Mangalore Refinery and Petrochemicals LTD. 20

Company Profile

3.1 Company Profile 20

3.2 Vision and Mission of the Company 22

3.3 Capacity of MRPL 22

3.4 Raw Material/CRUDE 23

3.5 Manufacturing Facilities 23

3.6 McKenzie’s 7s Model 32

3.7 SWOT Analysis 38

4 Research Methodology 41

4.1 Introduction 41

4.2 Scope of the Study 41

4.3 Objective of Study 41

4.4 Methodology 41

5 Industry Analysis and Interpretation 43

5.1 Industry Structure 43

5.2 Ratio analysis- 5 Companies 45

5.3 Porter’s five forces Analysis 59



5.4 Ratio Analysis- MRPL 60

6 Working Capital Management 63

6.1 Overview 63

6.2 Concept of Working Capital 63

6.3 Working Capital in MRPL 69

6.4 Inventory management at MRPL 80

6.5 Cash Management at MRPL 86

6.6 Receivables Management 94

6.7

Trend Projection of Working Capital of MRPL from 2010 to

2016 100

7 Findings 105

8 Recommendations & Conclusions 106

9 Learning Outcome 107

10 Bibliography 108



List of Charts

Chart no. Particulars Page no.

1.1 Crude Oil Reserves 3

1.2 Refining Capacity of the world 4

2.1 Snapshot of 7 rounds of NELP 12

2.2 India’s Oil Production and Consumption 17

2.3 India’s Refining Capacity Growth 18

2.4 India’s refinery Capacity Utilisation 18

2.5 India’s Oil Exports 19

2.6 India’s Oil Imports 19

3.1 Different Products of MRPL 27

3.2 Overview of the Process 30

3.3 McKenzie’s 7s Model 33

3.4 Organisation chart 35

5.1 Market Share 44

5.2 In-House R&D 46

5.3 Technological imports 46

5.4 Export intensity 47

5.5 Import intensity 48

5.6 Marketing/advertising intensity 49

5.7 Capital productivity 49

5.8 Labour productivity 50

5.9 Profitability 51

5.1 Return on sales 52

5.11 Working capital ratio 52

5.12 Return On Equity 53

5.13 Debt-Equity Ratio 54

5.14 Current Ratio 54

5.15 Tax Burden Ratio 55

5.16 Fixed Asset Turnover 56

5.17 Debtors Turnover Ratio 56

5.18 Inventory Turnover Ratio 57

5.19 Interest Coverage Ratio 58

5.2 Debtors Turnover Ratio-MRPL 60

5.21 Average Collection Period-MRPL 61

5.22 ROE-MRPL 61

5.23 ROCE-MRPL 62



6.1 Working Capital cycle 66

6.2 Operating Cycle of MRPL 69

6.3 Raw Materials Conversion Period 70

6.4 Work-in-Progress Conversion Period 71

6.5 Finished goods Conversion Period 72

6.6 Debtors Conversion Period 73

6.7 Payables Deferral Period 74

6.8 Gross Operating cycle 75

6.9 Net Operating Cycle 76

6.1 Working Capital 77

6.11 Component Wise Analysis of Working Capital 78

6.12 Current Ratio 79

6.13 Quick Ratio 79

6.14 Inventory to Net Working Capital Ratio 81

6.15 Inventory to Current Assets Ratio 82

6.16 Inventory / Stock Turnover Ratio 83

6.17 Cash Management System of (M.R.P.L.) 87

6.18 Cash and Bank Balances to Current Assets ratio 92

6.19 Sales to Cash and Bank Balances Ratio 93



List of Tables

Table no. Particulars

Page no.

1.1 Global Oil and Petroleum Production 2

2.1 Company-wise location and capacity of the refineries 14

2.2 Capacity expansions planned during XIth Five Year Plan 15

2.3 New grassroots refineries coming up 16

3.1 Performance comparison 38

3.2 Cost comparison 39

3.3 Production capacities 39

5.1 Market Share 44

6.1 Raw Materials Conversion Period 70

6.2 Work-in-Progress Conversion Period 71

6.3 Finished goods Conversion Period 72

6.4 Debtors Conversion Period 73

6.5 Payables Deferral Period 74

6.6 Gross Operating cycle 74

6.7 Net Operating Cycle 75

6.8 Working Capital 77

6.9 Component Wise Analysis of Working Capital 77

6.1 Inventory to Net Working Capital Ratio 81

6.11 Inventory to Current Assets Ratio 82

6.12 Inventory / Stock Turnover Ratio 83

6.13 Cash and Bank Balances to Current Assets ratio 92

6.14 Sales to Cash and Bank Balances Ratio 93

6.15 Profit and Loss Account (Audited) 101

6.16 Profit and Loss Account (Projections) 102

6.17 Balance Sheet (Audited): 103

6.18 Balance Sheet (Projections) 104

CHAPTER - 1

Overview of the Oil and

Petroleum Industry


Alliance Business School Page 1

CHAPTER - 1

Overview of the Oil and Petroleum Industry

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

1 Source:www.energy.com



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 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 3,186,0002

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.

Although OPEC is often seen as a villain in the political arena, the organization

serves an important purpose. OPEC prevents its members from being taken advantage

of by industrialized countries, by ensuring that oil-exporting countries are paid a fair

price for crude oil. Because oil-exporting countries are dependent on industrialized

2 Source: https://www.cia.gov/library/publications/the-world-factbook/rankorder/rawdata_2173.text

https://www.cia.gov/library/publications/the-world-factbook/rankorder/rawdata_2173.text



countries for oil products, OPEC standards prevent industrialized countries from

buying crude oil at rock-bottom prices, then turning around and selling oil products

back at vastly inflated prices.

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. OPEC Member

Countries have made significant additions to their oil reserves in recent years, for

example, by adopting best practices in the industry. As a result, OPEC's proven oil

reserves currently stand at well above 1000 billion barrels.

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.

In November 2006, Wood McKenzie and Fugro Robertson reported that the

USGS had overestimated Arctic oil and gas resources. Also most would be gas so that

oil would amount to less than 25% of previous estimates in North American /

Greenland basins.

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.

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. OPEC Member

Countries have made significant additions to their oil reserves in recent years, for

example, by adopting best practices in the industry. As a result, OPEC's proven oil

reserves currently stand at well above 1000 billion barrels.

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.

A Harrison Lovegrove study of 200 non state-owned oil and gas companies

found 2005 development costs rose 30% to US$ 159 billion, yet only yielded a 2%

increase in proved reserves and a 1% increase in production. Part of the reason is that

countries rich in oil are increasingly excluding foreign companies from participation.

A later study showed spending by 228 oil and gas companies increased 45% in 2006

to US$ 400 billion but again only increased reserves by 2%.

A March 2007 report by Harrison Lovegrove estimated that state owned oil and gas

companies invested US$ 75 billion in oil and gas asset acquisitions in 2006, 33% of

the total of US$ 166 billion. Average 2006 prices paid were US$ 12.86 per barrel of

proved oil / gas reserves, an increase of 34% on 2005.

Only three major fields have been discovered worldwide since 1969 and none since

1976. A study by Simmons found that since 1980, only three fields out of all of the

new discoveries are producing over 200,000 barrels a day. In the 1990's, over 420

fields were discovered, but only 11 have production that exceeds 100,000 barrels per

day.



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%

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

CHAPTER 2

Oil and Petroleum Industry in

India



CHAPTER 2

Oil and Petroleum Industry in India

2.1 Government Policies:

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 bidders3

.

2.1.1 Policy of the Government on Disinvestment:

The National Common Minimum Programme, envisages that profit-making

companies will not generally be privatised. All privatisations will be considered on a

3 Source: R K Narang, Ardhendu Sen and Leela Srivastava, Background paper: Issues in deregulation of oil and gas. In

Leela Srivastava and S K Sarkar, Transition to a Liberalized Environment: Experiences and issues in Liberalization, Teri

Press 1999, pp 411-426



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 In pursuance of the above policy the

Government of India has set up a " National Investment Fund" and has also approved

in principle the approach that (a) currently unlisted profitable PSUs with net worth in

excess of Rs. 200 crore could be listed through an Initial Public Offering (IPO), either

in conjunction with fresh equity issue of the PSU or independently, on a case by case

basis, subject to Government's retaining the residual equity of 51% and management

control : (b) sale of minority shareholding profitable PSUs either in conjunction with a

public issue of fresh equity of the PSU or independently, subject to Government's

retaining the residual equity of 51% and management control.4

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.

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.

Vision-2015 for the oil sector which will focus on providing better services to

customers covering four broad areas of LPG (liquefied petroleum gas),

kerosene, auto fuels and compressed natural gas/piped natural gas.

4 Source: http://petroleum.nic.in/fs.htm

http://petroleum.nic.in/fs.htm



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.

IOC is setting up a coker plant in West Bengal at an investment of US$ 596.53

million.

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.

Essar Exploration and Production Ltd, an arm of Essar Oil, will invest US$ 400

million in its coal bed methane gas project at Ranigunj in West Bengal by

2012.GAIL (India) Limited will pick up a 4 per cent stake, while OVL, the

overseas arm of oil and gas major ONGC, will pick up another 8-8.5 per cent in

the US$ 2-billion Myanmar-China gas pipeline project, The total investment of

GAIL and OVL is expected to be around US$ 250 million.

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

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 by way of anfractuous or abortive exploration

Expenditure incurred for exploration or drilling activities or services or assets

used for these activities.

PSC

Allowability of expenditure

Special deduction - 100 percent of exploration and drilling expenses (both

capital and revenue allowed)

Other expenses (including production expenditure) allowed under normal

provisions.

Manner of deduction

Allowable expenditure is aggregated till the commencement of

commercial production.

Accumulated expenditure allowed in the year of commencement of

commercial production or permitted to be amortized over a period of 10

years.

No Ring Fencing of Expenditure

All unsuccessful exploration costs in other contract areas can be set off against

income in the contract area in which commercial production has commenced.

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 Role of Oil and Natural Gas Industry in India GDP-Investments

Abroad:

India is one of the largest investors in oil fields located abroad

Most of the Government owned oil companies have share in the oil and gas

fields in different places of the world such as Sudan, Egypt, Libya, Ivory Coast,

Vietnam, Myanmar, Russia, Iraq, Qatar, and Australia

India has 20 % share in Sakhalin-I oil project in Russia

The Oil and Natural Gas Corporation (ONGC) has entered into an agreement

with ENI to acquire 20-25 % share of the Congo oil block5

2.3 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.

To add fuel to injury, the 5% basic customs duty on crude petroleum has been

restored. Moreover, central excise tax on petro products has been hiked by Re 1 while

non-petro products will see a levy of 10%.

The fuel price has been increased by Rs.2.71 per litre for petrol and Rs.2.55 per litre

for diesel.6

2.4 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

5 Source:http://business.mapsofindia.com/india-gdp/industries/oil-natural-gas.html

6 Source:http://www.moneycontrol.com/news/business/oilgas-budget-2010.html

http://business.mapsofindia.com/india-gdp/industries/oil-natural-gas.html



Production

Refining

Transportation and Distribution

Research and Development

2.5 The New Exploration Licensing Policy (NELP):

Recent rounds of NELP have proved attractive in gaining the interest of Indian private

sector and foreign players, with the private sector giant, RIL, winning the maximum

number of blocks after the state-owned ONGC. A number of foreign players such as

Cairn, BHP Billiton etc have also participated in the bidding rounds, forming

consortiums with domestic and other foreign players. However, some of the super-

majors, such as ExxonMobil, Shell etc. continued to watch from the sidelines, rather

than mark their presence in the bidding rounds. The NELP was formulated by the

Government during 1997-981 to provide a level playing field to both the Public and

the Private sector, through allocating acreages on the basis of open competitive

bidding as opposed to the nomination basis as earlier. Companies are expected to bid

on the following parameters:

The Work Programme committed to be undertaken

Percentage of value of annual production sought to be allocated towards cost

recovery

Profit petroleum share offered to the Government at various levels of

Investment Multiples.

The weight age to the above three parameters has varied from one round to the other

over the seven rounds of NELP

Chart 2.1



2.6 Outlook for E&P activity in India:

Given the commencement of production from RIL's KG Basin fields, the scheduled

commencement of Cairn India's production and the potential development of the

discoveries announced by GSPC and ONGC, the E&P sector is poised to see

considerable activity in the near future. This could mean an increased interest in

exploring India's hydrocarbon potential by foreign players. However, the economic

downturn (and the consequent cut-back in capital expenditures by some players) as

well as some ambiguity on freedom to market oil and gas and the applicability of tax

concessions for the production of natural gas could serve as a dampener. On the other

hand, the promise offered by certain acreages, particularly off India's east coast-the

KG and Mahanadi Basins, means that the prospects for the growth of the upstream

sector remains bright. It is expected that this is also likely to have a positive spin-off

effect on the provision of off-shore services.

2.7 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 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.



Table 2.1

Taking a look back in time, it would be fair to state that the Refining sector has come

a long way since the Mumbai Refinery of HPCL was commissioned post

independence. Starting with relatively modest capacities, the public sector units (PSU)

refiners have gradually ramped up capacities at existing locations or constructed



Greenfield refineries at new locations. Today, there are 20 refineries, both large and

small, in the country with even further additions being planned.

India, which is already surplus in refining capacity, aims to emerge as a refining hub.

Its favourable location, close to the oil-producing regions of the Middle East renders it

an advantage in this quest and the ability of the latest refineries to process heavy, low-

grade crude, will further help in this regard. The erstwhile RPL's new refinery in

Jamnagar, in particular, was established as an export-oriented one, with an aim to sell

its refined products in the US market. The Gross Refining Margins (GRM) of RIL's

existing refinery are among the highest in the region, due to its high complexity index

and consequent ability to process our, high-sulphur crude.

2.8 Status & Size of the Refining Sector:

India today boasts of surplus refining capacity, with further large expansions planned.

The major expansions are for the Vadinar refinery of Essar, the Indian Oil Corporation

(IOC) refinery at Paradeep and the planned refineries at Bina in Madhya Pradesh by

BPCL and Bhatinda in Punjab by HPCL-Mittal Energy

Most of the private sector refineries are focusing on the export market to a large

extent. As far as the PSU refineries are concerned, concerns have been expressed over

the viability of the small refineries in the North-east, which are land-locked and

possess a sub-optimal economic size. Most of the older refineries are also expected to

upgrade themselves to meet new fuel specification standards.

Expansion of existing refineries:

Capacity expansions planned during XIth Five Year Plan has been indicated in Table



Table 2.2

New Refineries:

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

Table

Table 2.3



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. In addition,

permits for Greenfield refineries are hard to obtain in these countries due to

environmental concerns. Therefore, capacity addition is primarily coming from

emerging economies like India, China and some Middle Eastern countries.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:

Chart 2.2



India’s Refining Capacity Growth:

Chart 2.3

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 MMTPA7

India’s refinery Capacity Utilisation8

Chart 2.4

7 Source: XIth Plan Projection 8 Source :Ministry of Oil Petroleum &Natural Gas 2008



India’s Oil Exports:9

Chart 2.5

India’s Oil Imports:

Chart 2.6

9 Source: http://www.indexmundi.com/india/oil_production.html

http://www.indexmundi.com/india/oil_production.html

Chapter 3

Mangalore Refinery and

Petrochemicals LTD.

Company Profile



Chapter 3

Mangalore Refinery and Petrochemicals LTD.

Company Profile

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

asset base of over 7,000 crores. 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 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 crores thus making MRPL a majority held

subsidiary of ONGC. The lenders also agreed to the Debit Restructuring Package

(DRP) proposed by ONGC, which included interalia, and conversion up to Rs 365

crore of their loans into equity. 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.

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.

2. Hydro cracker unit: (Technology: UOP, USA):

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 (Technology: UOP, USA):

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.

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.

Other support facilities:

Two oil jetties to receive crude oil and dispatch petroleum products by Ocean

tankers.

Total of 79 numbers/ Numbers of storage tanks including a number of LPG

Horton spheres.

Raw Water line, 43 km long from river Nethravathi. A weir has been

constructed across the river.

Well – equipped laboratory with sophisticated analytical instruments.

Blast – proof centralized control room and State of the art distributed digital

control system for entire refinery operation.

Telecommunication facilities between the port and the refinery.

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.

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.



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.

MRPL is the convener of the Mangalore Chapter of National Safety Council.

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

Safety and house keeping committees regularly review the plant safety.

Mutual aid Scheme with neighboring industries already in place.

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.

3%

4%

13%

11%

16%

53%

MS

OF

SKO/ATF

LPG

BITUMEN

HSD



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.

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 Training Facilities:

HRD‟s mission is continuous upgradation of skill and managerial capabilities.

Training simulators for all process units have been installed and are used for

training operators and supervisors.

Vocation training for college students.

Fire training.

Regular Presentation by vendor and licensors.



3.5.5 Committed To Environment In Every Aspect Of Refining:

Measures are taken for the protection of the environment from the design stage.

The process units are heat integrated to the possible extent to achieve higher

overall thermal efficiency of the refinery, thereby reducing fuel oil or fuel gas

consumption and emission.

Tall stacks to reduce ground level concentration of sulphur dioxide(so2)

Continuous monitoring of Sox and NOx analyzer in stacks.

Low sulphur fuel oil used in furnaces(less than 1 percent)

Amine Treating Unit scrubs hydrogen sulphide off the process wastewater.

Highly efficient Sulphur Recovery Unit (99 percent Recovery) licensed by M/s

KTI, Italy, recovers elemental Sulphur from hydrogen sulphide. Advanced

technology for treating refinery wastewater has been adopted.

3.5.6 Quality Policy of Refinery:

Satisfied internal customer, external customers, business associates, and the

society through excellence in quality products and processes.

Continual improvement in product processes service and quality management

system.

Satisfied, motivation and committed employee.

Safe working condition and Eco-friendly environment.

3.5.7 Waste Water Treatment:

The waste water treatment plant installed, treats refinery wastewater containing

sulphide, phenol, ammonia, oil etc. So as to get treated water, meeting the limits of

Karnataka State Pollution Control Board (KSPCB). The treatment consists of oil

separation, chemical treatment, biological treatment and filtration. The treated waste

water is discharged into the sea at a distance of 900m and at depth of 6.5m the

location of discharge point was selected by National Institute of Oceanography after

carrying out detailed study on the effect of this water on marine life the quality of

treated waste water and the marine environment around the discharge point is being

monitored by an independent agency all around the year.



In actual practice, the treated wastewater quality surpasses KSPCB limits. In order to

conserve water, MRPL is recycling about 70% of treated wastewater to cooling tower.

MRPL is one of the few a refineries in the world, which reuse treated wastewater

consciously.

3.5.8 Production Layout:

Chart 3.2

3.5.9 Awards and milestones:

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

9001:2000 on January 2003.

Conferred Star Trading House status on September 21, 2001.

Encon Award from Ministry of Power on December 14, 2001.

Receive ISO 14001 certification on September 2, 2001.

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.

In recognition of its performance, MRPL was awarded the “Best Exporter

through NMPT award” by The Federation of Karnataka Chambers of

Commerce and Industry for export excellence for the year 2006-07.

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.

Revised accreditation for its ISO 9001-2000 Quality management System

including Marketing and Bunker supply facility - Company is ISO 9001:2000

and ISO 14001:2004 certified.

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)

In recognition of the very high safety levels in MRPL, the Company was

conferred with Safety Awards by Oil Industry Safety Directorate (OISD) and

also by Ministry of Labour & Employment (29th September, 2007)

It is also a moment of pride that MRPL received the prestigious NABL

(National Accreditation Board for Testing and Calibration Laboratories)

accreditation and ISO/IEC 17025/2005 Certification. This will enable any

National and International Company to utilize the service of MRPL, for testing

of petroleum and related products (23rd September, 2007).

MRPL has received „Energy efficient Unit‟ Award 2007 from Confederation of

Indian Industry (CII).



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.

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.

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.



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.



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 onthe 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.

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.

h) The recent commissioning of MHBPL has brought economic in supply to

interland areas.

i) New investment are made achieve Bharath II and Euro III norms.

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.

a) Power Plant :

MRPL has a power plant which generates 112.5 MW using Turbo generaters

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

and steam to the complex for an industry like MRPL uninterpted 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 emergiency like cooling water faliurs, power

faliurs.

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.

3) Mechanical Organization Structure

Opportunities :

The opportunities of MRPL are as follows:

1) MRPL has plans to invest Rs. 600 Crores 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.

Chapter 4 Research Methodology



Chapter 4

Research Methodology

4.1 Introduction:

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 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 observational in nature.

This type of study relies on observations, often without due regard to system

of theory. To some extent the study can also be stated as Applied Study, which

basically aims at finding a solution for a problem.

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 primary source of data has been company‟s Balance

Sheet and Profit and Loss Accounts over a period of past 5 years.

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.

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

CHAPTER – 5

Industry Analysis and

Interpretation



CHAPTER – 5

Industry Analysis and Interpretation

5.1 Industry Structure:

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

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%

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.

16.24%

15.22%

37.13%

4.64%

17.19%

market share

BPCL

HPCL

IOCL

MRPL

Reliance



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

o In house R & D

o Technology imports

Foreign exposure

o Export intensity

o Import intensity

Productivity

o Capital productivity

o Labour productivity

Marketing Intensity

Performance

o Growth analysis

o Profitability trend

o Return on Sales

o Working Capital ratio

Financial ratios

o Debt Equity ratio

o Tax Burden Ratio

o Current Ratio

o Return on Assets

o Return on Equity



5.2.1 Technology intensity/orientation:

a) In-House R&D:

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%:

Chart 5.3

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

Mar 09 Mar 08 Mar 07 Mar 06 Mar 05

HPCL

BPCL

IOCL

RELIANCE

MRPL

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7


HPCL

BPCL

IOCL

RELIANCE

MRPL



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.

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:

Advanced Research Technologies (ART), Chevron & IIT

Kanpur: ufacturing unit and feasibility study for producing polymer-grade

Hexane (With IIP)

Optimization studies of NMP Lube Extraction Unit (With IIP)

Membrane Separation Study to recover Propylene from Visakh Refinery

Gas Mixture & LPG

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:

Chart 5.4

0

10

20

30

40

50

60

70


HPCL

BPCL

IOCL

RELIANCE

MRPL



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:

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.

0

10

20

30

40

50

60

70

80

90

100


HPCL

BPCL

IOCL

RELIANCE

MRPL



5.2.3 Marketing/advertising intensity:

Chart 5.6

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:

Chart 5.7

0

0.0002

0.0004

0.0006

0.0008

0.001

0.0012

0.0014

0.0016

0.0018

0.002


HPCL

BPCL

IOCL

RELIANCE

MRPL

0

1

2

3

4

5

6


HPCL

BPCL

IOCL

RELIANCE

MRPL



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.

b) Labour productivity:

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.

0

100

200

300

400

500

600

700


HPCL

BPCL

IOCL

RELIANCE

MRPL



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.

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:

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.

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5


HPCL

BPCL

IOCL

RELIANCE

MRPL



b) Return on sales:

Chart 5.10

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:

Chart 5.11

0

0.05

0.1

0.15

0.2

0.25


HPCL

BPCL

IOCL

RELIANCE

MRPL

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

0.2


HPCL

BPCL

IOCL

RELIANCE

MRPL



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.

d) Return On Equity:

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 unultilised 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.

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8


HPCL

BPCL

IOCL

RELIANCE

MRPL



5.2.7 Financial Ratios:

a) Debt-Equity Ratio:

Chart 5.13

HPCL is seen to have increasing it‟s 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:

Chart 5.14

0

0.5

1

1.5

2

2.5


HPCL

BPCL

IOCL

RELIANCE

MRPL

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2


HPCL

BPCL

IOCL

RELIANCE

MRPL



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:

Chart 5.15

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.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6


HPCL

BPCL

IOCL

RELIANCE

MRPL



d) Fixed Asset Turnover:

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.

e) Debtors Turnover Ratio:

Chart 5.17

0

1

2

3

4

5

6

7


HPCL

BPCL

IOCL

RELIANCE

MRPL

0

10

20

30

40

50

60

70


HPCL

BPCL

IOCL

RELIANCE

MRPL



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:

Chart 5.18

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.

0

2

4

6

8

10

12

14

16


HPCL

BPCL

IOCL

RELIANCE

MRPL



g) Interest Coverage Ratio:

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 additional debt capacity. So if the company goes for higher debt,

then at the same time it should have higher interest coverage ratio.

0

5

10

15

20

25

30


HPCL

BPCL

IOCL

RELIANCE

MRPL



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. For example, some types of

pumping trucks needed at well sites cost more than $1 million each. 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. Oil is used for running our vehicles.

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

particularly troublesome situation facing some firms. Until quite recently, oil



refineries were a particularly good example. For a period of almost 20 years, no

new refineries were built in the U.S. Refinery capacity exceeded the product

demands as a result of conservation efforts following the oil shocks of the

1970s. 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:

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.

0

5

10

15

20

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

Debtors Turnover

Debtors Turnover



b) Average Collection Period:

Chart 5.21

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:

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

0

20

40

60

80

100


Average Collection Period

Average Collection Period

0

0.1

0.2

0.3

0.4

0.5


ROE

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:

Chart 5.23

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.

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35


ROCE

ROCE

Chapter 6 Working Capital Management



Chapter 6

Working Capital Management

6.1 Overview:

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 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 two concepts of working capital Gross and Net are not exclusive; rather

they have equal significance from the point of view of management. 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?

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 parking, 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 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:

Chart 6.1

Each component of working capital (namely inventory, receivables and

payables) has two dimensions: TIME and MONEY. When it comes to managing

working capital -TIME IS 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

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

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:

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.

Cash

Raw Materials

which includes

Crude

Debtors

Sales

Creditors Storage

Finished

Product



Raw Materials Conversion Period:

𝑅𝑎𝑤 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑

=𝑅𝑎𝑤 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

𝑅𝑎𝑤 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑑 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡𝑕𝑒 𝑑𝑎𝑦∗ 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

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

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.

0

5

10

15

20

25

30


RMCP

RMCP



Work-in-Progress Conversion Period:

𝑊𝑜𝑟𝑘 − 𝑖𝑛 − 𝑝𝑟𝑜𝑔𝑟𝑒𝑠𝑠 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑

=𝑊𝑜𝑟𝑘 − 𝑖𝑛 − 𝑃𝑟𝑜𝑔𝑟𝑒𝑠𝑠 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

𝐶𝑜𝑠𝑡 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

WIPCP 0.707043 1.743356 1.946734 1.292808 2.746815

Table 6.2

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.

0

0.5

1

1.5

2

2.5

3


WIPCP

WIPCP



Finished goods Conversion Period:

𝐹𝑖𝑛𝑖𝑠𝑕𝑒𝑑 𝐺𝑜𝑜𝑑𝑠 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑 =𝐹𝑖𝑛𝑖𝑠𝑕𝑒𝑑 𝐺𝑜𝑜𝑑𝑠 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

𝐶𝑜𝑠𝑡 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

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.

0

2

4

6

8

10

12

14

16

18


FGCP

FGCP



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

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𝑕𝑎𝑠𝑒𝑠∗ 360

0

5

10

15

20

25

30


DCP

DCP




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

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:

𝐺𝑟𝑜𝑠𝑠 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 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 60.03007

Table 6.6

0

10

20

30

40

50

60

70


CDP

CDP



Chart 6.8

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 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐶𝑦𝑐𝑙𝑒 = 𝐺𝑟𝑜𝑠𝑠 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐶𝑦𝑐𝑙𝑒 − 𝐶𝑟𝑒𝑑𝑖𝑡𝑜𝑟 𝐷𝑒𝑓𝑒𝑟𝑟𝑎𝑙 𝑃𝑒𝑟𝑖𝑜𝑑


GOC 31.3864028 66.64955 46.44637 46.038 60.03007

CDP 31.047517 59.26371 39.2265 35.98426 53.01525

NOC 0.339142 7.385838 7.21987 10.05375 7.014822

Table 6.7

0

10

20

30

40

50

60

70


GOC

GOC



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

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.

0

2

4

6

8

10

12


NOC

NOC



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


Total Current Assets 6,007.55 6,793.32 4,461.32 3,844.45 3,687.86

Total Current Liabilities 3,438.56 5,173.16 3,131.00 2,537.10 2,649.01

Working Capital 2,568.99 1,620.16 1,330.32 1,307.35 1,038.85

Table 6.8

Chart 6.10

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 05

Inventories 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

0.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00


Working Capital

Working Capital



Chart 6.11

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.

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

capital conditions of MRPL.

0

20

40

60

80

100

120


Loans and Advances

Cash and Bank

Sundry Debtors

Inventories



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:

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

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 has reduced from

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

0

0.5

1

1.5

2


Current Ratio

Current Ratio

0

0.2

0.4

0.6

0.8

1

1.2

1.4


Quick ratio

Quick ratio



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.



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 𝑡𝑜 𝑁𝑊𝐶 𝑅𝑎𝑡𝑖𝑜 =𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

𝑁𝑒𝑡 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙∗ 100


Inventory 1,899.40 3,632.33 2,503.21 1,890.70 1,911.62

NWC 2,568.99 1,620.16 1,330.32 1,307.35 1,038.85

Ratio 73.9% 224% 188% 144% 184%

Table 6.10

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.

0

0.5

1

1.5

2

2.5


Inventory to NWC

Inventory to NWC



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 Working Capital and the ratio of inventory to Current Assets will

bring out the minute details.

𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑜 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 𝑅𝑎𝑡𝑖𝑜 =𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠∗ 100


Inventory 1,899.40 3,632.33 2,503.21 1,890.70 1,911.62

Current Assets 6,007.55 6,793.32 4,461.32 3,844.45 3,687.86

Ratio 31.6% 53.4% 56.1% 49.18% 51.83%

Table 6.11

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

0

0.1

0.2

0.3

0.4

0.5

0.6


Inventory to Current Assets

Inventory to Current Assets



turned over during a given accounting period. It therefore, explains whether

investment in inventories is within proper limits or not.

𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 =𝐶𝑂𝐺𝑆

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

Table 6.12

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

0

2

4

6

8

10

12

14


Inventory turnover Ratio (times)

Inventory turnover Ratio (times)


Cost of goods sold 36623.09 32223.04 29022.55 23951.52 17672.85

Avg Inventory 2765.865 3067.77 2196.955 1901.16 1550.485

Ratio (times) 13.2411 10.50373 13.21035 12.59837 11.39827



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

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.

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.

Safety margin:

Zero stock:

Zero stock are those stocks, which are unpumpable from the tank.

:. Unpumpable = 5000 metric tons/200 CMS / per tank

= 60000 metric tons (total 12 tanks)

The above figure had arrived on the following basis:

1 tank = maximum 45000 MT at height of 1700 CMS



12 tanks = max 540000 MT

1 tank = minimum 5000 Mt at height of approx. 200 CMS (5000 x 1700/45000)

12 tanks = min 60000

Safety margin should be over and above zero stock or unpumpable stock, as this will

protect evaporation etc. thus it should hold 10 days stock, i.e., approx. 200000 MT at

height of 630 CMS. (i.e., 20000 MT is normal requirement x 10 days)

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

Contingencies & seasonal factors:

The arrangement of term basis or contract basis, which in turn results in scheduled

programming, thereby reduces constraints of contingencies and seasonal factors.

Quality:

When crude is procured, it is first based on Crude Assay for the quality. Crude assay

refers to different or majority of properties it contains, i.e., here proportionate

percentage of finished products is pre-determined in crude assay. This crude assay is

checked with the properties of crude to be procured. After it meets its requirement,

i.e., after procuring crude it is undergone with TBP Analysis (True Boiling Point

Analysis) through laboratory, this is to see whether it matches with assay. If it matches

then it is sent to the unit as throughput. After it is processed result is compared with

assay to observe whether it matches or not. Crude Assay though does not match 100%

but it gives upto 98% of the result. If it gives a negative figure then a complaint is

lodged to the suppliers about the differences in the product and assay.



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

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 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

Sometimes, to reduce clearing float, firm receive large cheques drawn on

distant banks or a large number of cheques drawn on banks in a given city many

arrange to present these cheques directly for payment to the bank on which they are

drawn.



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 payees 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 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/-; 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

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”

𝐶𝑎𝑠𝑕 and Bank Balances to Current Assets ratio

=Cash and Bank Balance

CurrentAssets∗ 100


Cash and Bank 1,771.12 406.66 132.9 5.19 9.16

Current Assets 6,007.5 6,793.3 4,461.3 3,844.4 3,687.8

Current Assets to Cash and Bank Ratio 0.29 0.059 0.029 0.001 0.002

Table 6.13

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

0

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



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 inturn 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 to Cash and Bank Balances Ratio =Yearly Sales

Cash & 𝐵𝑎𝑛𝑘∗ 100


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 9.16

Net sales to Cash and bank Ratio 21.61299 80.08127 213.655 4816.478 2018.598

Table 6.14

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.

0

1000

2000

3000

4000

5000

6000


Net sales to Cash and bank Ratio

Net sales to Cash and bank Ratio



6.6 Receivables Management:

Receivables Management is also known as Management of Trade Credit. The term

receivables are defined as debt owned 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.

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. M/S Mangalore Refinery and Petro Chemicals Limited consider the key

variables while contemplating, relaxing or tightening its credit standards, will give a

general idea of the kinds of decisions involved.

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

Or

Turnover of Accounts Receivable =

Annual Sales ÷ Accounts Receivable

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.

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.

Variable Direction of Change Effect on Profits

Sales Volume Increase Positive



Investment in Accounts

Receivable

Decrease Positive

Bad Debt Expenses Decrease Positive

Profit per unit Decrease Negative

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

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).

First, HPCL sends an indent to M.R.P.L. that is required to them. According to the

availability of product, price and policy etc. M.R.P.L. will place a receipt. In site,

when the products are dip the opening balance is noted and same way closing balance

is noted. The difference between opening and closing balance will be recorded in

receipt. After that product is sent along with invoice to HPCL. HPCL will compare

invoice quantity with their receipt quantity. This certified invoice is sent to M.R.P.L.‟s

Mumbai office. They will discount with their banker. Then, within the due date (i.e.,

21 days) HPCL has to pay the amount due to respective banker.

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, laydays, laytime 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, laydays, laytimes and demurrage while

offer. Then M.R.P.L. will analyse the offer and the best offer will be awarded with the

tender.

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.

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):

Table 6.15



Profit and Loss Account (Projections)

Table 6.16



Balance Sheet (Audited):

Table 6.17



Balance Sheet (Projections)

Table 6.18

Chapter 7

Findings



Chapter 7

Findings

Raw material conversion period, work in progress conversion period and the

finished goods conversion period is decreasing over the years.

They are able to collect their money from their customers within 30 days.

Working Capital in 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 which has been considered. But the percentage is reducing over

the years which is good for the company.

It has a good inventory turnover ratio and it is increasing over the years which

is good for the company.

Cash and bank balance is also increasing because of the increase in the sales

amount of the refined product.

It provides a credit period of 30 days for local sales and 45 days for export

sales.

Cost of production in increasing over the years when compared with the gross

sales.

Cost of sales is increasing over the years when compared with the gross sales.

Company is having good profit, so they are reducing term loans over the years.

Working capital requirement can be financed from internal as well as external

sources. The working capital of MRPL is financed cash credit facility from

Banks, credit from suppliers, working capital advance from ONGC after March

2007 (Prior to 2007 March HPCL was providing working capital advance). 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 source

of working capital. For example, most of the debtors of the company are

prompt in repayment of debts which is provided to them.

Chapter 8

RECOMMENDATIONS

AND

CONCLUSIONS



Chapter 8

RECOMMENDATIONS AND CONCLUSIONS

The firm invested more funds in fixed assets recent years, proper utilization of

these fixed assets will help the company to greater profit and maximize the

firm production.

The firm should take adequate steps to keep the firm liquid by framing

effective financial policies.

The company is starting the phaseIII project with increase in capacity to

12MMT by which it can increase its production and also try to reduce the cost

of production.

At present MRPL is focusing more on the middle and heavy distillates ,

however the revenue generated can be more from the light distillates. So it can

produce more of these light distillates and try to increase the margins.

The expansion of refinery will enable MRPL to produce propylene, which is a

value added product. MRPL must try to focus on this type of products not only

at present but also in case of future plans.

There is very less demand for some products like Naphtha, both in domestic as

well as international markets. Instead of selling this product as it is, it can be

converted to other products which are in demand (e.g. ethylene) and then sold.

This will ensure that there is realization from all the products produced.

MRPL must start its own outlets and also do proper marketing to sell their

products.

Chapter 9

Learning Outcome



Chapter 9

Learning Outcome

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 Ltd.,

were very co-operative and resourceful who helped me in getting the required data.

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.

Chapter 10

Bibliography



Chapter 10

Bibliography

http://www.eia.doe.gov/emeu/cabs/India/Oil.html

http://www.businessmonitor.com/oilgas/india.html

http://www.indiacatalog.com/search_results/petroleum.html


http://www.kpmginstitutes.com/global-energy-institute/index.aspx

http://www.financialexpress.com/news/indias-gdp-to-grow-at-5-in-200910-eiu/435703/

http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=INR

http://www.economywatch.com/

http://www.indiastat.com/petroleum/25/petroleumproduction/229/stats.aspx

http://www.indexmundi.com/india/

http://petroleum.nic.in/apppric.htm

http://www.ongcindia.com/press_release1_new.asp?fold=press&file=press433.txt

https://www.cia.gov/library/publications/the-world-factbook/geos/in.html

http://petroleum.nic.in/oisd.htm

http://www.mrpl.co.in

Books Referred:

Financial Management by I.M Pandey

Financial Management by Prasanna Chandra

http://www.eia.doe.gov/emeu/cabs/India/Oil.html

http://www.businessmonitor.com/oilgas/india.html

http://www.indiacatalog.com/search_results/petroleum.html


http://www.kpmginstitutes.com/global-energy-institute/index.aspx

http://www.financialexpress.com/news/indias-gdp-to-grow-at-5-in-200910-eiu/435703/

http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=INR

http://www.economywatch.com/

http://www.indiastat.com/petroleum/25/petroleumproduction/229/stats.aspx

http://www.indexmundi.com/india/

http://petroleum.nic.in/apppric.htm

http://www.ongcindia.com/press_release1_new.asp?fold=press&file=press433.txt

https://www.cia.gov/library/publications/the-world-factbook/geos/in.html

http://petroleum.nic.in/oisd.htm

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

Documents

Manoj_InternshipReport_MRPL