INTRODUCTION AND OBJECTIVES OF STUDY:

The importance of working capital in any industrial concern needs no emphasis. The management of working capital is one of the most important aspects of the overall financial management. The existence of an adequate working capital and its careful management can make substantial difference between the success and failure of an enterprise. Even in a well-established business with a long history of successful operation, careful attention to the management of working capital can result in greater profitability. It is important, therefore, for management to apply particular attention to the planning and control or working capital. The effective management of working capital calls for careful short-range and long-range cash flow budgeting based on sound operating budgets, careful control of credit and collection period, proper handling of inventory etc. it also calls for judicious handling of funds not otherwise employed and proper use of bank advances to finance seasonal requirements of the business.

Born out of India’s drive to liberalization and globalization of industries and also with the entry of new players in the market, competition in the oil sector is bound to come. To meet this challenge and to survive in this environment. Public sector enterprises, which have the exclusive privilege in refining and marketing of Oil and petroleum products, will require to reorient themselves for effective financial management. In this connection if a study of existing management or floating capital in oil sector companies is made and certain meaningful inferences be drawn the same may be use and importance for their improvement and the economies development of country as a whole. Hence this study assumes greater importance and significance. The main objective is to carry out a study of oil industry (integrated refining and marketing companies)of India in the area of working capital management. Towards this end and to set a direction for the study, the following objectives are set forth:

Present Structure

The entire Oil and gas sector has been carved into distinct segments based on the nature of activity. The scope of opeRatios of individual companies has been restricted within their respective segments. The current major player in the oil and gas sector in India is presented in  given below chart .

It involves exploration and production (E and P) of crude oil. The upstream sector is currently near monopolized by the Oil and Natural Gas Commission (ONGC) and Oil India Limited (OIL), which operate as the national oil companies. This sector is still undeveloped. The major reasons for the under development of the upstream sector was the country’s relatively unattractive geological profile or rather lack of adequate data, perennial shortage of long term resources required for exploration and lower level of industrialization.

The down stream sector comprises of the exclusive refining companies as well as the integrated companies responsible for refining and marketing. The pure refiners have to surrender all of their refined products to the distribution companies mainly Indian Oil Corporation and Indo-Burmah Petroleum Company (IBP). IBP is the only oil company with a distribution network but no refining capacity. The downstream sector currently comprises of nine companies, three of which are integrated (refining and marketing)companies [Indian Oil Corporation Ltd. (IOCL), Hindustan Petroleum Corporation Ltd. (HPCL) and Bharat Petroleum Corporation Ltd. (BPCL)] and four refining companies [Cochin Refineries Limited (CRL), Madras Refineries Limited (MRL), Bongaigaon Refineries and Petrochemicals Limited (BRPL) and Mangalore Refineries Petrochemicals Ltd. (MRPL)] and two others i.e. IBP and GAIL. In all these companies except MRPL, the Central Government holds more than 51% of the paid up share capital.

The companies which are integrated and engaged in refining, distribution and marketing have been selected as the sample of study,

These  three oil sector companies are:

i)                    Bharat Petroleum Corporation Limited (BPCL)

ii)                   Hindustan Petroleum Corporation Limited (HPCL)

iii)                 Indian Oil Corporation Ltd. (IOCL).

IOCL owns 6 refineries which process about 45% of the total crude throughput of the country. Its market share is around 55%. All cross country product pipelines excepting one are owned by IOCL and these pipelines have an annual throughput of 11.4 Million Metric Tonnes (MMT). At 10 port locations (of 12 port locations in the country), IOCL has facilities for import / export of products, and at three locations viz. Haldia, Madras, and Tuticorin, it has exclusive control. If also has the marketing rights of the products produced by CRL, MRL and BPRL. It may, however, be added that under the administrative instructions of Ministry of Petroleum and Natural Gas (MOP & NG), marketing companies can draw products from refineries according to their entitlement. IOCL is the sole canalizing agency for import and export of crude oil and petroleum products excluding free trade products (prices of which are not fixed by Government). HPCL owns two refineries with a processing capability of about 19% of the country’s total crude throughput. The market share of HPCL almost matches with that of its refining capacity. If owns one cross – country product pipeline with a capacity of 3.1 MMT per annum. It has import / export capabilities at eight ports and at one location (Paradeep) it had exclusive control. BPCL, with one refinery, has 13% share in refining capacity and a market share of around 20%. It has port facilities at six locations but has no cross-country product pipeline. IBP, the only marketing and distribution facilities of IOCL, HPCL and BPCL as on March 96 is presented in  the given below Chart

Comparison of production, marketing and distribution facilities of IOCL, HPCL and BPCL as on March 96

It is evident that Indian Oil has a major share of the market in all the areas of downstream oil industry in India, more over it has also the target marketing network well spread throughout India.

A time span of ten years period commencing from the financial year 1987 – 88 to the financial year 1996 – 97 is chosen for the present study. For the purpose of analysis, this ten-year period is divided into two distinct phases of five years each. Financial years from 1987 – 88 to 1991 – 92 pertains to period before liberalization and globalization of Indian industry and the period 1992 – 93 to 1996 – 97 pertains to the period after liberalization and globalization period of Indian economy has started to given its impact. Though the actual liberalization and globalization of Indian economy has started in the year 1991 – 92 but its impact has been felt from the succeeding year, hence we have considered the post liberalization and globalization period with effect from he year 1992 – 93 to 1996 – 97.

LIQUIDITY ANALYSIS.

The importance of adequate liquidity to meet current / sot term obligations as and when they become due for payment can hardly be over stressed. In fact liquidity is a pre – requisite for the very survival of a firm. The short – term creditors of the firm are interested in the short – term solvency or liquidity of a firm. But liquidity implies, from the viewpoint of utilization of the funds of the firm, that funds are idle or they earn very little. Hence, maintenance of adequate liquidity without impairing profitability is the foremost requirement of sound and efficient working capital management. Maintenance of adequate liquidity will also depend on the firm’s access to sources of funds and ease with which these can be tapped I times of need. The two liquidity ratios that are used to compute and analyze liquidity position of the firms under study are: (i) current ratio and (ii) acid test or quick ratio. These are defined as Table 1 and Table 2 respectively.

The current ratio of a firm measures its short – term solvency, i.e. its ability to meet short – term solvency, i.e. its ability to meet short – term obligations. As a measure of short – term / current financial / liquidity, it indicates the rupees value of current assets available for each rupee of current ratio the greater the safety of funds of short – term creditors. A very high current ratio may be indicative of slack management practices, as it might signal excessive inventories for the current requirements and poor credit management in terms of over – extended accounts receivable. At the same time, firm may not be making full use of its current borrowing capacity. Although there is no hard and fast rule, conventionally a current ratio of 2:1 (current assets twice current liabilities) is considered satisfactory. The logic underlying the conventional rule is that even with a dropout of 50% (half) in the value of current assets, a firm can meet its obligations, i.e. a 100% margin of safety is assumed to sufficient to ward off the worst of situations. The rule of thumb (a current ratio of 2:1) cannot, however, be applied mechanically. What is a satisfactory ratio will differ depending on the development of the capital market and the availability of long term funds to finance current assets, the nature of industry and so on.

The term quick assets refer to current asset, which can be converted into, cash immediately or at a short notice without diminution of value. Included in this category of current assets are (a) Cash and back balances, (b) Sundry Debtors, (c) Loan and Advances and (d) Other current assets which include interest accrued on bank deposits.

Thus the current assets, which are excluded is inventory. The exclusion of inventory is based on the reasoning that it is not easily and readily convertible into cash. Generally speaking, an acid – test ratio (also called quick ratio) of 1:1 is considered satisfactory as a firm can easily meet all current claims. The quick ratio is an ore rigorous and penetrating test of the liquidity position of a firm.

Table 1

Current ratio

Table 2

Acid Test ratio

The liquidity ratios for the three oil companies over the period 1988 – 97 are presented in Table 1 and 2. From the analysis of ratio values following inferences are drawn:

(i)                  In all the years during the period 1988 – 97 it is found that BPCL has the lowest current ratio. The average current ratio is the lowest at 1.11 for BPCL followed by 1.43 for HPCL and then 1.58 for IOCL during the period 1988 – 97. The average current ratio has increased for industry as well as sample companies during the period 1993 – 97 as compared to 1988 – 92.

(ii)                The average acid - test ratio during the period 1988 – 97 for the sample oil companies was the lowest at 0.55 for BPCL followed by 0.60 for HPCL, 0.70 for industry and 0.94 for IOCL, but during the period 1988 – 92 HPCL has lowest average acid – test ratio. However, the ranking during different yeas in the period 1988 – 97 has shown a fluctuating trend but BPCL has the lowest acid test ratio for all the 5 years during the period 1993 – 97.

(iii)               The coefficient of variation for current ratio during the period 1988 – 97 for the companies is:

a)      BPCL              =          39.32%

b)      HPCL              =          38.87%

c)      IOCL               =          35.8%

The above suggests less variation in different years in terms of acid suggest ratio for IOCL as compared to HPCL and BPCL.

The percentage differences in average acid test ratio and average current ratio is less in IOCL as compared to BPCL and HPCL, which shows tat IOCL has less percentage of inventory (in current asset) as compared to BPCL and HPCL.

The relationship between sales and working capitals tests the efficiency with which the working capital is used.

Two to calculate the average working capital year and current year have divided the total of working capital of the previous. The ratio reflects the extent to which a business is operating on a small or a large amount of working capital in relation to sales.

Table 3

Working Capital turnover ratio

For BPCL working capital turnover has fluctuated between wide limits from a maximum of 290.03 in 1994 to a minimum of 14.55 in 1977. The average working capital turnover have increased from 120.04 during 1988 – 92 to 158.76 during 1993 – 97, which shows that increase in sales during 1993 – 97 over 1988 – 92 was more than proportionate in the working capital over the same period.

For HPCL Working capital turnover has shown an increasing trend during the period 1988-92 except negligible decline in 1991. However the trend during the period 1993 – 97 reversed and there is a continuous decline in working capital turnover. The average working capital turnover has declined by about 20% from 23.27 during the period 1988 – 92 to 18.04 during the period 1993-97.

For IOCL the working capital turnover has shown a fluctuating trend during the period 1988 – 1997, with a maximum of 21.62 in 1989 and a minimum of 4.88 in 1994. The average working capital turnover during the period 1988 – 92 was 15.09, which has declined to about half at 7.96 during the period 1993 – 97. On the whole working capital turnover went down and it should be improved.

This shows that BPCL has very high average working capital turnover at 139.40 during the period 1988 – 97 as compared to 20.65 of HPCL and 11.5 of IOCL. Working capital turnover has increased in the case of BPCL whereas in the case of HPCL and IOCL it has decreased.

CURRENT ASSETS TURNOVER.

The current assets of previous year and current year have been divided by two calculate the average current assets.

For BPCL Average current assets turnover has decreased from 6.69 during 1988 – 92 to 3.89 during 1993 – 97, which shows increase in current assets during 1993 – 97 over 1988 – 92 was more than proportionate increase in sales over the same period.

For HPCL Current assets turnover has shown a fluctuating trend during the period 1988 – 97 and average for the period 1993 – 97 was lower by about 10% as compared

Table 4

Current assets turnover ratio           

to average for the period 1988 – 92. For IOCL Current assets turnover has shown a fluctuating trend during the period 1998 – 97 with a minimum of 4.57 in 1989 and a minimum of 2.29 in 94. Average current assets turnover has decreased by about 20% from 3.86 during the period 1988 – 92 to 3.13 during the period 1993 – 97.

Current Assets turnover has shown a decline for all the sample firms. HPCL has the maximum current assets turnover.

INVENTORY TURNOVER RATIO AND ITS INVENTORY DAYS.

The inventory turnover ratio and inventor days have been presented in table 5 and table 6.

Table 5

Inventory turnover ratio

Table 6

Inventory days

In theory, this equation is not a satisfactory basis as numerator = (Sales-Duties), and the denominator = (inventory) are not strictly comparable as the former is expressed in terms of market price, the latter, is based on cost. The effect will be that the ratio calculated by this approach will be higher than the one given by considering cost of goods sold. This fact should be borne in mind while analysis ad interpreting inventory turnover ratio.

For BPCL Inventory turnover has reduced continuously from 14.05 in 1988 to 5.42 in 1994 and then recovered from the declining trend and increased to 12.57 in 1997. The decline in inventory turnover may be attributed to the uncertain market. Condition of supply further aggravated by Gulf War. The increasing trend from 1995 is a welcome step in view of the increasing profitability in the industry as unstable condition has reduced to a great extent. However the average inventory turnover has decreased by about 50% from 12.44 during 1988-92 to 8.08 during 1993-97. Average inventory days have increased by about 66% from 29.81 during 1988-92 to 49.54 during 1993-97.

For HPCL the average inventory turnover has improved marginally from 8.68 during the period 1993-97 and also inventory days have reduced by 3.5 days, which shows efficient management of inventories.

For IOCL Inventory turnover has shown a fluctuating trend with a maximum of 11.85 in 97 and minimum of 11.85 in 97 and minimum of 6.14 in 1995. the average inventory turnover has improved by about 15% from 7.78 during the period 1988-92 to 8.86 during the period 1993-97 which is a good sign and shows effective management of inventory. Average inventory days have also improved by reduction of about 4 days from 47.32 during the period 1988-92 to 43.62 during the period 1993-97.

Inventory turnover has improved in the case of IOCL and HPCL. However it has declined by about 33% in , BPCL from 12.44 during the period 1988-92 to 8.08 during the period of study 1988-97 among the sample firms. BPCL has slipped from rank 1 (for lowest inventory days) in terms of inventory days during the period 1988-92 to rank 3 during the period 1993-97. IOCL has shown maximum improvement in reducing its inventory days.

DEBTORS TURNOVER RATIO AND DEBTOR DAYS (COLLECTION PERIOD)

It is a test of the liquidity of the debtors of a firm. The debtors turnover shows relationship between credit sales and debtors of a firm.

It would have been ideal to take credit sales in the numerators. But due to non-availability of that data, total sales figures have been used.

Table 7

Debtor’s turnover ratio

Table 8

Debtor’s days

For BPCL Debtors turnover has shown a fluctuation trend during 1988-92 and a decreasing trend during 1993-97. Average debtors turnover has decreased from 60.57 during 1988-92 to its half at 27.67 during 1993-97. This is an unfavorable trend and needs to be checked. Average debtors days have increased by about 90% from 7.69 days during 1988-92 to 13.86 during 1993-97. The worst performance in terms of debtors days in 16.40 days in 1997 and best was 3.68 days in 1988. The over all days (inventory days + debtors days) have increased by more than 50% from 37.50 days during 1988-92 to 63.40 days in 93-97. This increase in overall days may pose problems and reduce profitability of the firm.

For HPCL Debtors turnover has shown a declining trend during the period 1988-97 except in year 1989 when it has improved over previous year’s value. Average Debtors turnover has sharply declined from 139.04 during the period 1988-92 less than it’s half at 65.50. However, analysis of debtor days shows that they have increased by about 3 days from 2.82 during the period 1988-92 to 5.75 during the period 1993-97. An increase of 3 days is not a major cause of concern. However that needs to be checked is the continuous rising trend. The overall days have down during the period 1993-97 as compared to the period 1988-92 which is a healthy sign of efficient working capital management by the firm.

For IOCL Debtors turnover has shown a fluctuation trend during the period 1988-97 except during the period 1989-94 when it has continuously increased. Average debtors days have increased by about 50% from 9.60 during the period 1988-92 to 58.36 during the period 1993-97. This was due to the fact that reduction in inventory days was more than mitigated by an increase in debtor’s days.

Debtors turnover has reduced for all the sample firms, however the reduction in the case of BPCL and HPCL was much more as compared to IOCL during the period 1993-97 over the period 1988-92. Average debtor turnover during the period 1988-97 was maximum for HPCL followed by BPCL and then IOCL in that order. Higher debtors turnover for HPCL suggests that, HPCL, credit and collection policy and implementation results are much better. HPCL has lowest debtor days of 4.29 days during the period 1988-97 which is remarkable performance as compared to 10.77 days of BPCL and 12.17 days of IOCL. HPCL has shown improvement in performance by reducing overall days (inventory + debtors days). BPCL has slipped from number 1 rank to rank 3 with sharp decline. There has been marginal increase in the case of IOCL.

CONCLUDING OBSERVATIONS

Oil industry is an essential economic sector since last century. It has played a vital role in India’s transport and defence system, offering number of advantages such as flexibility, reliability, speed and door-to-door service. Further, it provides on of the basic infrastructures for economic development of India including backward areas. Oil industry is an indispensable element of national transportation system and down stream petrochemical and petrol products industry. Therefore, it is imperative that oil industry is managed not only for social and developmental objectives but also with efficiency and profit so that it caters successfully to the needs of society on one hand and generates sufficient resources for its own existence and expansion on the other. It is true that as a public sector undertaking the sample firms have social objectives and other multiple objectives, but to serve the society dose not mean running into losses. Absence of profit and prudent financial management practices may bring down the growth rate and reduce their capacity to serve the society. A sound financial position should exist for growth, stability and fulfillment of social obligations.

In this study an endeavor has been made to examine and compare the efficiency of three integrated refining and marketing oil industry firms, namely, BPCL, HPCL and IOCL in the management of their working capital resources and to deal with qualitative and quantitative aspects of short term financial resources management.

RECOMMENDATIONS AND SUGGESTIONS

The main findings of the study and some suggestions for further research are as under;

a)      Liquidity in BPCL is an area, which needs attention. Its current ratio was less than 1.5in all the 10 years of the study period and acid test ratio was less than 0.8 during 1988-96. In fact average current ratio and average acid test ratio were 1.11 and 0.55 respectively during the ten years period, this needs attention. Liquidity position of HPCL is not very satisfactory but there is appreciable improvement as average current ratio and average acid test ratio have improved during the period 1993-97 as compared to the period 1988-92. IOCL has satisfactory liquidity position as its current ratio has increased by about 20% from 1.4 during 1988-92 to 1.76 during 1993-97. Acid test ratio has increased by more than 50% from 0.74 during the period 1988-92 to 1.15 during 1993-97.

b)      There is wide disparity among sample firms in terms of working capital turnover. BPCL has the highest average working capital turnover of 139.40 followed by HPCL at 20.65 and IOCL at 11.52 during the 10 years period. However, the disparity among sample firms in terms of current assets turnover is narrow, i.e. average current asset turnover is 5.29 for BPCL, 5.41 for HPCL and 3.49 for IOCL. This implies that BPCL is making more use of current liabilities to fund its current assets as compared to IOCL and HPCL.

c)      BPCL and HPCL have better managed their inventory days in comparison with industry average and IOCL has performed poorer than industry average. The average inventory days for industry are 42.03 and they have shown an increase of about 4 days during the period 1993-97 as compared to the period 1988-92.

d)      The average debtors days are low at 9.08 for the industry however, they have shown a sharp increase from 6.70 during the period 1988-92 to 11.45 during the period 1993-97. HPCL is having the best performance with 4.29 days as average debtor days followed by BPCL at 10.77 then IOCL at 12.17.

BPCL’s performance in the area of working capital management was not good. Inventories during the period 1993-97 increased from 30 to 50 days and sundry debtors increased from 8 to 14 days of turnover, as compared to that of 1988-92. In creased efforts should be directed at arresting this trend. Increase in average working capital turnover during 1993-97 as compared to 1988-92 is a positive sign. Due to no-recovery of dues from Oil Coordination Committee (OCC) there has been a sharp increase in share of loans and advances as a part of current assets. This calls for immediate settlement of dues recoverable from OCC. HPCL’s performance in the area of working capital management was good. Inventory days have reduced by 3 days although debtors days have increased by little less than 3 days. Decreasing trend in working capital turnover and current assets turnover should be checked. IOCL performance in the area of working capital management was not very satisfactory. Average working capital turnover has declined to about half from 15.09 during the period 1988 – 93 to 7.96 during the period 1933 – 97. Average inventory days have decreased by about 4 days, which is a commendable performance however all the good work has been nullified by increase of about 5 days in sundry debtors days.

In sum, it seems that some of the inhibiting factors with regard to sound financial management may be excessive control by the government. Now the Government of India has awarded all the three sample companies the Navratna Status, which indicated that these three public sector companies have competitive advantage and have potential to become global giants. In order to support these companies in their effort to become global players, the Government has decided to enhance autonomy and give greater powers to them. The Boards of these companies are to be restructured with non – official Directors. These steps are expected to enable these companies to meet the challenges posed by liberalization and globalization of Indian economy.

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