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CHAPTER1: INTRODUCTION

1.1 INDUSTRY PROFILE

By definition, petrochemicals are simply chemicals that happen to be derived from a

starting material obtained from petroleum. They are, in almost every case, virtually
identical to the same chemical produce from other sources, such as coal, coke, or
fermentation processes.

Petrochemicals in the strictest sense, any of a large group of chemicals derived from
petroleum and natural gas and used for a variety of commercial purposes. The definition
however, has been broadened to include the whole range of aliphatic, aromatic, and
naphthenic organic chemicals, as well as carbon black and such inorganic materials as
sulphur and ammonia. On many instances, a specific chemical included among the
petrochemicals may also be obtained from other sources, such as coal, coke, or vegetable
products. For example, material such as benzene and naphthalene can be made from
either petroleum or coal, while ethyl alcohol may be of petrochemical or vegetable origin.
This makes it difficult to categorize a specific substances, strictly speaking,
petrochemical or non petrochemical.

Products made from petrochemicals include such item as plastics, soaps and detergents,
drugs, fertilizers, pesticide, explosives, rubbers, paints, flooring and insulating materials.
Petrochemicals are found in products as diverse as aspirin, luggage, boats, automobiles,
aircraft, polyester cloths and decoding discs and tapes.

Like crude oil and natural gas, petrochemicals are composed primarily of carbon and
hydrogen and are called hydrocarbons. Unsaturated chemicals are preferred as
petrochemical feedstocks because they are more chemically reactive and can more easily
be changed into other petrochemicals.

The various components of petroleum used as raw materials in the production of other
chemicals are known as feedbacks. Petrochemical feedstock’s can be classified in to three
general groups: olefins, aromatics and third group includes synthesis gas and inorganic.

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Synthesis gas is used to make ammonia and methanol. Ammonia sis used primarily to
form ammonium nitrate, a source of fertilizer. Much of the methanol produced is used in
making formaldehyde. The rest is used to make polyester fibers, plastics and silicon
rubber.

The petrochemical industry received its chief impetus in 1913 from the development of
the thermal- cracking process by which crude petroleum was refined. The process yielded
gaseous by products that were at first used only as illuminating gas or as fuel but were
found useful as chemical raw materials in the 1920s and 30s. The introduction of
catalytic cracking in 1937 and increased supplies of natural gas brought further expansion
of the industry.

1.1.1 INDUSTRY STRUCTURE

Petroleum is a naturally occurring liquid found in rock formations. It consists of a

complex mixture of hydrocarbons of various molecular weights, plus other organic
compounds. It is generally accepted that oil, like other fossil fuels, formed from the
fossilized remains of dead plants and animals by exposure to heat and pressure in the
Earth's crust over hundreds of millions of years. Over time, the decayed residue was
covered by layers of mud and silt, sinking further down into the Earth’s crust and
preserved there between hot and pressured layers, gradually transforming into oil
reservoirs.

The origin of oil & gas industry in India can be traced back to 1867 when oil was struck
at Makum near Margherita in Assam. At the time of Independence in 1947, the Oil & Gas
industry was controlled by international companies. India's domestic oil production was
just 250,000 tonnes per annum and the entire production was from one state - Assam.

The foundation of the Oil & 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

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government company was set up. In 1959, for marketing of petroleum products, the
government set up another company called Indian Refineries Ltd. In 1964, Indian
Refineries Ltd was merged with Indian Oil Company Ltd. to form Indian Oil Corporation
Ltd.

During 1960s, a number of oil and gas-bearing structures were discovered by ONGC in
Gujarat and Assam. Discovery of oil in significant quantities in Bombay High in
February, 1974 opened up new avenues of oil exploration in offshore areas. During 1970s
and till mid 1980s exploratory efforts by ONGC and OIL India yielded discoveries of oil
and gas in a number of structures in Bassein, Tapti, Krishna-Godavari-Cauvery basins,
Cachar (Assam), Nagaland, and Tripura. In 1984-85, India achieved a self-sufficiency
level of 70% in petroleum products.

In 1984, Gas Authority of India Ltd. (GAIL) was set up to look after transportation,
processing and marketing of natural gas and natural gas liquids. GAIL has been
instrumental in the laying of a 1700 km-long gas pipeline (HBJ pipeline) from Hazira in
Gujarat to Jagdishpur in Uttar Pradesh, passing through Rajasthan and Madhya Pradesh.

After Independence, India also made significant additions to its refining capacity. In the
first decade after independence, three coastal refineries were established by multinational
oil companies operating in India at that time. These included refineries by Burma Shell,
and Esso Stanvac at Mumbai, and by Caltex at Visakhapatnam. Today, there are a total of
18 refineries in the country comprising 17 in the Public Sector, one in the private sector.
The 17 Public sector refineries are located at Guwahati, Barauni, Koyali, Haldia,
Mathura, Digboi, Panipat, Vishakapatnam, Chennai, Nagapatinam, Kochi, Bongaigaon,
Numaligarh, Mangalore, Tatipaka, and two refineries in Mumbai. The private sector
refinery built by Reliance Petroleum Ltd is in Jamnagar. It is the biggest oil refinery in
Asia.

By the end of 1980s, the petroleum sector was in the doldrums. Oil production had begun
to decline whereas there was a steady increase in consumption and domestic oil
production was able to meet only about 35% of the domestic requirement. The situation
was further compounded by the resource crunch in early 1990s. The Government had no

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money for the development of some of the then newly discovered fields (Gandhar, Heera
Phase-II and III, Neelam, Ravva, Panna, Mukta, Tapti, Lakwa Phase-II, Geleki, Bombay
High Final Development schemes etc. This forced the Government to go for the
petroleum sector reforms which had become inevitable if India had to attract funds and
technology from abroad into the petroleum sector.

The government in order to increase exploration activity, 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.

To meet its growing petroleum demand, India is investing heavily in oil fields abroad.
India's state-owned oil firms already have stakes in oil and gas fields in Russia, Sudan,
Iraq, Libya, Egypt, Qatar, Ivory Coast, Australia, Vietnam and Myanmar. Oil and Gas
Industry has a vital role to play in India's energy security and if India has to sustain its
high economic growth rate.

1.1.2MAJOR PLAYERS & INDUSTRY COMPETITION

ONGC

It is a public sector petroleum company in India, contributing 77% of India’s crude oil
production.

Revenue (2006): $ 10.5 billion

Employees: 41000

India's ONGC lags in global oil race. ONGC's setbacks in acquiring major oil resources
are made worse by the Indian government's order to help shoulder the burden of
subsidized fuels earlier this year, which pushed the country's biggest refiners into the red.

ONGC has gained junior shares in a host of projects, from Russia's Sakhalin-1, Iran's
Yadavaran Field and Sudanese properties abandoned by Western investors.

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But it has yet to take a lead role that would give it more say and a bigger share of future
production. The race is gaining urgency both for India and ONGC as Chinese and other
Asian competitors snap up plum properties in the face of stagnating domestic production.

The 50-year-old firm has acquired interests in 16 overseas projects since it started
looking abroad in 2001.

ONGC has not met the most basic measure of an explorer's success: finding more oil than
it pumps out. For three years in a row, the firm has failed to replace the reserves it
produced. Its last major oil discovery was in 1974.

Government officials say ONGC must boost its reserve-to-production ratio - the number
of years its reserves will last with the current level of output - by improving its drilling
technology and management practices. ONGC's ratio is 22 years. In some on land areas
the ratio is 57 years.

ONGC lost a major offshore platform at Bombay High, India's largest oilfield, reducing
the company's output by 123,000 barrels per day (bpd) after an errant rig crashed into the
facility during the monsoon, setting it on fire. It has since restored half that production.

Oil Minister Mr. Aiyar has pushed for Indian and Chinese firms to cooperate not
compete, for overseas assets, but his efforts appear to have met with little interest in
Beijing, where the oil majors are gaining ground abroad, despite some hiccups.

IOCL

It is India's largest commercial enterprise, with a sales turnover of US $36.537 billion.

A wholly owned subsidiary company, Indian Oil Technologies Ltd. is the 19th largest
petroleum company in the world

Indian Oil's world-class R&D Centre has developed over 2,100 formulations of SERVO
brand lubricants and greases for virtually all conceivable applications meeting stringent
international standards and bearing the stamp of approval of all major original equipment
manufacturers.

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Indian Oil is also strengthening its existing overseas marketing ventures and
simultaneously scouting new opportunities for marketing and export of petroleum
products to new energy markets in Asia and Africa.

BPCL

It is the 3rd largest oil company in India owned by the Government of India.

Revenue (2005): $17.613 billion

Employees: 12400

In 1976, the Burma Shell Group of Companies was taken over by the Government of
India to form Bharat Refineries Limited.

In 1977, it was renamed Bharat Petroleum Corporation Limited.

It was the first refinery to process newly found indigenous crude (Bombay High), in the
country.

Major Refineries in India:

1. Guwahati Refinery (Assam):

Guwahati Refinery, the first in public sector, was set up in collaboration with Rumania at
a cost of Rs.17.29 crores and commissioned on 1st January, 1962 with a design capacity
of 0.75 MMTPA. The present capacity of this Refinery is 1.00 MMTPA.

2. Barauni Refinery (Bihar)

Barauni Refinery was built in collaboration with the Soviet Union at a cost of Rs.49.4
crores and went on stream in July, 1964. By November, 1967, the initial capacity of 2
MMTPA was expanded to 3 MMTPA. The present capacity of this Refinery is 4.20
MMTPA.

3. Koyali Refinery (Gujrat)

The Gujarat Refinery was built with Soviet assistance at a cost of Rs.26.00 crores and
went on stream in October, 1965. The Refinery had an initial installed capacity of 2

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MMTPA and was designed to process crude from Ankleshwar, Kalol and Nawagam
oilfields of Oil & Natural Gas Commission in Gujarat. In September, 1967, the capacity
of the Refinery was expanded to 3 MMTPA. The capacity of the Refinery was further
increased to 4.3 MMTPA through debottlenecking measures and to 7.3 MMTPA in
October, 1978 by implementing an expansion project of Rs.56.07 crores. With the
implementation of additional processing facilities the Refinery could achieve capacity of
9.5 MMTPA in 1989. The refinery was further expanded to 12.5 MMTPA with
commissioning of 3.0 MMTPA CDU in September, 1999.

4. Haldia Refinery (West Bengal)

The Haldia Refinery for processing 2.5 MMTPA of Middle East crude has been set up
with two sectors - one for producing fuel products and the other for Lube base stocks.
The fuel sector was built with French collaboration and the Lube sector with Romanian
collaboration. The capacity of the Refinery was increased to 2.75 MMTPA in 1989
through debottlenecking measures. The refining capacity has been further expanded to
3.75 MMTPA with the commissioning of new crude distillation unit of 1.0 MMTPA in
March, 1997.

5. Mathura Refinery (Uttar Pradesh)

The Mathura Refinery with a capacity of 6.00 MMTPA has been set up at a cost of
Rs.253.92 crores. The Refinery was commissioned in January, 1982 excluding FCCU
and Sulphur Recovery Units which were commissioned in Jan, 1983. The capacity of the
Refinery was expanded to 7.5 MMTPA in 1989. The Project of matching secondary
processing facility is under implementation and is expected to be completed by end 1999.

6. Digboi Refinery (Assam)

The Refinery was set up at Digboi in 1901 by Assam Oil Company Limited. The Indian
Oil Corporation Ltd. took over the Refinery and marketing management of Assam Oil
Company Ltd. with effect from 14.10.1981 and created a separate division. This division
has both Refinery and marketing operations. The Refinery at Digboi had an installed
capacity 0.50 MMTPA. The capacity of the Refinery has been increased to 0.65 MMTPA
by modernisation of Refinery in July, 1996.

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7. Mumbai Refinery (HPCL) (Maharashtra)

The Refinery at Mumbai came into stream in 1954 under the ownership of ESSO. In
March, 1974, Govt. of India acquired it. Hindustan Petroleum Corporation Ltd. was
formed on 15.7.1974 after the merger of these companies. The capacity of the Mumbai
Refinery of HPCL was 3.5 MMTPA which was increased to 5.5 MMTPA during 1986
after implementation of expansion programme.

8. Visakh Refinery (HPCL) (Andhra Pradesh)

In 1957, Visakh Refinery went on stream under the ownership of M/s Caltex India Ltd. In
May, 1978, M/s Caltex Oil Refinery (India) was amalgamated with Hindustan Petroleum
Corporation Ltd. The installed capacity of 1.5 MMTPA was increased to 4.5 MMTPA in
1985, through an expansion programme. Further expansion to 7.5 MMTPA has been
approved on 13th September, 1995 at a cost of Rs.998.26 crores with F.E. of Rs.79.85
crores at April, 1995 prices, the project is expected to be completed by November, 1999.

9. Bharat Petroleum Corporation Ltd. (BPCL) (Maharashtra)

The Refinery at Mumbai came into stream in January, 1955 under the ownership of
Burma-Shell Refineries Ltd. Following the Government's acquisition of the Burma-Shell,
the name of the Refinery was changed to Bharat Refineries Limited on 11.2.1976. In
August, 1977, the Company was given its permanent name, viz. Bharat Petroleum
Corporation Ltd. The installed capacity of 5.25 MMTPA was increased to 6 MMTPA in
1985. The present capacity of the refinery w.e.f. 1.4.1999 is 6.9 MMTPA.

10. Madras Refineries Ltd. (MRL) (Chennai)

In December, 1965, Madras Refineries Ltd. was incorporated as a Joint Venture of Govt.
of India, the National Iranian Oil Company and AMOCO. In September, 1969, the
Refinery came on stream. The initial authorized capital was Rs.13.5 crores. In March,
1984, the authorized capital was increased to Rs.135 crores and with the purchase of 8,
53,800 rights shares by the President of India of the value of Rs.1000/- each the paid up
equity share capital of the Company stood at Rs.98.2549 cores till 1987-88. During the
year 1988-89, the paid up capital was increased further to Rs.113.9850 crores consequent
upon the National Iranian Oil Company (NIOC) bringing in additional share capital of

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Rs.15.73 crores in March, 1989. In the year 1985-86, all the 16,737 shares held by M/s
AMOCO India Inc. were acquired by President of India. M/s NIOC continued to be
shareholders with an increased participative percentage of 15.27%. The installed capacity
of 2.8 MMTPA was increased to 5.6 MMTPA in 1985, which has been increased to 6.5
MMTPA by debottlenecking.

11. Crude Distillation Unit at Narimanam (Chennai)

Government had approved on 25.1.1991 setting up of crude distillation unit of 0.5

MMTPA at Panangudi Village near Nagapattinam for processing of Cauvery Basin
Crude. The project has been completed at a cost of Rs.196.00 crores . The project has
been commissioned in November, 1993.

12. Cochin Refineries Limited (CRL) (Kerala)

The Cochin Refineries Ltd. is a public sector undertaking set up in pursuance of a

formation agreement dated 27th April, 1963 between Govt. of India, Phillips Petroleum
Co. of USA and Duncan Brothers of Calcutta with an authorised capital of Rs.15 crores.
Subsequently, the authorised capital was increased to Rs.75 crores and the paid up capital
in March, 1989 stood at Rs.68.47 crores after issue of shares on rights basis. During the
year, the Phillips Petroleum Company also completed withdrawal of their equity by
disinvesting of shares. With this, in March 1989, Government was holding 61.58
percentages of equity shares of the Company. As on September, 1999, the paid up capital
of the company was Rs.68.93 crores. The Govt. of India holds 55.04% of the total shares,
the balance of the shares being held by Government of Kerala, Financial Institutions and
the Public. The installed capacity of 2.5 MMTPA was increased to 3.3 in September,
1973 and to 4.5 MMTPA in November, 1994. The capacity of the Refinery was further
increased to 7.5 MMTPA in December,95.

13. Bongaigaon Refinery & Petrochemicals Ltd. (BRPL) (Assam)

On 20th January, 1974, M/s BRPL was incorporated in Assam under the Companies Act,
1956 with an authorised capital of Rs.50 crores. With the objective of installation of the
Refinery having a crude processing capacity of 1 MMTPA and a Petrochemicals
Complex consisting of Xylene, Di-Methyl Terephthalate (DMT) and Polyester Staple

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Fibre (PSF) Units. The complex was built and commissioned in phases. The capacity of
Crude Distillation Unit was increased to 1.35 MMTPA from April, 1987 by
debottlenecking. Now the authorized capital (equity) of the company is Rs.200 crores.
The paid-up capital as on date is Rs.199.82 crores. The Refinery products are marketed
by M/s IOC and the Petrochemicals products, including Polyester Staple Fibre are
marketed by the BRPL. The capacity of the Refinery has been increased to 2.35 MMTPA
in June, 1995 by installing additional unit.

14. Panipat Refinery (Haryana)

A 6.0 MMTPA Refinery at Baholi Village in district. Panipat at an estimated cost of

Rs.3868 crores has been commissioned in October, 98.

15. Tatipaka (ONGC):

ONGC has entered in the refining sector too with the commissioning of the Tatipaka
mini-refinery in East Godavari district. The Takipaka refinery with a capacity to handle
1500 barrels per day (260 tones) was the first of its kind in the country. It had been built
at a cost of Rs. 30 crores with no time or cost overruns.

16. Numaligarh Refinery (Assam)

Pursuant to the Assam Accord, it was decided to set up a 3.0 MMTPA grass root
Refinery at Numaligarh in Golaghat district, Assam, the Govt.’s approval was conveyed
on 15.7.1992 with completion schedule of 60 months. The CDU was commissioned in
April, 1999 and other units are expected to be completed by December, 99.

17. Reliance Petroleum Limited (RPL) Jamnagar (Gujrat)

The Private Sector Refinery (RPL) was commissioned on 14th July, 1999 with an
installed capacity of 27 MMTPA at Jamnagar.

1.1.3 MARKET SHARE

100 percent FDI is permitted under automatic route in Petroleum and Natural Gas.
Petroleum and Natural Gas Industry accounts for 35 percent share in the entire energy

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requirements in India. Important initiatives have been taken by the Indian government to
drive FDI inflows to Petroleum and Natural Gas in India.

Petroleum and Natural Gas Industry accounts for 35 percent share in the entire energy
requirements in India. Downstream industries like petrochemicals, fertilizers and energy
plays a vital role in the Oil industry in India.

The total crude oil demand is estimated to be 116 MMT and the production of crude oil
in domestic market has accounted for 33.4 MMT. In the past three years, petroleum has
witnessed a growth of 7 percent per year. The demand for Natural Gas has been estimated
to be 150 MMSCMD in 2004 among which, the domestic market has accounted for only
81 MMSCMD. The Oil and Natural Gas Commission (ONGC) and Oil India Limited
(OIL) are both public sector companies and have occupied around 83 percent of the entire
domestic production of Petroleum and Natural Gas.

1.1.4 SWOT ANALYSIS

The energy sector has witnessed mixed news during the current fiscal so far. While crude
prices firmed up in the global market, the government's freeze on prices of petro-products
affected margins of oil companies in 1QFY05.

However, the government took a series of steps starting mid-June including excise duty
reduction and price increases. This was followed by another series of duty cuts (this time
excise as well as custom duties).

Given this backdrop, we feel that there is a compelling reason for a SWOT analysis on
the oil sector at the current juncture.

STRENGTHS

1. Developing economy:

Historically, demand for petroleum products has traced the economic growth of the
country. With GDP expected to grow at near 7% in the long-term, the energy sector
would benefit from the same, going forward.

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To put things in perspective, diesel sales grew by nearly 12% (which constitutes 40% of
the entire petro-products basket), petrol sales by 9% and a double-digit growth in LPG
(liquefied petroleum gas) in 1QFY05. While this rate is not likely to sustain, we expect
the industry to witness a 4% growth in the entire product basket in FY05 and beyond.

2. Government decisions:

The recent price increases and also the decision to allow oil companies to increase prices
within a band of 10% augur well for the industry.

This step is likely to reduce government interference and provide some autonomy to oil
companies when it comes to increasing petrol and diesel prices in order to protect
margins. Further, the duty cuts are also likely to result in reduced under-recoveries by
way of subsidies on LPG and kerosene.

 Large and very fast growing Indian petrochemical market.

 Huge trained talent pool.
 Competitive labor cost.

WEAKNESS

1. Crude prices:

Nearly 70% of India's crude requirements are fulfilled by imports and this figure is likely
to increase going forward. Crude prices have breached the $45 barrier again and are
likely to remain at around $40 per barrel range.

As per IEA, India is one of the most inefficient countries among developing nations as far
as energy usage is concerned. Such high crude prices are likely to impact margins of oil
marketing companies. Given the political implications, retail prices may continue to lag
the rise in input cost.

2. Lack of freedom:

Although the government has decided to provide autonomy to oil companies to increase
petrol and diesel prices within a 10% band, other products such as LPG and kerosene
continue to remain under the government controlled price mechanism.

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As per the current estimates, the subsidies on LPG amount to Rs 90 per cylinder after
factoring in duty cuts and that on kerosene is over Rs 6 per litre.

While the government has managed to reduce its share in subsidies, select oil companies
are being forced to absorb the losses.

 Insufficient basic infrastructure for the petrochemical industry.

 High feedstock cost in comparison to Middle East countries.
 Prevalence and use of old technology.
 Synthetic fiber industry is unorganized and operates in small clusters.

OPPORTUNITIES

1. Equity Oil:

Major oil marketing companies are now venturing into upstream exploration and
production activities so as to secure crude supply.

To put things in perspective, IOC and OIL India are likely to jointly bid for oil fields
aboard. At the same time, ONGC's wholly owned subsidiary, ONGC Videsh (OVL) has
acquired stakes in over 9 countries in its quest to attain the 20 MMT (million metric tons)
by 2020. This backward integration is an opportunity for IOC to secure at least 25% of its
crude oil requirements for the refineries.

2. Natural Gas:

Natural gas has the potential to be the fuel of the future with demand outpacing supply by
more than two times. Such high scarcity of natural gas provides a big opportunity for oil
companies. The below mentioned table indicates the allocation to the various core sectors
and the shortage faced by them, thereby giving an idea of the potential for growth.

Although Petronet LNG has now started importing natural gas, the future holds promise
as Reliance Industries Krishna Godavari Basin goes into commercial production in FY06
and Shell commences its terminal at Hazira. More exploration activities are in the
pipeline and this could reduce the country's dependence on crude in the long term.

 Huge demand for polymer and synthetic fiber.

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 Great opportunity for product development exists.

 Low consumption of polymer in comparison to global consumption rate.

THREAT

1. Competition:

Until FY04, oil-marketing companies had complete control over the downstream
marketing business while private sector players were restricted to only refining.

However, with entry of private players such as Reliance, Essar Oil and Shell (in the
waiting), the sector is likely to witness increased competition going forward. The oil
PSUs had hitherto developed a fortnightly pricing mechanism, which is likely to
discontinue.

The price of petrol and diesel is artificially kept high so as to cross-subsidize LPG and
kerosene. Since private players will not be bound to provide for these subsidies, PSU
marketing players are likely to suffer from lower throughput per outlet.

2. Continuing government interference:

During the first six months of the current fiscal year, the oil marketing companies were
refrained from increasing product prices due to political reasons.

This affected margins of downstream players. Going forward, if the government

interference continues, oil-marketing companies will be at a disadvantage.

Although we believe the industry is likely to witness increased competition, the initial
retail rush by private sector players has slowed down. PSU marketing companies have
already stepped up their expansion plans and to that extent, have created significant entry
barriers for private players.

Although throughput per outlet (sales per outlet) is likely to decline in the future, we
believe that any substantial entry of the private players would indirectly benefit the PSUs,
as the government's pricing policy will not hold much water and the market forces would
determine pricing.

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 Stiff competition from other regional players like, China and the Middle East
countries.
 Stiff rational pricing pressures.
 Environmental hazards concerns.
 Low market recognition.
 Relocation of manufacturing sites to region with abundance of feedstock.

1.1.5 PORTER’S FIVE FORCE MODEL

Rivalry amongst Competitors

There is great rivalry in the petrochemical business. There are 12 major players currently
in the oil business in India, all of which are international companies that have expanded
into this market. In rank of size (billions of barrels of oil produced), they are the Saudi
Arabian Oil Company (295), National Iranian Oil Company (287), Qatar Petroleum
(165), Abu Dhabi National Oil Company (137), Gazprom (115), Kuwait Petroleum
Corporation (107), Petroleos de Venezuela S.A. (102), Nigeria National Oil Company
(62), National Oil Corporation of Libya (45), Sonatrach (40), and Rosneft (35). Among
these there is strong competition, although each is based in another country and their core
business lies in the extraction of those reserves. The rivalry has many parts to it, each
company trying to take advantage of their own competitive advantage. The ONGC has a
great advantage in that they are native to India and control most of the exploration and
drilling licenses; they also have the highest technological ability due to recent innovations
in virtual reality and computer data management and communications technology.

Threat of Potential Entry

There are numerous barriers to entry in this industry, although with such high demand
globally there are ways to penetrate and find a niche within the massive market. The first
great barriers to entry are political: most, if not all, rights to oil and mineral reserves are
either held by governments or private corporations who are already exploiting them.
There are, however, reserves off shore as well as internationally that have yet to be found,
and it is rumored that there is more oil at the North Pole than any other place in the

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world, but it remains untouched. This aside, if a corporation were to get an exploration
license or permit to drill an oil well, there would be significant capital costs incurred
starting up an extraction facility and the infrastructure to support it. To fully enter the
market they would have to build or purchase a refinery and find the infrastructure /
pipelines to transport the products to and from it. Cost of capital in this situation is in the
hundreds of billions of dollars; still assuming you can use the existing infrastructure.
Building and maintaining a pipeline would further skyrocket capital expenditures.
Looking at the domestic market to India, other big international Oil companies could
pose a threat in that they have the market knowledge (and some the market share as well)
to operate anywhere and have the capital to buy out or complete a hostile takeover of the
existing company. ONGC has much new technology and communications systems and is
in the top 10 companies for research and development / exploration of reserves by high-
tech means. With their recent advances in data processing and analyzing, virtual reality
systems and enterprise resource management systems, many companies that already have
the capital may be enticed to take them over and learn from the company, while
instantaneously dominating the petrochemical market in India. Companies that may have
interest include the giants Exxon Mobile, Conoco-Phillips, and British Petroleum, all of
whom operate internationally and are searching hard for more oil reserves and new
technology to further exploit them to their full potential.

Bargaining Power of Suppliers

The ONGC is actually one of the main suppliers of oil in that region of the Middle East.
To examine the suppliers for them, we must look more so at who builds and provides
their machinery and infrastructure. The equipment and machinery company BHEL has
recently taken a contract for oil field machinery and equipment from ONGC. Although
they have this contract, many other firms compete for standard oil extraction equipment.
Recently, the ONGC has begun importing approximately 30 million barrels of oil per
year for refinement in it’s own facilities. These suppliers of oil have great power over the
ONGC because they determine the price of selling their reserves to benefit another
company. Releasing more to them may drive the final product price down and would not

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benefit the suppliers. Controlling the amount of oil released and for what price really
determines the market value for the ultimate product.

Bargaining Power of Buyers

Buyers of petrochemical products do not really have great bargaining power. In this
industry consumption / demand are the biggest factors in the market. In most situations
there is a set price, less a volume discount, a commission is added to the price, usually .
50$ per gallon, and then the buyer simply pays that price. In some situations, such as the
aviation industry, volume discounts are given because thousands upon thousands of
gallons are purchased daily. With a given delivery plan and consumption being scheduled
with flights, they can

confidently give a discount and still earn a profit. Other products, such as kerosene and
some petroleum based lubricants for industrial use can be bargained for as well. Nearly
all industrial lubricants contain at least some petrochemicals or petroleum byproduct.
Corporations using significant amounts of these products may also be able to get volume
or loyal customer discounts on the product for using so much of it. For example, oil
retailers who purchase crude oil, refine and add additives to, and resell by the court, will
purchase significant amounts of crude oil, and refine it into their own product themselves.

Threat of Substitutes

The threat here is great because most consumers of oil and petrochemical products,
namely gasoline, are solely driven by price. This is not always true, however, because
some people are brand loyal and will purchase gasoline from the same company
regardless of price. For those that are not brand loyal, however, they determine much of
the market price for fuel. The market for gasoline products is fiercely competitive and
varies daily, that station with the lowest price of fuel, selling the most, and thus getting
the best volume discount from their suppliers, or ONGC. More recent substitutes are
coming in the form of alternative and green energy, electric hybrid cars and flex fuel
powered motors. Flex fuel is a term used when a motor can run on both E-85 ethylene
based fuel or normal gasoline. These motors cater to an interesting group of people, they
are concerned with global warming and pollution issued but still cost oriented. People

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who purchased these engines will still go for the lower cost product, and drive rates
down, but they would prefer, within reason, to buy the environmentally friendly product
instead of regular gasoline.

Complimentors

There are many products currently produced that could be considered complimentary to
or vise versa petroleum products. The first being the biggest user of petroleum products;
cars run on petroleum products and use them, almost exclusive, as a power source. In the
automotive industry you could also say that lubricants are a complimentary product, as
they are derived from petroleum based products and further refined to meet specific
needs. More so than lubricants, additives would be a complementary product to gasoline
or jet fuel. A simple kerosene based jet fuel can be mixed with additives that make it
flammable a high altitudes regardless of low temperature or pressure, keep them in a
jellified form, burn cleaner and faster, and produce more power per pound of fuel. In
cars, additives typically make the fuel burn slightly hotter, allowing less carbon to stick to
the metallic parts and cause buildup. This is preferable for car owners, over regular fuels,
because their cars will need less maintenance and will last longer if no deposits are inside
the engine and exhaust systems.

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1.1.6 Mc Kinsey’s 7S Model

Figure 1.1.6: Mc Kinsey’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, organizational 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 organization. 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 heard
strategies and system of the organization.

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

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class quality at internationally competitive cost. The quality policy of MRPL is to have a
set of satisfied internal customers, business associates, and societv through excellence in
quality products and services 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 making the maximum use of the raw-material and upgrades the
crude oil in to value added products

Style
Style is one of the factor from which manager of the organization can bring
organizational change. The MC Kinsey frame work considers 'style' as more than the
style of top management. The management at MRPL, is closely associated with team
building, interpersonal interaction 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 recognized and their performance is praised in the form of quick
promotion and with attractive incentives. Regarding the style of productions, MRPL has
adapted the policy of TQM (Total Quality Management), which refers to providing
training on various areas such as Total Productivity Management (TPM). 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 in the employee are given full
freedom to express what they think and some time the discussion of the employer with
employee are also taken in to consideration while making important decisions.

Structure
Structure describes the hierarchy of authority and accountability in an organization These
relations are frequently diagrammed in organizational charts. Most organizations use
some mix of structure-pyramidal matrix or structured to accomplish their goals. A

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structure is the formalizing of relationship: roles and responsibilities in order to recognize

and perform work.
MRPL's organization structure is shown below:
MRPL has a well built organization structure. Since its activities has grown 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 since, specialists are
involved in functional organization structure, it provides clearly marked carrier path for
their services, and it also facilitates the developments of skills who working in
organization.

Staff
People are main asset of the organization. Organization performance is mainly depends
upon individual's performances who are working in the organization. So Staffing plays
important role by employ 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 achievements 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 total strength of the employees in MRPL is 1310 as on 31 Dec 2009.
The personnel and administration department is responsible for recruiting people for
MRPL. The most eligible candidate is selected by the candidates 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 centers, schools, departmental stores, and employee's club
facility to its employees

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Systems
System means all the rules, regulations and procedures both formal and informal that
compliment the organization 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., a top level to bottom
level and bottom to top. Each division has its own reporting system which
integrates entire organization in to corporate office. MRPL has a proper
set of procedure for selecting right candidates to the organization.

Skill

The MRPL possesses labor force with various skills. The company
encourages and provides training for the developments of skills,
depending on the employees at operating level and management level.

The employees at management level, posses skill for company

administration, leadership, motivation etc. They are also trained under
various aspects like skill development, behavioral 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 sell-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.

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 its 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 a particular culture.

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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 achieve 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 from any basic
interference.

1.2COMPANY PROFILE

Mangalore Refinery & Petrochemicals located in Mangalore, India is a subsidiary of

ONGC and was set up in 1988 with the initial processing capacity of 3.0 million ton per
annum that was later expanded to the present capacity of 9.69 million ton per annum. It
has a design capacity to process 9.69 million ton per annum and is the only refinery in
India to have 2 Hydrocrackers producing premium diesel (high cetane). It is also the only
refinery in India to have 2 CCRs producing unleaded petrol of high octane. Prior to the
acquisition by ONGC in March 2003, MRPL, was a joint venture oil refinery promoted
by Hindustan Petroleum Corporation and IRIL & Associates (AV Birla Group). The
refinery was conceived to maximise middle distillates with the capability to process light
to heavy and sour to sweet crudes with 24 to 46 API gravity. MRPL has got
petrochemical FCCU and delayed coker unit as its approved projects and others including
isomerization unit mixed xylene unit are under implementation. MRPL plans to initiate
plant-scale experiments on spent caustic treatment with chlorine dioxide to treat phenols,
conduct a study on ONGC-Hazira HCR samples, on producing Gasoline using ONGC
Hazira naphtha and MRPL reformate, and analyse the feasibility of producing US
Military grade ATF-JP5. The company also plans to augment refining capacity from the
present rating of 9.69 tpa to 15 tpa. Studies have been initiated to add fresh capacities to
the tune of 15 tpa.

MRPL, located in a beautiful hilly terrain north of Mangalore city, is a State of Art
Grassroot Refinery at Mangalore and is a subsidiary of ONGC. The Refinery has got a

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versatile design with high flexibility to process Crudes of various API and with high
degree of Automation.

MRPL has a design capacity to process 9.69 million metric tonnes per annum and is the
only Refinery in India to have 2 Hydrocrackers producing Premium Diesel (High
Cetane). It is also the only Refinery in India to have 2 CCRs producing Unleaded Petrol
of High Octane.

MRPL has high standards in refining and environment protection matched by its
commitments to society. MRPL has also developed a Green Belt around the entire
Refinery with plant species specially selected to blend with the local flora.

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 & associates (AV Birla Group). MRPL was set up in 1988 with
the initial processing capacity of 3.0 Million Metric tonnes per annum that was later
expanded to the present capacity of 9.69 Million Metric tonnes per annum. The Refinery
was conceived to maximise middle distillates, with capability to process light to heavy
and sour to sweet Crudes with 24 to 46 API gravity. On 28th March 2003, ONGC
acquired the total shareholding 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 Debt Restructuring Package (DRP) proposed by ONGC, which included,
interalia, conversion upto Rs 365 crore of their loans into equity. Subsequently, ONGC
has acquired equity allotted to the lenders pursuant to DRP raising ONGC’s holding
in MRPL to 71.62 percent.

1.2.1COMPANY INFORMATION

The idea of MRPL was generated in 1987 when HPCL was looking for a partner to start
refinery in South India, it was also a dream project of Aditya Vikram Birla which was
known as Petro Gold. A tripartite agreement was signed between the Govt. of India,
HPCL and Indian Rayon Limited during 1987. It was incorporated on 7th March 1988
after a memorandum of understanding executed to the President of India.

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MRPL was initially set up during June 1991 as a joint sector company promoted by
Indian Rayon and Industries Ltd. and its associates (forming part of Aditya Birla Group)
and Hindustan Petroleum Corporation Ltd., a public sector company. This has a
distinction of being a first joint sector refinery in India and also the fifth oil refinery in
South India.

Mangalore Refinery and Petrochemicals Limited engage in refining crude oil in India.
The company produces and markets various products, such as liquefied petroleum gas,
naphtha, motor gasoline, aromatic feed stock, LPG (Cooking Gas), Naphtha, lead-free
Motor spirit (Petrol), Kerosene, Aviation Turbine Fuel (ATF), Diesel, Fuel Oil, Bitumen
and Sulphur. Its initial capacity was 3 million metric tonnes per annum.

From March 31, 2003, Oil & Natural Gas Corporation Limited – ONGC has taken over
management control of MRPL and now MRPL is a subsidiary company of ONGC. Its
current capacity is 9.69 million metric tonnes per annum.

It has received ISO 9001:2000 and ISO 14001:2004 certification for quality management
system and Environmental management system. MRPL a subsidiary of ONGC is only
refinery to have 2 hydrocrackers that produces premium diesel (High Cetane).

Milestone: MRPL received A1+ rating (indicating highest safety) for its Short Term
Borrowing programme from ICRA.

MRPL was awarded the Commendation Certificate for 'Large Scale Manufacturing
Industry - Chemical Industry' under the Rajiv Gandhi National Quality Award 2006.

MRPL won prestigious Jawaharlal Nehru Centenary Award in the year 2006.

It was honoured with Green Tech Gold Safety award for Health and Safety Management
Systems in 2005.

Outlook: MRPL is expanding its refining capacity up to 15 MMTPA .It has reached to
phase III of the expansion plan and is anticipated to be completed by October 2011 .The
project will cost Rs12412 crore.

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Table 1.2.1.1: Company Overview

COMPANY OVERVIEW

1. Date of
2 n d August 1988.
incorporation

2. Mode of Incorporated as a Public Limited Company under the

incorporation Companies Act, 1956.

Oil & Natural Gas Corporation Limited.

SuSubsidiary of
3.

Government Company under section 617 The

4. Category of
Companies Act, 1956
Company
 The equity shares of the Company are presently
5. Listing with
listed with the following stock exchanges
Stock
Exchanges  Bombay Stock Exchange
Limited. Mumbai.
 The National Stock Exchange of
India Ltd
6. SHARE CAPITAL AS ON 31 S T 2010.
7. Authorized  1,900,000,000 Equity Shares of Rs.10/- each.
Capital  100,000,000 Non-Cumulative Redeemable
Preference Shares of Rs.10/- Each.

 1,752,598,777 Equity Shares of Rs.10/-

8. Subscribed,
each.
issued &
paid-up
 9,186,242 Non-Cumulative Redeemable
capital
Preference Shares of Rs.10/- Each.

1.2.2SHARE HOLDING PATTERN

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Table 1.2.2: Share Holding Pattern

Shareholders Percentage
Oil and Natural Gas Corporation Limited 71.62%
SHARE PRICE INFORMATION
Hindustan Petroleum Corporation Limited 16.95%
MutualOpen
Funds, Banks and Financial 1.68%
68.5
High
Institutions 68.6
Individuals
Low / Private bodies 8.31%
66.85
Domestic and Non-Domestic Companies 1.44%
Previous Close
TOTAL 67.95
100.00%
Average Price 67.6
Total Traded Quantity 314361
Figure 1.2.2:
Turnover in Rs.Lakhs 212.51
SHARE
52 week high price 102.45
52 week low price 64.35
SHARE
Face Value HOLDING PATTERN 10

ONGC

1% 9% HPCL
1%
17% Banks/ MFs/ FIs

72% FIIs

Individuals / Pvt
Bodies

HOLDING PATTERN

Table1.2.2.1: Share Price Information

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1.2.3MISSION & VISION STATEMENT

MISSION:

Mission reflects the essential purpose of the organization, concerning particularly why it
is existence, the nature of the business it is in and the customers it seeks to serve and
satisfy.

Mission of the Company is as follows:

 Sustain leadership in energy conservation efficiency, productivity and Innovation.

 Capitalize 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.

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 of employees”.

1.2.4 GUIDELINES, GENERAL POLICIES AND OBJECTIVES:

QUALITY POLICY

MRPL has a well maintained quality policy under ISO 9002 accreditation and occupies
an important position in refinery sector. Commitment towards:

 Quality through excellence in the quality of products and service.

 Motivated and committed employee.
 Safe working condition and eco-friendly environment.
 Continuous improvement of technology and manpower skills.

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SAFETY POLICY

 “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 housekeeping committees regularly review the plant safety.
 Mutual aid Scheme with neighboring industries already in place.
 Mock fire drill and on-site emergency plan.

OCCUPATIONAL HEALTH CENTER

The occupational health center is manned round the clock by qualified male nurses. In
case of emergency in the refinery the patient will be brought to the OHC for first aid and
after they will be referred to the hospital for further treatment. Medical officers of MRPL
hospitals are also available at OHC at the time specified. OHC is also equipped with an
ambulance.

GREEN BELT

MRPL has also developed a green belt around the entire refinery. The plant species have
been specially selected to blend with the local flora. Some of the species are expected to
act bio-indicaters. Till date more than 1, 18,000 saplings have been planted. The tree
density and plant species are as per NEERI’s recommendation.

COMMUNITY DEVELOPMENT

The community development department has focused on health, sanitation, medical and
educational activities in nearby villages. Besides infrastructural needs such as roads,
crematoriums, play-grounds, bus-shelters etc. are built in the villages.

 4 Villages of 2 Panchayat areas in which the Refinery is located, is adopted by

MRPL.

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 Integrated development plan worked out jointly with the Zilla Panchayat and
Village Panchayat, is implemented.

WASTE WATER TREATMENT

The wastewater 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.

OBJECTIVES:

Our employees are our assets:

 MRPL operates the Refinery with the optimized manpower.

 Highly innovative and motivated employees.
 Employees are trained on various subjects, as per requirement.
 Various group and individual annual awards instituted for efficiency, energy
conservation, safety, housekeeping, innovative ideas, heroic deeds, import
substitution, sports, cultural activities etc.
 A house journal- “REFINEWS” covering the events & achievements of
employees and their family members is circulated on quarterly basis to all the
employees.

1.2.5 ORGANIZAIONAL STRUCTURE

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MANAGEMENT BOARD

 Mr. R.S. Sharma - Chairman

 Mr. U.K Basu - Managing Director, MRPL
 Dr. A.K Balyan - Director (ONGC Nominee)
 Mr.Sudhir Vasudeva - Director (ONGC Nominee)
 Mr. L.K. Gupta - Director (Finance)
 Mr. K Murali - Director (HPCL Nominee)
 Mr. N.K. Mitra - Director
 Mr. V.K Dewangan - Director
 Mr. Vivek Kumar - Director (Government Director)
 Mr. S. Roy Chowdhary - Director
 Mr. G.M. Ramamurthy - Director (Independent Director)
 Dr. A.K Rath - Director (Independent Director)
 Mr. V. P Singh - Director
 Mr. B Sukumar - Company Secretary

ORGANISATION GRADE STRUCTURE

 Chairman, Managing Director and Directors

 E8 (M1) – Group General Manager
 E8 (M2) – General Managers
 E7 (M3) – Dy. Gen. Managers
 E6 – Chief Manager
 E5 (M4) – Sr. Managers
 E4 (M5) - Managers
 E3 (M6) – Dy. Managers
 E2 (M7) – Sr. Executive, Sr. Engineers
 E1 (M8) – Executive, Engineers

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 TS1/JM1 to W1/JM6– 6 Grades of Non Management

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Figure1.2.5.1: MRPL Organisational Chart

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1.2.6 DEPARTMENTAL STUDY

HUMAN RESOURCE DEPARTMENT:

During the recent strike in January 09 by the members of Oil Sector Officers Association
(OSOA), safe and uninterrupted operations of the refinery were ensured and the
management and the Officers Association of your company deserve appreciation for the
same.

The Long Term Settlement (LTS) with the Employees Union came to amend on 31st
March 2010. Negotiations for the fresh LTS are in progress.

As reported earlier, the pay revision for Board Level and below Board Level executives
became due from 1.1.10. Based on approval of the Board for implementation of the pay
revision as per the Department of Public Enterprises, Government of India. (DPE)
Guidelines, the Ministry of Petroleum and Natural Gas have since issued the Presidential
Directive for implementation of the pay revision for your Companies Board Level and
below Board Level executives and the same are under implementation.

The Company continues to enjoy the cordial and harmonious relationship with its
collectives.

The Company recruited 57 employees during the year 2009-10. Out of these, 7 belonged
to Scheduled Caste (SC), 3 belonged to Scheduled Tribes (ST), 10 were from Other
Backward Class (OBC) and 5 were women.

The number of employees as on 31st March 2009 was 1253, including 57 women
employees. The number of employees belonging to SC, ST and OBC category were 65,
22 and 307 respectively. It is proposed to take up a special recruitment drive during the
current year to fill the above back log in SC category.

During 2008-09, the Company devoted 3314 man-days to training & development and
learning which amounts to an average of 2 ½ man-days for employee. This included
functional, developmental and specialized training programmes covering the entire
spectrum of employees.

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Firm Infrastructure: The Company has a very good infrastructure. It is the only refinery
in the country to have 2 Hydro cracker and 2 CCR units producing high quality fuel.

In addition to this MRPL has the following infrastructure facility:

 Oil Jetties at New Mangalore Port Trust, capable of handling 92,000 DWT ships,
with 14 M draft. Total capacity of jetties is over 16 MMTPA.
 Captive Power Plant - installed capacity 118.5 MV with 5 steam Turbo-
Generators and 7 Boilers.
 Raw Water required for the refinery is transported through a 43 km long pipeline
from the perennial river Nethravathi. A weir has been built by MRPL at Sarpady
on the river.
 120 Tanks are installed to store different products.
 Well - equipped laboratory with sophisticated analytical instruments.
 Blast proof Centralized Control Room.

FINANCE DEPARTMENT:

The finance department of MRPL is located at Mangalore and Mumbai .During the
financial year 2009-2010 the refinery processed a record through put of 12.55 million
metro tones (MMT) crude oil 912.54 MMT achieving 130% capacity utilization (129%)
it dispatched 11.83 MMT of finished products.

The Corporate Finance office is located at Mumbai and Central Accounts and Finance
office at Mangalore.

The corporate office Mumbai looks after the following works.

 Centralized Treasury Management.

 Foreign currency remittance and Foreign Exchange cover.
 Risk Management (which includes Insurance Cover).
 Establishing high value Letter of Credits.
 Organizing periodical meeting with lenders consortium.
 Follow-up of Sales realization from HPCL.

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 Monitoring daily cash flow.

 Submission of periodical statement to Lenders.
 Execution of loan documents and creation of charge.
 Liaison with Banks and financial Institution.
 Corporate Taxation.
 Repayment of loans, Interest, Lease rentals, Guarantee commission.

The Central Accounts and Finance Office at Mangalore look after the following work-

 Maintenance of Production records.

 Sales billing and obtaining certification of HPCL.
 Crude oil receipt and customs clearance accounting.
 Maintenance of Indirect Tax records, Central Excise, Customs & Sales Tax
Records.
 Certification of payment for Freight, Crude receipts, Demurrage.
 Preparation of Monthly Financials, Monthly Production Report, Monthly Targets.
 Daily Profitability.
 Insurance Claim lodgment and settlement.
 Processing all payments for supplies and works and services.
 Statutory compliance (such as Income tax deducted at source other than TDS on
Interest, Provident fund & Employees State Insurance).
 Export and Direct marketing billing and realization.

MARKETING DEPARTMENT

Marketing department at MRPL is divided into 2 sections - marketing and marketing

operations. The basic function of marketing section is to interact with the customers
directly and also to receive the payments. Once the order is received it has to be executed
and this is done by the marketing operation section.

Structure of Marketing Department at MRPL:

The functions of marketing department of MRPL not only includes advertising and
publicity of it's products but various other functions such as design engineering and

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construction of various marketing infrastructure such as setting up of marketing

terminals/depots. The Marketing department is also responsible for monitoring overall
progress of all marketing infrastructure projects, and also for co¬ordination with refinery
and depots. This function of marketing is handled by Bangalore office.

MRPL has had a new promoter -- the Rs 34,738.50 crore (Rs 347.38 billion) Oil and
Natural Gas Commission. And the company's fortunes are slowly changing. One sure
sign: one of the bungalows has been refurbished.

Efforts are on to slash costs at every turn and bring a new marketing focus to a company,
which with accumulated losses of Rs 412 crore (Rs 4.12 billion) and underutilised
capacity was lost in the now defunct Board of Industrial and Financial Restructuring
heap.

Rs 75 crore (Rs 750 million) will be invested in setting up a marketing and distribution
network. It will make the refinery independent of PSU company's infrastructure
preparing for the de-regulated market effective April 2004.

Direct Marketing

The Direct Marketing Sales during the year were at Rs.2,353 Crore, up by around 10%
from Rs.2,137 Crore in the previous year, despite substantial reduction in HSD consumer
sales due to heavy under-recoveries. The Company retained its market leader position
with respect to sale of Bitumen in its refinery zone. Sales of Crumb Rubber Modified
Bitumen (CRMB) increased by 360% with sales volume of 52.30 TMT in 2009-10 as
compared to 14.53 TMT in 2008-09.

Retail Marketing

Although the Company has approval from the Government of India to set up 500 retail
outlets across the country, it was proceeding cautiously in setting up the retail outlets in
view of the heavy under-recoveries in retail marketing of transportation fuels (Petrol and
Diesel). As of 31st March, 2010, the Company operated only one Retail Outlet under its
HiQ brand and its second retail outlet was commissioned in April, 10.

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Joint Ventures in Marketing

The joint venture of your Company with Shell B.V. Netherland Shell MRPL Aviation
Fuel Services Private Limited for marketing of Air Turbuine Fuel (ATF) to both
Domestic and International airlines at Indian airports, commenced its operation in August
2008 at Bangalore Airport and is progressing satisfactorily. It achieved sales of 35,517
KL of ATF valuing at Rs.104.69 Crore during 2008-09. The sales are likely to grow with
commencement of operations at Hyderabad Airport recently. The Company has also
secured Contracting Commission (CONCO) Business of Air India, Kingfisher and
Deccan Cargo at several international airports like Dubai, Hongkong etc. To enable
mobile fuelling at Mangalore, the Company has approached Director General of Civil
Aviation (DGCA), Airport Authority of India (AAI) for approval. DGCA has already
given approval for mobile fuelling at Mangalore and approval from AAI is awaited.

RESEARCH AND DEVELOPMENT DEPARTMENT:

The whole production process in the refinery is controlled through the control room by
using computers. Even though everything is automated there are people on the field who
do the work manually in case there is some problem. Thus ensuring everything is
working properly.

The Company has expanded its production under various phases thus ensuring that the
latest technology is used for refining.

PRODUCTION DEPARTMENT:

Mangalore Refinery and Petrochemicals Ltd (MRPL) will double off take of crude oil
from Cairn India's Rajasthan fields to 0.4 million tons this fiscal.

Cairn, which began crude oil production from the Mangala oilfield in the Thar desert
block in late August 2009, sells crude to MRPL, Indian Oil Corp (IOC) and Reliance
Industries.

Essar Oil has been added to the list of buyers. Gupta said MRPL's capital expenditure
will treble to Rs 3,000 crore this fiscal as against Rs 1,000 crore expenditure last year.

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The investment would be mostly in expansion of Mangalore refinery to 15 million tons

from current 11.82 million tons.

The expansion, along with setting of new facilities like coker and polypropylene unit,
would cost nearly Rs 14,000 crore. The refinery would be expanded by October 2011, he
said.

MRPL has already spent Rs 1,300 crore on the expansion project, and Gupta said the
spending on this project is going to rise significantly in the current year as it nears
completion.

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CHAPTER2: SERVICE AND PRODUCT MARKET

MRPL produces various products which are classified into four types

1. Light Distillates

2. Middle Distillates

3. Heavy Distillates

4. By-Product

2.1. LIGHT DISTILLATES:

 LIQUIFIED PETROLEUM GAS

It is used for cooking, used in vehicles, used to make hydrocarbon refrigerants.

 NAPHTHA
It is typically used for refinery process to produce or improve gasoline. It can be also
used to produce petrochemicals. it is also used in Fertilizers and Petrochemical Industries

 MOTOR SPIRIT
More commonly called petrol, it is the fuel for two wheelers and cars. MRPL is the only
company to produce unleaded petrol from day one of production. It is also the first
refinery in India to release Euro III MS.

2.2 MIDDLE DISTILLATES

 KEROSENE
It is still the poor man’s electricity in remote places, apart from being used as a fuel.

 AVIATION TURBINE FUEL (ATF)

It is used as fuel in domestic and defence aircrafts. It has to undergo stringent laboratory
tests before being dispatched.

 HIGH SPEED DIESEL (HSD)

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It 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. MRPL
is the first refinery in India to produce Euro III HSD.

2.3. HEAVY DISTILLATES

 FUEL OIL
It is used in furnaces and boilers.

 BITUMEN
MRPL produces different grades of Bitumen used in laying roads, highways and airport
runways.

2.4. BY-PRODUCT

 SULPHUR
This is directly dispatched from the Sulphur recovery unit by trucks. Sulphur is a
byproduct and is used in chemicals, drugs and fertilizer units. It is extracted to control
pollution

Before the products are dispatched, they are subject to blending, sampling, testing and
certification to meet the specifications. These products (except sulphur and bitumen) are
sold to M/S HPCL, who as per the agreement, are the sole distributors. Sulphur, bitumen
and naphtha are directly marketed by MRPL.

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CHAPTER3: FINANCIAL ANALYSIS

3.1 Debt Equity Ratio-

The Debt Equity Ratio is the relative proportion of long term debt and shareholders’
equity.

Table 3.1.1: Debt Equity Ratio

Year Long Term Debt(in Shareholders’ equity Debt Equity Ratio

Rs million) (in Rs million) (in Rs million)

2005 34665.33 21636.33 1.60

2006 3307.72 23953.39 1.38

2007 19688 37567.96 0.7

2008 19468 37829.43 0.5

2009 19868 49670 0.4

Interpretation

The ideal Debt Equity Ratio is 2:1. As such if the debt is less than 2 times the equity,
the logical conclusion is that the financial structure of the concern is sound and so the
stake/risk of long term of creditors is relatively less. On the other hand, if the debt is
more than two times the equity, the conclusion is that the financial structure of the
concern is weak and so the stake/risk of long term of creditors is relatively high.

3.2 Debt to Asset Ratio-

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The Debt to Asset Ratio is the proportion of total debt to total assets.

Table 3.2.1: Debt to Asset Ratio

Year Total Debt(in Rs Total Assets(in Rs Debt to Asset Ratios

million) million) (in Rs million)

2005 24665.33 82762.44 0.42

2006 32072.72 83011.38 0.40

2007 23683.07 88501.21 0.27

2008 20580.68 37829.43 0.54

2009 19868 40729 0.18

Interpretation

The above chart indicates that there is increase in the debt to asset ratio in the year
2004 up to 0.56 which has reduced to 0.27 in three consecutive years, that in the year
2005-0.42, in 2006-0.40 and in the year 2007-0.27, but again it has increased to 0.54 in
2008.

3.3 Gross Profit Margin-

It shows the gap between revenue trading and trading costs. It indicates the amount of
Gross Profit for every Rs. 100 of sales.

Table 3.3.1: Gross Profit Margin

Year Gross Profit(in Rs Sales(in Rs million) Gross Profit

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million) Margin(in Rs million)

2005 17183.90 185083.35 9.28

2006 14075.04 249675.40 5.64

2007 15847 284646 5.6

2008 20470 325751 6.3

2009 21509 382438 5.6

Interpretation

The actual gross profit is compared with the gross profit ratio of the previous year and
those of the other concern carrying on similar business. If the actual gross profit ratio is
higher, it is an indicator of good results. On the other hand, if the actual gross profit ratio
is too low, it is an indicator of poor results.

3.4 Operating Profit Ratio-

It shows the operational efficiency of the firm. Lower operating ratio shows the
higher operating profit and vice versa.

Operating Profit Ratio= Earnings before income tax × 100

Sales

Table 3.4.1: Operating Profit Ratio

Year EBIT(in Rs million) Sales(in Rs million) Operating Profit

Ratios (in Rs million)

2005 16904.93 185083.35 9.13

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2006 8103.50 249675.40 3.25

2007 13034.81 286331.40 4.55

2008 18815.37 325751.28 5.78

2009 18105.56 382438 4.73

Interpretation-

The ideal Operating Profit Ratio is 10%. So an Operating Profit Ratio of 10% or
more is an indicator of the operating efficiency of business. An Operating Profit Ratio of
less than 10% is an indicator of the operating inefficiency of business.

The above data shows that the Operating Profit Ratio was 8.32 and 9.13 in 2004
and 2005. In the year 2006 it has reduced to 3.25 and again increased to 4.55 and 5.78 in
2007 and 2008.

3.5 Earnings per share

The profit available to ordinary share holder’s thus shareholders are represented by net
profit after taxes and preference dividend.

Net profit available to equity share holders

Earnings per share= ----------------------------------------------------------

No. of equity shares outstanding

Table 3.5.1: Earnings per share

Net profit available

to equity No of equity shares
Year Earnings per shares
shareholders(Rs in outstanding
millions)

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2005 8797.58 1752.60 5.02

2006 3716.15 1752.62 2.12
2007 5255.23 1752.62 3.00
2008 12722.28 1752.64 7.26
2009 11919.72 1752.90 6.8

Interpretation-

More the earning per share the better is performance and the prospectors of the company
higher earnings per share suggest the profitability of more cash dividend or b onus share
and raises in the market price of the share.

3.6 Dividend per Share: DPS is the net distributed profit belonging to the shareholders
dividend by the number of organization ordinary shares outstanding.

Table 3.6.1: Dividend per Share

Dividend paid to Equity No of Equity Share Dividend Per

Year Shareholder(Rs. in Outstanding(Rs. in Share (Rs. in
millions) millions) millions)
2005 1752.61 1752.61 1.00
2006 1227.03 1752.62 0.20
2007 1402.32 1752.62 0.80
2008 2103.48 1752.64 1.20
2009 2103.48 1752.90 1.20

Interpretation-

The above table shows that in 2004 the company did not pay dividend to the Equity
Shareholders, in 2005 dividend per share was rupee 1. In 2007 dividend per share was
0.80 and in the year 2008 rupee 1.20.

3.7 Dividend Payout Ratio:

D/P Ratio can be found out by dividing the DPS by EPS. Thus,

Dividend per Share

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Dividend Payout Ratio= --------------------------------------- *100

Earnings Per Share

Table 3.7.1: Dividend Payout Ratio

EPS(Rs. in. Dividend Payout

Year DPS(Rs. in millions)
millions) Ratio
2005 1.00 5.02 0.20
2006 0.70 2.12 0.33
2007 0.80 3.00 0.27
2008 1.20 7.26 0.16
2009 1.20 6.8 17.64

Inference:

A low payout ratio suggests that there is good chance of appreciation in the price
of share. On the other hand, a high payout ratio suggests that a chance of price in the
share is dim. As such, an investor who is interested in the appreciation in the price of
share would invest in the share of company having low payout.

It indicates the proportion of earning available to Equity Shareholder when this

ratio is deducted from 100, it will give the percentage of profit retained.

The above data shows that there is more investment opportunity in the firm; it
retains most of its earnings. This will raise the share value of the firm in the market
instead of going for fresh issue or raising loan retain earning is one of the best source of
finance.

3.8 Dividend Yield Ratio:

The Earning Yield may be defined as the ratio of earning per share to market
value per ordinary share. It is calculated as follow:

Dividend per Share

Dividend Yield Ratio= ------------------------------------- *100

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Market Price Per Share

Table 3.8.1: Dividend Yield Ratio

Dividend Yield
DPS(Rs. In. EPS(Rs. In.
Year Ratio (Rs. In.
millions) millions)
millions)
2005 5.02 47.33 10.56
2006 2.12 42.50 4.99
2007 3.00 33.85 8.86
2008 7.12 78.85 9.29
2009 1.20 6.8 17.64

Interpretation-

The actual Dividend Yield Ratio of company is question should be compared with
the Dividend Yield Ratio of the other similar concern. If the dividend yield ratio of the
company in questions is more than that of other similar companies. It is an indication of
the investors that it is worth investing the share of the company in question. On the other
hand if the dividends yield ratio of the company in question is less than that of other
similar companies. It is suggest to the investor that the share of the company in question
or not attractive.

3.9 Price Earnings Ratio:

P/E ratio is closely related to the earning price ratio. It is calculated as follow:

Market price of share

Price Earnings Ratio = ------------------------------------------

Earnings Per Share

Table 3.9.1: Price Earnings Ratio

Market price of Price Earnings

EPS (Rs. In.
Year Share (Rs. In. Ratio(Rs. In.
millions)
millions) millions)

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2005 47.55 5.02 9.47

2006 42.50 2.12 20.05
2007 33.85 3.00 11.28
2008 78.10 7.26 10.76
2009 68.5 6.8 10.07

Inference:

The higher price earnings ratio, the better are the chance of appreciation. In the
Market Price of Shares a measure for determining the value of share. It is also used to
measure the Rate of Return expected by Investor. Above table shows that in the year
2007 the Price Earnings Ratio was 11.28 and it was decreases to 10.76 in the year 2008.

CHAPTER4:RESEARCH METHODOLOGY

4.1 Statement of the problem:

One of the ways the company can be in competition with itself is through cost reduction
and enhancing its value-added products. One of the effective ways of undertaking cost
reduction would be through efficient inventory control techniques. A study of inventory
management of Mangalore Refinery And Petrochemicals Limited was done to have a
general understanding of the current inventory management techniques at MRPL and to
suggest a further technique that maybe adopted for effective management of inventory.

4.2 Theoretical Background of the study:

Introduction to inventory:

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The primary object of any business is to ascertain profits. To measure the

profitability of the concern, the productivity of the total assets is considered. The ratio of
return on investment gives the productivity of the total assets.

Return on investments = Net profit

-------------- *100
Total assets

where total assets = fixed assets + current assets

Fixed assets comprise goodwill, building, plant and machinery etc.

Inventories constitute the most significant part of current assets of a large

majority of companies in India. Inventories are approximately 60% of current assets in
public limited companies in India. In any manufacturing industry, nearly 60-70% of the
total funds is emerged of tied up in current assets of which “Inventory” is the most
significant component. Because of large size of inventories size of inventories a
considerable amount of funds is required.

It is therefore absolutely imperative to manage inventories efficiently and

effectively in order to avoid unnecessary investments. A firm neglecting the management
of inventories will jeopardize its long run profitability and may fail ultimately. It is
possible for a company to reduce its level of investments to considerable degree, without
any adverse effect on production and a sale by using simple inventories carries a
favorable impact on a company’s profitability.

Meaning of inventory:

“Inventories are stock of the product a company is manufacturing for scale and
components that make up the product”. The various forms in which inventories exist are:

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 Raw Material.
 Work-in-process.
 Finished goods.

Raw materials are the basic inputs that are converted into finished product
through the manufacturing process. They are purchased and stored for future production.

Work-in-progress inventories are semi-manufactured products. They

represent products that need more work before they finished products.

Finished goods inventories are those completely manufactured products

which are ready for sale.

Yet another definition is that the term inventory includes the following categories of
items:

1. Production inventories: Raw materials, parts, and components which enter the
firm’s product in the production process. These may consist of two general
types,

(a) Specialitems manufactured to company specifications, and

(b) Standard industrial items purchased ‘off the shelf’

I
2. MRO Inventories: M a i n t e n a n c e , repair, and operating supplies which are consumed
in the production process b u t w h i c h do not become part of the product.

3. In-process Inventories: Semi-finished products found at various stages in the production

operation.

4. Finished goods Inventories: Completed products ready for shipment.

Merchandise meant for resale is not included in the above classification of inventories. The exclusion
of merchandise is justified on the ground that a manufacturing establishment does not buy anything
for resale in the same condition. It buys raw materials and other items for their conversion into

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finished product. A trading concern, however, buys finished goods for resale. The present study is
concerned with industrial establishments and not with trading concern.

Need to hold inventories:

There are three general motives for holding investors.

1. Transaction motives:
Emphasizes the need to maintain inventories to facilitate smooth production
and sales operations.
2. Precautionary motives:
Necessitates holding of inventory to protect the company against the risk of
unpredictable changes in demand and supply forces and other factors.
3. Speculative motive:
Influences the decision or reduces inventory levels to take advantage of
price fluctuations.

Inventory management:

Inventory management encompasses the planning, organizing and controlling

activities that on the flow of materials and inventory into through and from the
organization.

Objectives of inventory management:

1. Ensure a continuous supply raw materials and supplies to facilitate uninterrupted

production.

2. Maintain sufficient-finished goods for smooth sales operation and efficient customer
service.

3. Inventories permit the procurement of raw materials in economic lot sizes as well as
processing of these raw materials into finished goods is the most economical
quantity known as "economic lot size".

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4. Reduce dependencies of one another and enable the organizations to schedule

independently of another

5 . I n ventory management helps to reduce material handling costs

6. It helps to utilize people and equipment reasonably.

7. It facilitates product display and service to customers.

An effective inventory management should:

 Ensure a continuous supply of raw material to facilitate uninterrupted production.

 Maintain sufficient stock of raw material in periods of short supply and anticipate
price changes.
 Minimize the carrying cost and time.
 Control investment in inventories and keep it at an optimum level.

Inventory control:

Inventory control may be defined as a set of policies and producers by which

an organization determines what materials if should hold in stock and the quantities of
each that it should carry.

Effective material control demands a good deal of attention to be paid to

activities and procedure relating to purchase of materials as it has considerable influence
on cost quality of the product prompt delivery volume of production and efficiency of
manufacture. Lack of planned purchasing may create interruption in production through
shortage of materials and therefore may upset delivery schedule. There is also possibility
of over stocking materials. Efficient buying procedure enhances competitive strength of
the business through reduction in material cost. In the cost of storage and buying and also
through reduced waste. It builds up good will because of better quality output and timely
delivery.

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INVENTORY REVIEW SYSTEMS:

In most of the realistic inventory situations, certainty does not exist. Both usage
and lead time fluctuate and can’t be predicted demand or usage of items can be greater of
lesser than anticipated due to external and internal factors.
If the stock of items is not available when required due to any reason a stock out
situation occurs. This situation can lead to a decrease in profits and sometimes even
losses. As a result a class of inventory systems has been developed to cope with the
situations where the demand or the lead-time or both fluctuate.
There are two review systems:
1. Perpetual review systems: Under this system the recorder quantity is
fixed at the EOQ level but the frequency or ordering various depending on the
fluctuations in consumption. Whenever the inventory reaches the recorder level an order
for a fixed quantity is placed. This system is also known as the fixed order quantity
system or recorder point inventory system or Q-system.
2. Periodic review systems: This system is based on the determination
of a fixed period at which the order period. Here, the consumption, demand and stock
level are calculated and that quantity ordered which is required to make the stocks reach
the maximum level on the date of replenishment. Hence, the fluctuation demand is taken
care of by the safety stock.

Fixation of stock levels:

In order to know when the purchase requisition should be sent different

levels for stock of each item are decided. These stock levels are.

1. Minimum level (safety level)

2. Reorder level
3. Maximum level
4. EOQ (Economic Order Quantity)

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Minimum level:
It is the level below which stock of an item is never allowed to fall. If the actual
stock goes below this point, there is possibility of upsetting the production schedules due
to the shortage. This level is determined by taking into account:

 Average rate of consumption.

 Head-time i.e. average time required fresh supply of
materials.
 Re ordering level.

Minimum stock = re order level – average consumption * average lead time.

Re-ordering level:
When stock in hand reaches this level, it is an indication that replenishment is
necessary and proposals for purchase are to be initiated. This level is fixed somewhere
between the maximum and minimum levels. The quantity of material represent by the
difference between the re-ordering level and the minimum level will be sufficient to meet
the demand of production till such time as the other materializes and supplies are
delivered.

Re-ordering level = maximum consumption * maximum lead time.

Maximum level:
The maximum level indicates the maximum quantity of an item of material that
can hold in stock at any time. This level is fixed for avoiding overstocking of the
material. While fixing the level, the following are the factors to be considered.

 Rate of consumption and lead time.

 Availability of funds.
 Nature and durability of materials.

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 Price fluctuations.
 Supply conditions.
 Cost of carrying the inventory.
 Maximum requirement for production purpose at any point
of time.
 EOQ.

Maximum level = (re-order level + re order quantity)-(minimum consumption *

minimum lead time).

Economic Order Quantity (EOQ):

Economic Order Quantity (EOQ) is also known as re ordering as re ordering
quantity. It is deal quantity of a material to be purchased at a time. It is fixed in such a
manner as to minimize the total variable cost of the managing the inventory. This cost is
made up of two parts. That is the cost of ordering and the cost of carrying the inventory.
While increase in the quantity of purchase the ordering cost per unit decreases. The
carrying cost increases. The balance is therefore struck between these two factors and the
EOQ is the quantity for which the aggregate cost is the minimum. The quantity may be
determined with the help of mathematical formula, graphs or tables.
The following formula is used to determine the EOQ of an item.

Economic Order Quantity= 2xAnnual demand (units) x Ordering cost per

order

Unit price x Inventory carrying charges (%)

Assumptions in the calculation of EOQ:

 There are dynamic conditions of the supply, which enable a

firm to place as many order, as it needs.

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 Prices of the item remain stable which keep carrying cost

constant.
 The quantity of the item to be consumed during a particular
period is totally known. That is the quality to be consumed is certain.

Practical consideration:

 Goods of seasonal nature when purchased during the season will be cheaper
than purchase based on E.O.Q.
 In some cases, when considerable discount are available for bulk purchases,
should be compared with savings of E.O.Q. formula and a decision can be
taken as to which is cheaper.
 It can’t be applied in the case of imports because of the problems of
obtained import licenses. Uncertain lead times, etc.,
 EOQ is not always applicable for perishable articles whose shelf life is very
low.

Selection inventory control techniques:

Selective control means that there are variations in the method of inventory
control from item and this differentiation should be on selective basis.

Some of the selective control techniques are as follows:

 ABC analysis.
 HML analysis.
 SDE analysis.
 FSN analysis.
 XYZ analysis.
 VED analysis.
 GOLF analysis.

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 SOS analysis.

ABC analysis:
ABC analysis is an analytical of control which aims at concentrating efforts in
these sectors where attention is needed most. This method follows from the general
principals of Wilfred Pareto, Italy, 1896, that “in any serious of elements to be controlled
a selected small fraction in terms of number of elements would always account for a large
fraction in terms of effort.
In an organization material can be classified into three categories A,B&C based on
their value of annual consumption. The category A items consists of only a small
percentage of the total items handled but may have combined value that constitutes a
major portion of the total stock holding of the business. Category B items consists of
moderate percentage of the total items and may have a combined value that constitutes a
moderate portion of total stock holding. Category items may have a combined value that
constitutes a value of least importance.

ABC method is also known as “Always Better Control” and also “Selective Value
Approach”. This is nothing but adoption of the principles of “management by
expectation” to the area of inventory management.
HML analysis:
The letters HML stand for High, Medium and Low value. The procedure is
similar to ABC analysis. Here the unit value is the criterion and not the annual
consumption value. The items should be listed out in descending order of unit value and
the management may fix limits for deciding the three categories. For ex., it may decide
that all items of the unit value above Rs 5000 will be H items, between Rs 1000 to Rs
5000 will be M items and below Rs 1000 will be L items.
FSN analysis:
FSN analysis is also known as inventory turnover ratio or material turnover ratio.
The object of FSN analysis is to ascertain the speed of movement of a particular item. It
is the ratio of value of materials consumed during a period to the average stock held
during that period.

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Material turnover ratio = value of material consumed during the period value of
average stock held during the period.
Where,
Value of average stock = (value of opening stock+ value of closing stock)/2

High ratio indicators that the item is fast moving and investment in it are
minimum. A low ratio indicates that the item is low moving and investment in it is
maximum. No ratio indicates that the item is non-moving or dormant that is the item is
not consumed during that period.
SDE analysis:
These letters stands for scarce for scarce items, those which are different to obtain
and those which are fairly easy to obtain. This analysis helps to identify the availability of
the materials. A scare item might be an item which is not easily available in the market
and might source development or else it might be item which is difficult to manufacture
of there are only one or two manufactures who have to give orders several months in
advance, and so on.
XYZ analysis:
X-Y-Z analysis is based on value of the stocks on hand (i.e. inventory
investment). X Items are those which have high inventory stock. While Z items are those
which have low inventory stock. And Y items are those which have moderate inventory
stock.
The XYZ analysis gives the user as immediate view of which is expensive to hold.
Through this analysis, users can reduce money locked up in stores by keeping as little as
possible of their expensive items.
VED analysis:
VED analysis means Vital, Essential, and Desirable. This is applicable to spare
part, where categorization is made in terms of the importance of criticality of the part to
operation of the plant. If it is vital it is given a V classification. Not so important items
are given D classification. Thus classification depends upon the machinery involved,
price, availability etc.
GOLF classification:

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This word stands for government ordinary local foreign. These refer to the
sources from which the material is obtained and accordingly inventory control is
established for the items.
SOS classification:
SOS, Seasonal and Off Seasonal classification is applied to those commodities
that are seasonal in nature. Commodity especially agriculture goods are brought at the
best time. The cost of procurement and the inventory may be very high. One can’t apply
EOQ mode in this case. O.R. techniques are used to obtain optimum results.

Valuation Of Material Issues:

There are various methods of valuing material issues.
FIFO (First-In-First-Out) Method:
It is assumed that materials purchased are issued in strict chronological order i.e.
oldest stock are issued first at the oldest cost price listed on the stock ledger sheets. The
material on hand at all items is the most recent purchases made and frequently termed as
the “recent purchase” method.
Suppose, the quantity demanded is greater in amount than the units remaining in the
first lot, he uses the cost price of the second lot, then third, fourth and so on until enough
material is obtained to fill the requisition.
LIFO (Last-In-First-Out) Method:
Materials are issued at actual cost and this is also suitable when a price fluctuation
is not high. This method is also known as “replacement cost” methods. Here, goods are
issued from those recently purchased at the cost of the last lot of materials received. The
production costs are closely related to current price level. It is favored frequently because
it results in reducing income taxes during a period of rising prices.
HIFO (Highest-In-First-Out) Method:
In this method the highest cost is taken for issues of materials in the stock. It is
based on the assumption that the closing stock of materials should be always remain at
the minimum value.
NIFO (Next-In-First-Out) Method:

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In this method the replacement value is taken into account materials are issued at
a price at which they can be replaced. Therefore, cost of the materials is not considered.
BASE STOCK METHOD:
Materials are issued at cost while maintaining a base or the minimum stock at
original cost and are never touched except in emergency conditions. The base always
valued at the cost price of the first lot and is carried forward as a fixed asset.
This method works with some other method is generally used with FIFO or LIFO
method. Any quantity over and above the base is issued in accordance with the other
method, which is used in conjunction with this method.
The objective of this method of this method is to issue the material according to the
current prices. This will be achieved only when the LIFO method is used along with the
Base Stock Method.
There are two components in stock here- Base stock valued at base price and latest
purchased stock not yet issued to production valued at actual.
THE STANDARD PRICE METHOD:
A predetermined price is ascertained for a definite period of time, perhaps for a year
after taking into account the factors which influences the price viz., quantity discount,
price rise etc., the store in charge will be supplied with a list of standard material prices
which is used to enter all the materials received and to price the material which is issued.
JUST-IN-TIME PURCHASING:
Just-In-Time (JIT) purchasing of goods or materials such that a delivery immediately
proceeds demand or use. JIT purchasing requires organizations to restructure their
relationships with suppliers and place smaller and more frequent purchase orders. JIT
purchasing can be implemented in both the retail and manufacturing sectors of the
economy. Consider JIT purchasing for HEWLETT-Packard’s (HP’S) manufacture of the
kayak workstation product line. HP has long-term agreements with suppliers who provide
the major components for this product line. Each supplier is required to deliver
components such that HP’s final assembly plants meet their own production schedules
and yet have minimal inventories of the various components on hand. Delivery to the
production floor rather than to a storeroom is the norm under JIT purchasing. A supplier
who does not deliver components on time, or who delivers components that fail to meet

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agreed-upon quality standards, can causes an HP assembly plant to not meet its own
scheduled deliveries for kayak workstations. Companies adopting JIT purchasing do not
have large amounts of materials inventories on hand that enable a production line to
continue operating even when some deliveries do not occur on time or where defective
materials are delivered.
HP shares it planned production schedule with each supplier. JIT purchasing for
HP requires a high level of information sharing with suppliers who commit to deliver
components in narrow time windows.

“GOOD INVENTORY MANAGEMENT IS GOOD FINANCIAL

MANAGEMENT”

The greater the opportunity cost of fund invested in inventory the greater the
incentive to reduce the lead time required receiving inventory once an order is placed.
The greater the efficiency with which the firm manages its inventory, the lower will be
the investment in inventory. Inventories should be under constant review.

The financial office should pay attention to the following aspects in inventory
management.

 Action taken against imbalance of raw-materials and goods in process

inventory that may limit the utility of stock that item which is in shortest
supply. Here one appreciate the common saying that the strength of its
weakest link.
 The full safety against of inventory has a prohibitive cost. There should,
however reasonable procurement lead time assumption and safety block level.
 Production schedules, as far as possible, should be firmly adhered for
reducing inventory of raw material and work-in-process goods. In case of
changes of production schedule, purchasing department should set early
notification.

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 There should be an efficient system to dispose of goods that are obsolete,

surplus or unusable for production.
 Continuous efforts have to be made to shorten the production cycle. The
longer production run should be worth the cost and rich of the extra inventory
investment.
 Special pricing policy may be required to move extremely slow moving
finished item.

The business firm which is chronic patients of shortage of funds may find to
them advantage that a serious look into their inventory accumulation proves highly
rewarding. Often one is inclined to agree with the observation that “when you need
money look at your inventories before you look, to your banks”. Even if there is no
shortage of funds in a business, the financial executive has to participate actively in the
formulation of inventory policies with a view to speeding inventory turnover ratio and
maximizing return on investment.

Financial manager are concerned with any aspect of inventory management

that is controllable from the stand point of reducing inventory cost and risk.
4.3 LITERATURE REVIEEW:

Historical Development of Inventory Management:

Optimizing Economic Order Quantity (EOQ) by Dave Piasecki says that inventory
models for calculating Optimal Order Quantities and reorder points have been in
existence long before the arrival of the computer.  When the first Model T Fords were
rolling off the assembly line, manufacturers were already reaping the financial benefits of
inventory management by determining the most cost effective answers to the questions
of When? and How much? Long before JIT, TQM, TOC, and MRP, companies were
using these same (then unnamed) concepts in managing their production and inventory. 
A text book published in 1931 named “Purchasing and Storing”, a textbook that was part
of a “Modern Business Course” at the Alexander Hamilton Institute in New York was
essentially a “how to” book on inventory management in a manufacturing environment.

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The text book though 70 years old would still explain and answer the fundamental
concepts of managing a business. These change very little with time, and reading about
these concepts in a vintage text is a great way to reinforce the value of the fundamentals.

This 70-year-old book contained a section on Minimum Cost Quantity, which is what we
now refer to as Economic Order Quantity (EOQ). In the 1930’s an accountant (or more
likely a room full of accountants) calculated EOQ or other inventory related formulas
one item at a time in a dimly lit office using the inventory books, a mechanical adding
machine and a slide rule. Time consuming as this was, some manufacturers of the time
recognized the financial benefits of taking a scientific approach to making these
inventory decisions.
In these days of advanced information technology, many companies are still not taking
advantage of these fundamental inventory models?  Part of the answer lies in poor results
received due to inaccurate data inputs.  Accurate product costs, activity costs, forecasts,
history, and lead times are crucial in making inventory models work. Ironically, software
advancements may also in part to blame. Many ERP packages come with built in
calculations for EOQ which calculate automatically. Often the users do not understand
how it is calculated and therefore do not understand the data inputs and system setup
which controls the output. When the output appears to be "out of whack" it is simply
ignored.  This sometimes creates a situation in which the executives who had purchased
the software incorrectly assume the material planners and purchasing clerks are ordering
based upon the systems recommendations.  It should also be noted that many operations
will find these built-in EOQ calculations inadequate and in need of modifications to deal
with the diversity of their product groups and processes.
Economic Order Quantity (EOQ):
EOQ is essentially an accounting formula that determines the point at which the
combination of order costs and inventory carrying costs are the least. The result is the
most cost effective quantity to order. In purchasing this is known as the order quantity, in
manufacturing it is known as the production lot size.

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The order quantity depends upon the cost of the inventory items, the rate and
nature of demand (whether constant or fluctuating), the replenishment time, and the
inventory carrying costs and ordering costs for the inventory items.
While EOQ may not apply to every inventory situation, most organizations will find it
beneficial in at least some aspect of their operation. Anytime you have repetitive
purchasing or planning of an item, EOQ should be considered. Obvious applications for
EOQ are purchase-to-stock distributors and make-to-stock manufacturers, however,
make-to-order manufacturers should also consider EOQ when they have multiple orders
or release dates for the same items and when planning components and sub-assemblies.
Repetitive buy maintenance, repair, and operating (MRO) inventory is also a good
application for EOQ. Though EOQ is generally recommended in operations where
demand is relatively steady, items with demand variability such as seasonality can still
use the model by going to shorter time periods for the EOQ calculation.
EOQ conflict with Just-In-Time (JIT):
JIT is assumed to mean all components should arrive in the exact run quantities “just in
time” for the production run. JIT is actually a quality initiative with the goal of
eliminating wasted steps, wasted labor, and wasted cost. EOQ should be one of the tools
used to achieve this. EOQ is used to determine which components fit into this JIT model
and what level of JIT is economically advantageous for an operation. As an example, let
us assume a lawn equipment manufacturer produces 100 units per day of a specific model
of lawn mower. While it may be cost effective to have 100 engines arrive at the dock
each day, it would certainly not be cost effective to have 500 screws (1 days supply) used
to mount a plastic housing on the lawn mower shipped daily. To determine the most cost
effective quantities of screws or other components the use of the EOQ formula is
essential.
The EOQ can be calculated with the help of a mathematical formula. Following
assumptions are implied in the calculation:
Constant or uniform demand
Although the EOQ model assumes constant demand, demand may vary from day to day.
If demand is not known in advance- the model must be modified through the inclusion of

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safe stock.
Constant unit price
The EOQ model assumes that the purchase price per unit of material will remain
unaltered irrespective of the order offered by the suppliers to include variable costs
resulting from quantity discounts, the total costs in the EOQ model could be redefined.
Constant carrying costs
Unit carrying costs may vary substantially as the size of the inventory rises, perhaps
decreasing because of economies of scale or storage efficiency or increasing as storage
space runs out and new warehouses have to be rented.
Constant ordering cost
This assumption is generally valid. However any violation in this respect can be
accommodated by modifying the EOQ model in a manner similar to the one used for
variable unit price. Instantaneous delivery- if delivery is not instantaneous, which is
generally the case; the original EOQ model must be modified through the inclusion of a
safe stock.
Independent orders
If multiple orders result in cost saving by reducing paper work and the transportation
cost, the original EOQ model must be further modified. While this modification is
somewhat complicated, special EOQ models have been developed to deal with it.

The basic Economic Order Quantity (EOQ) formula is as follows:

The Inputs
While the calculation itself is fairly simple the task of determining the correct data inputs
to accurately represent your inventory and operation is a bit of a project.  Exaggerated
order costs and carrying costs are common mistakes made in EOQ calculations. Using

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all costs associated with your purchasing and receiving departments to calculate order
cost or using all costs associated with storage and material handling to calculate carrying
cost will give you highly inflated costs resulting in inaccurate results from your EOQ
calculation. There should also exert caution against using benchmarks or published
industry standards in calculations. Frequently seen are references to average purchase
order costs of $100 to $150 in magazine articles and product brochures. Often these
references trace back to studies performed by advocacy agencies working for business
that directly benefit from these exaggerated (my opinion) costs used in ROI calculations
for their products or services. There is no denying that some operations may have
purchase costs in this range, especially if you are frequently re-sourcing, re-quoting,
and/or buying from overseas vendors. However if your operation is primarily involved
with repetitive buying from domestic vendors — which is more common — you’ll likely
see your purchase order costs in the substantially lower $10 to $30 range.
Annual Usage 
Expressed in units, this is generally the easiest part of the equation.  It requires the input
your forecasted annual usage.
Order Cost  
The Order Cost is also known as purchase cost or set up cost. It is the sum of the fixed
costs that are incurred each time an item is ordered. These costs are not associated with
the quantity ordered but primarily with physical activities required to process the order.  
For purchased items, these would include the cost to enter the purchase order and/or
requisition, any approval steps, the cost to process the receipt, incoming inspection,
invoice processing and vendor payment, and in some cases a portion of the inbound
freight may also be included in order cost.  It is important to understand that these are
costs associated with the frequency of the orders and not the quantities ordered. For
example, in a receiving department the time spent checking in the receipt, entering the
receipt, and doing any other related paperwork would be included, while the time spent
repacking materials, unloading trucks, and delivery to other departments would likely not
be included. In the purchasing department a person would include all time associated
with creating the purchase order, approval steps, contacting the vendor, expediting, and
reviewing order reports, it would not include time spent reviewing forecasts, sourcing,

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getting quotes (unless you get quotes each time you order), and setting up new items. All
time spent dealing with vendor invoices would be included in order cost.  
In manufacturing, the order cost would include the time to initiate the work order, time
associated with picking and issuing components excluding time associated with counting
and handling specific quantities, all production scheduling time, machine set up time, and
inspection time. 
For the most part, order cost is primarily the labor associated with processing the order;
however, you can include the other costs such as the costs of phone calls, faxes, postage,
envelopes, etc. 
Every time an order is placed for stock replenishment, certain are involved, and, for most
practical purposes, it can be assumed that the cost per order is constant. The ordering cost
may vary, dependent upon the type of items: raw materials like steel against production
components like casting. However, it is assumed that an estimate Co can be obtained for
a given range of items. This cost of ordering, Co includes: Paper work costs, typing and
dispatching an order. Follow-up costs – the follow-up required to ensure timely suppliers-
includes the travel cost for purchase follow-up, telephone, telex and postal bills. Costs
involved in receiving the order, inspection, checking and handing to the stores. Any set
up cost of machines if charged by the supplier, either directly indicated in quotations or
assessed through quotations for various quantities. The salaries and wages to the purchase
department. This is relevant for consideration if the purchase function is carried out at
same level with the existing staff. If the level of purchasing activity decreases
significantly, obviously a proportional amount of personnel will be transferred to other
departments. If the level of purchasing increases, the extra load will be tackled by paying
overtime to existing staff or by recruiting new personnel. This additional cost can be
viewed as the marginal cost of orders. The ordering cost in a typical Indian firm is around
Rs. 100 per order, but experience shows that this cost varies considerably depending
upon the efficiency of the purchasing department. Some firms operate on the basis of
“receipt cost” particularly when dealing with staggered delivers. The mathematical
models can be suitably modified to get the “economic receipt quantity” instead of
“economic order quantity’.
Carrying cost. 

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The carrying cost is also called Holding cost. Carrying cost is the cost associated with
having inventory on hand.  It is primarily made up of the costs associated with the
inventory investment and storage cost. For the purpose of the EOQ calculation, if the cost
does not change based upon the quantity of inventory on hand it should not be included in
carrying cost.  In the EOQ formula, carrying cost is represented as the annual cost per
average on hand inventory unit. Given below are the primary components of carrying
cost:
Interest:  If money was borrowed to pay for inventory, the interest rate would be part of
the carrying cost.  If money is not borrowed on the inventory, but have loans on other
capital items, you can use the interest rate on those loans since a reduction in inventory
would free up money that could be used to pay these loans.  If by some miracle a person
is debt free then a person would need to determine how much can be made if the money
was invested.
Insurance:  Since insurance costs are directly related to the total value of the inventory,
this part would be included as part of carrying cost.
Taxes:  If taxes are required to be paid on the value of the inventory they would also be
included.
Storage Costs:  Mistakes in calculating storage costs are common in EOQ
implementations.  Generally companies take all costs associated with the warehouse and
divide it by the average inventory to determine a storage cost percentage for the EOQ
calculation.  This tends to include costs that are not directly affected by the inventory
levels and does not compensate for storage characteristics.  Carrying costs for the purpose
of the EOQ calculation should only include costs that are variable based upon inventory
levels.  
To illustrate, If you are running a pick/pack operation where you have fixed picking
locations assigned to each item where the locations are sized for picking efficiency and
are not designed to hold the entire inventory, this portion of the warehouse should not be
included in carrying cost since changes to inventory levels do not effect costs here. 
Other costs that can be included in carrying cost are risk factors associated with
obsolescence, damage, and theft.  Do not factor in these costs unless they are a direct

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result of the inventory levels and are significant enough to change the results of the EOQ
equation.
The inventory carrying cost varies and in a typical Indian industry is about 30 percent. A
major portion of this is accounted for by the interest on capital, which depends on the
fiscal policies of the government. A few firms differentiate the costs as fixed and
variable. In the analysis of and use of mathematical formula, only the variable costs of
ordering should be considered as the fixed costs will be constant irrespective of the
number of orders placed or the inventory carried.
Variations on the basic EOQ Model:
There are many variations on the basic EOQ model. Listed below are the most useful
ones.

 Quantity discount logic can be programmed to work in conjunction with the EOQ
formula to determine optimum order quantities.  Most systems will require this
additional programming.
 Additional logic can be programmed to determine max quantities for items
subject to spoilage or to prevent obsolescence on items reaching the end of their
product life cycle.
 When used in manufacturing to determine lot sizes where production runs are
very long (weeks or months) and finished product is being released to stock and
consumed/sold throughout the production run you may need to take into account
the ratio of production to consumption to more accurately represent the average
inventory level.
 The safety stock calculation may take into account the order cycle time that is
driven by the EOQ.  If so, you may need to tie the cost of the change in safety
stock levels into the formula.
Implementing EOQ
There are primarily two ways to implement EOQ. Both methods obviously require
determining the associated costs as mentioned above. The simplest method is to set up
the calculation in a spreadsheet program, manually calculate EOQ one item at a time, and
then manually enter the order quantity into the inventory system. If the inventory has

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fairly steady demand and costs and you have less than one or two thousand SKUs you
can probably get by using this method once per year. If you have more than a couple
thousand SKUs and/or higher variability in demand and costs you will need to program
the EOQ formula into your existing inventory system. This allows for quick re-
calculation of EOQ automatically as often as needed. You can also use a hybrid of the
two systems by downloading your data to a spreadsheet or database program, perform the
calculations and then update your inventory system either manually or through a batch
program.
A related calculation is the Total Annual Cost calculation. This calculation can be used
to prove the EOQ calculation.
Total Annual Cost = [(annual usage in units)/(order quantity)(order cost)]+
{[.5(order quantity)+(safety stock)]*(annual carrying cost per unit)}.
This formula is also very useful when comparing quotes where vendors offer different
minimum order quantities, price breaks, lead times, transportation costs.
4.4 Objectives of the study:

 To study and understand the financial position of the company.

 To study the inventory management as it exists in Mangalore Refinery and
Petrochemicals Ltd.,
 To calculate EOQ of various raw materials and analyze it.
 To study, understand and analyze the inventory of raw materials, work in
progress and finished goods over the past five years.
 To study the performance of the company in terms of inventory when
compared to its competitors.
 To recommend methods and strategies to control the inventory.

4.5 Data collection:

To achieve the foresaid objectives of the study, both primary as well as secondary data
have been used. The data envisaged through interviews and discussion with the

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executives and the staff of finance and stores department of Mangalore Refinery and
Petrochemicals Ltd., constitute the main source of primary information.

Data collection technique used for collection of primary data was direct interviews with
the manager of inventory department and employees.
Data collection techniques used for collection of secondary data are from stores record,
annual reports, news articles, journals, various web sites and professional books.
In order to draw meaningful inferences the data collected are analyzed with
the help of graphs, charts, financial ratios and statistics.

4.6 Statistical Techniques:

Statistical tools like bar charts and multiple bar charts have been used in the study. Also
pie chart has been used to show the share holding pattern of the company.

4.7 Limitations of the study:

The following limitations were found:

 The study extensively uses the data provided in the financial
reports. If there is any window dressing the findings could be misleading.
 This being an academic study it suffers from time and cost
constraints.
 The inferences that have been framed are only on the basis of
financial statements.
 Based on the limited information it is not possible to arrive at
proper conclusion.

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CHAPTER5: DATA ANALYSIS

5.1 ECONOMIC ORDER QUANTITY:

Economic Order Quantity= 2xAnnual demand (units) x Ordering cost per

order

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Unit price x Inventory carrying charges (%)

Since it is not possible to calculate the carrying cost and ordering cost per order it is
assumed to be 15% and Rs.10000 per order respectively.
a) EOQ of non ferric alum, ammonia, antifoulant and carbon, activated:
Table 5.1.1: EOQ of non ferric alum, ammonia, antifoulant and carbon,
activated
Annual consumption 300940
Cost per unit 92.375
Carrying cost 15%
Ordering cost per order 10000
Economic Order Quantity 20842

INTERPRETATION: EOQ of non ferric alum, ammonia, antifoulant and

carbon, activated is calculated to be 20842kgs.

b) EOQ of Caustic soda, corrosion inhibitor, dimethyl disulfide and

hydrochloric acid:
Table 5.1.2: EOQ of Caustic soda, corrosion inhibitor, dimethyl disulfide and
hydrochloric acid
Annual consumption 1595000
Cost per unit 29.5125
Carrying cost 15%
Ordering cost per order 10000
Economic Order Quantity 84888

INTERPRETATION: EOQ of Caustic soda, corrosion inhibitor, dimethyl disulfide and

hydrochloric acid is calculated to be 84888kgs.

c) EOQ of hydrogen peroxide, lubricity improver, methoklone and

multifunctional additive:
Table 5.1.3: EOQ of hydrogen peroxide, lubricity improver, methoklone and
multifunctional additive
Annual consumption 414000
Cost per unit 42.6875
Carrying cost 15%

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Ordering cost per order 10000

Economic Order Quantity 35960

INTERPRETATION: EOQ of hydrogen peroxide, lubricity improver, methoklone and

multifunctional additive is calculated to be 35960kgs.

d) EOQ of corrosion inhibitor, liquid cum gas nitrogen, orange dye and
perchloroethylene:
Table 5.1.4: EOQ of corrosion inhibitor, liquid cum gas nitrogen, orange dye
and perchloroethylene
Annual consumption 397000
Cost per unit 146.5
Carrying cost 15%
Ordering cost per order 10000
Economic Order Quantity 19008

INTERPRETATION: EOQ of corrosion inhibitor, liquid cum gas nitrogen, orange dye
and perchloroethylene is calculated to be 19008kgs.

e) EOQ of indfloc-238, pour point despressant, salt, rock, unicorn-c, corrosion

inhibitor:
Table 5.1.5: EOQ of indfloc-238, pour point despressant, salt, rock, unicorn-
c, corrosion inhibitor

Annual consumption 282400

Cost per unit 97.95
Carrying cost 15%
Ordering cost per order 10000
Economic Order Quantity 19606
INTERPRETATION: EOQ of indfloc-238, pour point despressant, salt, rock, unicorn-c,
corrosion inhibitor is calculated to be 19606kgs.

5.2 INVENTORY OF MATERIALS:

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5.2.1 INVENTORY OF RAW MATERIALS:

Table 5.2.1: Inventory of Raw Materials

(Rs. In crores)

Year Raw Material

2005-06 12,085.99
2006-07 10,117.59
2007-08 20,203.95
2008-09 8,828.95
2009-10 17,763.85

Figure 5.2.1: Inventory of Raw Materials

Raw Material
25,000.00

20,000.00

15,000.00 Raw Material

10,000.00

5,000.00

0.00
2005-06 2006-07 2007-08 2008-09 2009-10

INTERPRETATION:

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Inventory of raw materials has decreased from 12,085.99 in 2005-06 to 10,117.59

in 2006-07, which is due to the increase in production in the FY 2006-07. The
decrease in stock is also due to proper flow of raw materials from suppliers to
stores and from stores to production houses. The inventory of raw materials
increased to 20,203.95 in 2007-08 as compared to the previous FY, the reason
being decrease in production of the products which lead to the accumulation of
raw materials. The figures decreased in the next FY to 8,828.95 and then again
increased to 17,763.85 in the year 2009-10. There should be proper utilization of
raw materials in order to increase the production.

5.2.2 INVENTORY OF STORES, SPARES & CHEMICALS:

Table 5.2.2: Inventory of Stores, Spares & Chemicals

(Rs. In crores)

Years Stores,
Spares &
Chemicals
2005-06 613.79
2006-07 674.66
2007-08 874.93
2008-09 889.21
2009-10 1,237.79

Figure 5.2.2: Inventory of Stores, Spares & Chemicals

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Stores Spares & Chemicals

1400

1200

1000

800 Stores Spares & Chemicals

600

400

200

0
2005-06 2006-07 2007-08 2008-09 2009-10

INTERPRETATION:
The stock of stores, spares and chemicals has been increasing from 613.79 in
2005-06 to 674.66 in 2006-07 to 874.93 in 2007-08. It has continued to increase
from 889.21 in 2008-09 to 889.21 in 2009-10. The increase is mainly due to the
increase in spares and general consumables. This shows lack of control of spares
and stores by the company.

5.2.3 INVENTORY OF FINISHED GOODS

Table 5.2.3: Inventory of Finished Goods

(Rs. In crores)

Years Finished
Goods
2005-06 5,377.94
2006-07 12,710.94
2007-08 13,771.08
2008-09 8,582.98
2009-10 11,143.67

Figure 5.2.3: Inventory of Finished Goods

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Finished Goods
16,000.00
14,000.00
12,000.00
10,000.00
Finished Goods
8,000.00
6,000.00
4,000.00
2,000.00
0.00
2005-06 2006-07 2007-08 2008-09 2009-10

INTERPRETATION:
Inventory of finished goods has increased from 5,377.94 in 2005-06 to 12,710.94
in 2006-07 to 13,771.08 in 2007-08. This is due to decrease in sales in 07 and 08
respectively. The inventory of finished goods decreased from 13,771.08 in 2007-
08 to 8,582.98 in 2008-09 and then increased to 11,143.67 in 2009-10, the reason
being increase in sales during 2008-09 and decrease during the next financial
year.

5.2.4 INVENTORY OF WORK-IN-PROGRESS:

Table 5.2.4: Inventory of Work-in-Progress

(Rs. In crores)

Years Work-in-
Progress
2005-06 829.29
2006-07 1,480.12
2007-08 1,473.30
2008-09 692.84
2009-10 1,090.92

Figure 5.2.4: Inventory of Work-in-Progress

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Work-in-Progress
1600
1400
1200
1000
Work-in-Progress
800
600
400
200
0
2005-06 2006-07 2007-08 2008-09 2009-10

INTERPRETATION:
The inventory of work in progress increased from 829.29 in 2005-06 to 1,480.12
in 2006-07 and further decreased to 1,473.30 in 2007-08 and 692.84 in 2008-09.
Inventory of work in progress increased to 1,090.92 during the FY 2009-10.

5.3 COMPARISON OF INVENTORY OF MRPL WITH ITS COMPETITORS:

Table 5.3 Comparison of inventory of MRPL with its competitors

(Rs. In crores)

ESSAR
Company BPCL CPCL HPCL RIL MRPL IOCL OIL
Stores and
spares 181.46 1616.59 176.52 2,801.31 1152.09 1,438.29 184.04

Raw
materials 1,519.63 12763.35 2,055.38 15,023.40 17,763.85 5,109.04 1,137.05

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Work in
progress 485.52 2162.13 338.76 2,878.85 1090.92 1,586.38 614.22

Finished
goods 4,631.30 8160.69 6,215.09 6,278.06 11,136.69 13,159.63 289.31

Figure 5.3: Comparison of inventory of MRPL with its competitors

20000
18000
16000
14000
12000
Stores and spares
10000 Raw materials
Work in progress
8000
Finished goods
6000
4000
2000
0
BPCL CPCL HPCL RIL MRPL IOCL ESSAR OIL

INTERPRETATION:

The inventory of MRPL is highest when compared to its competitor i.e., BPCL,
CPCL, HPCL, RIL, IOCL and ESSAR OIL. From the graph it is evident that the
inventory of raw materials is highest in MRPL i.e., 17,763.85 which is due to the
decrease in production. The company has to adopt new ways to ensure optimum
utilization of resources. The inventory of finished goods is lowest in ESSAR OIL
i.e., 289.31 which implies that the company has good sales when compared to its
competitors. MRPL should try to reduce the inventory of finished goods by
increasing its sales. The inventory of stores and spares is lowest in HPCL i.e.,
176.52 which means the company is successful in controlling its spares and
stores. The inventory of stores and spares in MRPL is quite high which shows
lack of control of spares and stores by the company.

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CHAPTER6:SUMMARY OF FINDINGS

6.1 FINDINGS BASED ON DATA COLLECTION:

1. From the study it has been found that the company orders materials based on the
minimum-maximum level set for different items by the company. The EOQ model
applied for raw materials showed that when EOQ of raw materials are ordered the total
cost is minimum and if more or less quantity is ordered the cost is greater. Thus EOQ
model can be applied for procuring raw materials with least cost.

2. Inventory of raw materials has been fluctuating over the years which are mainly
because of lack of optimum utilization of resources. In the FY 09-10 the inventory of raw

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materials was high i.e., 17,763.85crores when compared to previous yr 8,828.95 crores,
the reason being decrease in production level.

3. Inventory of stores and spares is been increasing from 889.21 crores in 2008-09 to
889.21 crores in 2009-10 which is due to the lack of control of spares and stores by the
company.

4. Inventory of finished goods has increased from 8,582.98 crores in 2008-09 to

11,143.67 crores in 2009-10. This is due to the decrease in sales in the year 2009-10.
From the study it is evident that the overall inventory of the company has increased
compared to the last year due to macro economic factors and also lack of control over
some materials.

5. The inventory of MRPL is high when compared to its competitors i.e., BPCL, CPCL,
HPCL, RIL, IOCL and ESSAR OIL. Having high inventory level can be beneficial to the
company helps in smooth functioning of production and sales operations and also to
make the most of the price fluctuations. At the same time excess inventory will lead to
the working of working capital. This will help improve the performance of the company.

6.2 FINDINGS BASED ON OBSERVATIONS:

The Materials Department of MRPL has been computerized. This in turn

has assisted the company in maintaining the accounts perfectly and enhancing effective
audit internally and externally. Vendors are rated based on their performance with respect
to delivery, quality and price standard. The company also handles materials with care as
per the standards set by the company. The same standards apply for inspection of
received materials. All materials are stored in right condition at respective locations .The
slow moving and non moving materials of the company are disposed off as per company
norms.

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CHAPTER7: SUGGESTIONS, CONCLUSION

AND FUTURE LINE OF REFERENCE

7.1 SUGGESTIONS:

Looking at the present world scenario and economy these are some of the suggestions

1. Planning committee:
A planning committee has to be set in order to plan and develop new strategies to procure
materials at least cost possible.
2. Proper planning:

From the study it is evident that the inventory has increased in the FY 09-10 due to macro
economic factors and also lack of control over some materials. Better forecasting should

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be done not only about the refinery industry but also about the world economy. Thus
maintain low inventory and supplying right amount of materials for production.

3. Making better use of selective techniques:

The company uses ABC, XYZ and FSN techniques to control the inventory. It has been
found that the company disposes the non-moving items once in 3 years. So selective
technique should be used in a better manner and the non-moving items should be
disposed off immediately which will reduce the inventory of the company. Other
selective techniques like VED can also be used.
4. Improving the inventory control techniques for spares:
One of the reasons for high inventory are spares which are either slow moving or non-
moving items. Thus inventory control techniques should be used for spares and better
procurement and storing should be made.
5. Transfer of stock:
There are some items required by different departments. If one department finishes the
stock of the items, transfer of stock can be done from the departments having surplus
stock. Thus avoiding unnecessary procurement of those items.

6. Using EOQ model for procurement of raw materials:

The company places the order for stock based on minimum-maximum level. This will
increase the total cost of inventory. The company should use EOQ model for
procurement of raw materials as this provide right level of inventory with minimum cost.
7. Introducing SAP:
SAP software provides better maintenance of data and records through internal control.
These technologies can provide easy accessibility to authorized employee of the
organization to go through the record of data, inventory, etc. to help follow better
inventory management.

7.2 CONCLUSION:

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Inventory is vital to every company simply because without inventory it would not be
able to survive. Inventory is a current asset which can be converted into cash within 12
months. Keeping inventory in sufficient quantity will help to face lead time component,
demand and supply fluctuations and any unforeseen circumstances in the procurement of
materials. Though inventory is a must, it is such an item which will pile up and creep into
the area of profits to turn them into losses and can put the company in the red. It is
therefore necessary for any company to have control over the inventory to save the
company from pilling up of inventory and to avoid losses. We can conclude from the
detailed study of inventory management conducted in MRPL that the company has to
plan and have better control on the inventory.

By studying the data and information collected from various sources and analyzing EOQ
model it can be concluded that inventory control techniques are important for MRPL
which has 46569 items as its inventory which is worth 3114.36 crores, in order to
minimize inventory and maintain required stock of materials. This will help in the smooth
functioning of production and sales operations at the same time the working capital will
not be blocked. This will improve the performance of the company.

7.3 FUTURE LINE OF RESEARCH:

MRPL has 46569 items as its inventory and it is not easy to have a control over such
huge inventory. Therefore the company uses the 3 selective control techniques i.e., ABC,
XYZ and FSN. 67 items are included in A class and 402 and 6115 items in B and C class
category respectively. Similarly 2254 items are include in X category and 5472 in Y
category. 32599 items are included in category Y. The company also follows FSN
technique of selective inventory control where 881 items are categorized as F class items,
5050 items as S class items and 39682 items as N class items. Non moving category
involves spares and store which should be disposed off in order to bring down the
inventory level in the company.

V.E.D. Analysis: This method is used for control of spare parts. VED is the symbol of

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1. Vital spare parts: Are those spares whose cost of stock out is very high.

2. Essential spare parts: Are those spares which are essential for the production to
continue.

3. Desirable spare parts: Are those spares which are needed but their absence even a
week or more will not lead to stoppage of production.

From the above data analysis we can find that store and spares are constantly
increasing and will in the future need a specific inventory control technique. The most
appropriate of these techniques would be VED analysis which has been explained
above. Therefore the company can consider the implementation of this technique for
its future inventory management. Further research undertaken at MRPL can be into
this line of inventory control technique analysis.

BIBLIOGRAPHY

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Last accessed on 18/6/2010
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Last accessed on 30/6/2010
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Last accessed on 17/6/2010
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Last accessed on 17/6/2010

6. http://www.inventoryops.com/economic_order_quantity.htm
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Last accessed on 2/7/2010
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Last accessed on 2/7/2010
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techniques-of-store-inventory-control.html
Last accessed on 2/7/2010
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Last accessed on 3/7/2010
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Last accessed on 5/5/2010
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Ltd-.html
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limited-(500109)-financial-and-strategic-analysis-revie... - United States
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Last accessed on 6/5/2010

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19. valueinvestorindia.wordpress.com/.../oil-and-gas-industry-refineries/
Last accessed on 6/5/2010
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27. oilgasrefining.energy-business-review.com
Last accessed on 7/5/2010

ANNEXURE

Mangalore Refinery and Petrochemicals

………………...Rs. in crores……………...
Balance Sheet

  Mar '05 Mar '06 Mar '07 Mar '08 Mar '09
 
Sources Of Funds        

Total Share Capital 1,761.80 1,761.80 1,761.80 1,761.82 1,761.83

Equity Share Capital 1,752.61 1,752.62 1,752.62 1,752.64 1,752.65

Share Application
Money 0 0 0 0 0

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Preference Share
Capital 9.19 9.19 9.19 9.19 9.19
Reserves 401.83 633.54 994.99 2,021.12 2,967.57

Revaluation Reserves 0 0 0 0 0
Networth 2,163.63 2,395.34 2,756.79 3,782.94 4,729.40
Secured Loans 893.44 579.71 437.82 350.2 238.94
Unsecured Loans 2,573.10 2,727.56 1,930.48 1,707.86 1,747.86
Total Debt 3,466.54 3,307.27 2,368.30 2,058.06 1,986.80
Total Liabilities 5,630.17 5,702.61 5,125.09 5,841.00 6,716.20

           
Application Of Funds        

Gross Block 6,740.19 6,779.36 7,297.80 7,371.61 7,415.88

Less: Accum.
Depreciation 2,335.35 2,683.49 3,036.38 3,398.81 3,766.14
Net Block 4,404.84 4,095.87 4,261.42 3,972.80 3,649.74
Capital Work in
Progress 77.98 409.23 98.71 133.67 414.95
Investments 0 27.28 27.28 645.14 642.89
Inventories 1,911.62 1,890.70 2,498.27 3,624.30 1,890.43
Sundry Debtors 960.8 1,153.02 1,194.87 2,204.70 1,286.98
Cash and Bank
Balance 7.52 3.19 6.12 12.32 15.37
Total Current Assets 2,879.94 3,046.91 3,699.26 5,841.32 3,192.78

Loans and Advances 1,785.49 1,448.72 902.14 1,378.41 2,569.95

Fixed Deposits 1.64 2 126.78 394.34 1,755.75
Total CA, Loans &
Advances 4,667.07 4,497.63 4,728.18 7,614.07 7,518.48
Deffered Credit 0 0 0 0 0

Current Liabilities 3,271.31 3,144.92 3,808.96 5,506.68 3,902.06

Provisions 278.95 182.47 181.53 1,017.98 1,607.81

Total CL &
Provisions 3,550.26 3,327.39 3,990.49 6,524.66 5,509.87

Net Current Assets 1,116.81 1,170.24 737.69 1,089.41 2,008.61

Miscellaneous 30.53 0 0 0 0

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Expenses

Total Assets 5,630.16 5,702.62 5,125.10 5,841.02 6,716.19

 
Contingent Liabilities 796.98 861.53 669.59 746.67 5,739.54
Book Value (Rs) 12.29 13.61 15.67 21.53 26.93

Profit & Loss

account ------------------- in Rs. Cr. -------------------

  Mar '05 Mar '06 Mar '07 Mar '08 Mar '09
 

  12 mths 12 mths 12 mths 12 mths 12 mths

 
Income        
Sales Turnover 20,829.22 28,242.86 32,376.88 37,339.12 42,718.89
Excise Duty 2,202.19 3,245.34 3,813.60 4,773.28 4,439.69
Net Sales 18,627.03 24,997.52 28,563.28 32,565.84 38,279.20
Other Income 35.63 -40.22 68.57 206.98 -426.9
Stock
Adjustments 194.34 -293.39 798.32 104.8 -596.86
Total Income 18,857.00 24,663.91 29,430.17 32,877.62 37,255.44
Expenditure        
Raw Materials 16,287.25 22,897.20 27,140.30 30,127.94 34,537.71
Power & Fuel 6.57 3.63 3.88 3.82 13.45

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Cost
Employee Cost 47.01 47.96 54.76 124.82 113.03
Other
Manufacturing
Expenses 25.03 27.01 41.38 48.49 58
Selling and
Admin Expenses 352.31 492.23 467.66 246.97 139.6
Miscellaneous
Expenses 53.05 50.23 66.03 63.79 58.06
Preoperative Exp
Capitalised 0 0 0 0 0
Total Expenses 16,771.22 23,518.26 27,774.01 30,615.83 34,919.85

  Mar '05 Mar '06 Mar '07 Mar '08 Mar '09
 
  12 mths 12 mths 12 mths 12 mths 12 mths

 
Operating Profit 2,050.15 1,185.87 1,587.59 2,054.81 2,762.49
PBDIT 2,085.78 1,145.65 1,656.16 2,261.79 2,335.59
Interest 229.62 187.77 214.53 147.59 143.45
PBDT 1,856.16 957.88 1,441.63 2,114.20 2,192.14
Depreciation 378.14 350.02 354.86 377.82 382.32
Other Written Off 30.53 30.53 0 0 0
Profit Before Tax 1,447.49 577.33 1,086.77 1,736.38 1,809.82
Extra-ordinary
items 16.23 45.25 -26.95 -119.07 -45.09
PBT (Post Extra-
ord Items) 1,463.72 622.58 1,059.82 1,617.31 1,764.73
Tax 583.97 250.97 534.32 342.01 571.27
Reported Net
Profit 879.76 371.62 525.52 1,272.23 1,192.54
Total Value
Addition 483.97 621.06 633.7 487.88 382.13
Preference
Dividend 0 0 0 0 0
Equity Dividend 175.26 122.7 140.23 210.35 210.35
Corporate
Dividend Tax 24.58 17.21 23.83 35.75 35.75
Per share data (annualised)        
Shares in issue
(lakhs) 17,529.02 17,529.02 17,529.02 17,529.02 17,529.02
Earning Per Share
(Rs) 5.02 2.12 3 7.26 6.8

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Equity Dividend
(%) 10 7 8 12 12
Book Value (Rs) 12.29 13.61 15.67 21.53 26.93

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