TERM PAPER

FINANCIAL MANAGEMENT

COMPARATIVE ANALYSIS OF COST OF CAPITAL OF

GAIL VS. HPCL

SUBMITTED TO- MR.AMARJIT SAINI

SUBMITTED BY:

NAME-SUBODH KUMAR

ROLL NO- “B-28

SECTION- RS 1901

Sub-MGT-517
 Reg.no-10905459

Decleration Regarding Term Paper

TOPIC OF TERM PAPER : FINANCIAL MANAGEMENT

COURSE INSTRUCTOR : MR.AMARJIT SAINI

DATE OF SUBMISSION : 06/05/2010

ROLL NO. : B-28

SECTION: RS1901

COURSE CODE: MGT-517

Declaration:

I declare that this assignment is my individual work. I have

not copied from any other student’s work or from any other source
except where due acknowledgement is made explicitly in the text, nor
has any part been written for me by another person.

Student’s Signature: Subodh Kumar.

ACKNOWLEDGEMENT

I would like to thank first for the introduction of term paper in our course to the

dpt. 0f LSM .The term paper on ‘oil and gas limited’ prepared by me could not

have been completed without the support and kind help of our course instructor

MR.AMARJIT SAINI who helped and guided me in doing my work. I PAY MY

REVERENCE TO HIS FOR KIND SUPPORT .

THANK YOU.
GAS AUTHORITY OF INDIA LIMITED(GAIL):-

INTRODUCTION:-
Gas Authority of India Ltd, is India largest natural gas transportation company,
integrating all aspects of the natural gas value chain. GAIL is listed by Forbes as
one of the world's 2,000 largest public companies in 2007.

This company was set up by the Government of India in August 1984 to

create gas sector infrastructure. This is the company mainly for petrolium and gas.
The head quarter of this company is at New Delhi. Chairman and md of this
company is Shri B. C. Tripathi.

Total revenue of gail is 18,008 crore and total net

income is 2,601 crore in 2007-08. The total number of employee of gail is near
about 3480.

GAIL GAS is a wholly owned subsidiary of GAIL INDIA Ltd. was

incorporated on 27.05.2008. Distribution and Marketing, in India and abroad, of
CNG & Auto LPG as fuel for vehicles. PNG for domestic, commercial, and industrial
purposes. Investing in & setting up required infrastructure in various cities of India
and along the highways for building CNG corridors. Allied business relating to
distribution & marketing of natural gas, CNG, Auto LPG etc. GAIL has nine JV
companies also in area of City Gas Distribution. Average gas tariff for state-owned
gas marketing firm GAIL India is likely to rise by about 40% next year following
the petroleum regulator provisionally approving gas carriage charges that are
nearly double the existing ones.

GAIL Gas Limited, a wholly owned subsidiary of GAIL

(India) Limited, was incorporated on May 27, 2008 for the smooth
implementation of City Gas Distribution (CGD) projects. GAIL Gas Limited is a
limited company under the Companies Act, 1956.

Gail Industries designs and manufacturers one of the

leading triplex high-pressure plumber pumps in the industry. These pumps are
technically superior to most of the pumps offered in the marketplace today. Gail
pumps have been in use since 1971 in literally thousands of industrial and name
brand commmerical locations.

HINDUSTAN PETROLIUM CORPORATION LIMITED(HPCL):-

INTRODUCTION:-
Hindustan Petrolium Corporation Limited is a Navratan PSU oil company of the
government of India. This company was founded in 1974. The head quarter of
this company is at Mumbai. Chairman and MD of HPCL is Arun balakrishnan.
 Hindustan Petroleum Corporation HPCL limited, is a
Fortune 500 company of India listed at number 311, in the global 500 rankings,
with an annual turnover of over of 1,16,428 Crores and sales/income from
operations of Rs 1,31,802 Crores during financial year 2008-09, about 20%
Marketing share in India and a strong market infrastructure. Corresponding
figures for financial year 2007-08 are: Turnover- Rs 1,03,837 crores, and
sales/income from Operations- Rs. 1,12,098 Crores .

HPCL also owns and operates the largest Lube Refinery in India
producing Lube Base Oils of international standards. With a capacity of 335 TMT.
This Lube Refinery accounts for over 40% of the India's total Lube Base Oil
production. Presently HPCL produces over 300+ grades of Lubes, Specialities and
Greases.

HPCL produce different type of product like fuel, oil, Lpg ect. The total
revenue of HPCL 28.247 billion US$ in 2008.

COST OF CAPITAL:-

The cost of capital is the cost of a company's funds or, from an investor's point of
view "the expected return on a portfolio of all the company's existing securities. It
is used to evaluate new projects of a company as it is the minimum return that
investors expect for providing capital to the company, thus setting a benchmark
that a new project has to meet.

The cost of capital is the rate of return that capital could

be expected to earn in an alternative investment of equivalent risk. If a project is
of similar risk to a company's average business activities it is reasonable to use the
company's average cost of capital as a basis for the evaluation. A company's
securities typically include both debt and equity, one must therefore calculate
both the cost of debt and the cost of equity to determine a company's cost of
capital.
Balance sheet of gail:-
  Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05
Sources of funds
Owner's fund
Equity share capital 1,268.48 845.65 845.65 845.65 845.65
Share application money - - - - -
Preference share capital - - - - -
Reserves & surplus 13,501.15 12,159.23 10,547.26 9,127.64 7,780.46
Loan funds
Secured loans 1,100.00 1,100.00 1,100.00 1,600.00 1,600.00
Unsecured loans 100.13 165.87 237.85 316.56 397.40
Total 15,969.76 14,270.75 12,730.76 11,889.85 10,623.51
Uses of funds
Fixed assets
Gross block 17,603.98 16,957.86 14,932.56 14,469.48 14,222.35
Less : revaluation reserve - - - - -
Less : accumulated
8,553.66 8,024.57 7,478.19 6,913.52 6,376.47
depreciation
Net block 9,050.32 8,933.29 7,454.37 7,555.96 7,845.88
Capital work-in-progress 2,426.33 816.66 1,936.94 615.59 309.08
Investments 1,737.27 1,490.88 1,463.84 1,443.35 783.95
Net current assets
Current assets, loans &
12,393.93 10,525.05 7,814.12 12,876.93 11,021.23
advances
Less : current liabilities &
9,638.09 7,495.13 5,938.51 10,601.98 9,336.63
provisions
Total net current assets 2,755.84 3,029.92 1,875.61 2,274.95 1,684.60
Miscellaneous expenses not
- - - - -
written
Total 15,969.76 14,270.75 12,730.76 11,889.85 10,623.51
Notes:
Book value of unquoted
897.96 598.16 1,517.94 600.42 90.61
investments
Market value of quoted
4,905.94 6,343.17 5,458.80 5,672.21 3,736.27
investments
Contingent liabilities 11,352.14 8,115.13 4,940.60 11,208.69 9,739.35
Number of equity
12684.77 8456.52 8456.52 8456.52 8456.52
sharesoutstanding (Lacs)
Profit & loss account of gail:-

  Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05
Income
Operating income 23,784.71 18,012.74 16,036.56 16,354.59 13,605.51
Expenses
Material consumed 16,646.23 11,371.17 11,296.17 11,521.07 8,924.55
Manufacturing expenses  1,703.06 1,536.61 818.68 631.92 519.90
Personnel expenses 576.67 470.01 292.87 221.83 205.78
Selling expenses 54.93 42.28 46.25 55.40 53.95
Adminstrative expenses 698.03 639.74 594.67 344.84 292.28
Expenses capitalised -16.74 -2.16 -1.09 -0.78 -0.93
Cost of sales 19,662.18 14,057.65 13,047.55 12,774.28 9,995.53
Operating profit 4,122.53 3,955.09 2,989.01 3,580.31 3,609.98
Other recurring income 796.26 555.25 544.98 452.20 345.13
Adjusted PBDIT 4,918.79 4,510.34 3,533.99 4,032.51 3,955.11
Financial expenses 101.09 94.25 107.08 117.30 134.09
Depreciation  559.91 571.02 575.38 559.49 946.65
Other write offs - - - - -
Adjusted PBT 4,257.79 3,845.07 2,851.53 3,355.72 2,874.37
Tax charges  1,400.32 1,253.54 813.03 966.55 917.48
Adjusted PAT 2,857.47 2,591.53 2,038.50 2,389.17 1,956.89
Non recurring items -43.74 -12.32 0.58 -3.93 -2.10
Other non cash adjustments -10.03 22.25 347.59 -75.17 -0.88
Reported net profit 2,803.70 2,601.46 2,386.67 2,310.07 1,953.91
Earnigs before appropriation 2,803.70 2,601.46 2,386.67 2,310.07 1,953.91
Equity dividend 887.93 845.65 845.65 845.65 676.52
Preference dividend - - - - -
Dividend tax 150.90 143.72 123.62 118.60 92.51
Retained earnings 1,764.87 1,612.09 1,417.40 1,345.82 1,184.88

COST OF EQUITY:-
Cost of equity = Risk free rate of return + Premium expected for risk.

(A)- Expected return:-

Expected Return = dividend yield + growth rate of dividends.

COST OF DEBT :-

The cost of debt is computed by taking the rate on a risk free bond whose
duration matches the term structure of the corporate debt, then adding a default
premium. This default premium will rise as the amount of debt increases (since
the risk rises as the amount of debt rises). Since in most cases debt expense is a
deductible expense, the cost of debt is computed as an after tax cost to make it
comparable with the cost of equity. Thus, for profitable firms, debt is discounted
by the tax rate.

Cost of debt= (Rf + credit risk rate)(1-T),

where T is the corporate tax rate and Rf is the risk free rate.

WEIGHTED AVERAGE COST OF CAPITAL (WACC):-

The total capital for a firm is the value of its equity (for a firm without outstanding
warrants and options, this is the same as the company's market capitalization)
plus the cost of its debt (the cost of debt should be continually updated as the
cost of debt changes as a result of interest rate changes). The "equity" in the debt
to equity ratio is the market value of all equity, not the shareholders' equity on
the balance sheet.To calculate the firm’s weighted cost of capital, we must first
calculate the costs of the individual financing sources: Cost of Debt Cost of
Preference Capital Cost of Equity Capital.

Cost of equity:-

For 2009:-

Dividend= 887.93 net profit= 2,803.70

Cost of equity = 887.93/2803.70*100 = 31.86

For 2008:-
Dividend = 845.65 net profit = 2601.46

Cost of equity = 845.93/2601.46*100 = 32.51

For 2007:-

Dividend = 845.65 net profit = 2386.67

Cost of equity = 845.65/ 2386.67*100 = 35.43

For 2006:-

Dividend = 845.65 net profit = 2310.07

Cost of equity = 845.65/2310.07*100 = 36.60

For 2005:-

Dividend = 676.52 net profit = 1953.91

Cost of equity = 676.52/1953.91*100 = 34.62

Cost of debt:-
For 2009:-

Interest =101.09 net profit = 2803.70 tax = 1400.32

Cost of debt = 101.09 / 2803.70 *(1- 1400.32) = 50.45

For 2008:-

Interest = 94.25 net profit = 2601.46 tax = 1253.54

Cost of debt = 94.25/2601.46 *(1- 1253.54) = 43.37

For 2007:-

Interest = 107.08 net profit = 2386.67 tax = 813.03

Cost of debt = 107.08/ 2386.67 *(1-813.03) = 36.43

For 2006:-

Interest =117.30 net profit = 2310.07 tax = 966.55

Cost of debt = 117.30/2310.07*(1- 966.55) = 49.02

For 2005:-

Interest = 134.09 net profit = 1953.91 tax = 917.48

Cost of debt = 134.09/ 1953.91*(1-917.48) = 62.85

WACC:-

Ko =Kd(1-T)Wd +Ke(We)

For 2009:-

Ke = 31.86 Kd = 50.45 tax = 1400.32 Wd = 0.075 We = 0.924

Ko = 50.45(1-1400.32) 0.075 + 31.86*0.924 = 2584.10

For 2008:-

Kd = 43.37 Ke = 32.51 tax = 1253.54 Wd = 0.088 We = 0.911

Ko = 43.37(1-1253.54)0.088+32.51*0.911 = 4810.006

For 2007:-

Kd = 36.43 tax = 813.03 Wd = 10548.84 Ke = 35.43 We = 0.8949

Ko = 36.43(1-813.03)10548.84 +35.43*0.894 = 34.79

For 2006:-

Kd = 49.02 tax = 966.55 Wd = 0.16 Ke = 36.60 We = 0.83

Ko = 49.02(1-966.55)0.16 + 36.60*0.83 = 7603.38

For 2005:-

Kd = 62.85 tax = 917.48 Wd = 0.188 Ke = 34.62 We = o.811

Ko = 62.85(1-917.48)0.188 +34.62*0.811 = 10857.016

Balance sheet

  Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05
Sources of funds
Owner's fund
Equity share capital 339.01 339.01 338.95 338.94 338.93
Share application money - - - - -
Preference share capital - - - - -
Reserves & surplus 10,391.62 10,224.28 9,259.70 8,396.80 8,101.92
Loan funds
Secured loans 698.49 1,118.48 1,005.48 1,486.16 319.91
Unsecured loans 22,056.68 15,668.22 9,512.05 5,177.67 1,865.44
Total 33,485.80 27,349.99 20,116.18 15,399.57 10,626.20
Uses of funds
Fixed assets
Gross block 20,208.63 19,570.05 15,638.48 13,479.25 12,393.17
Less : revaluation reserve - - - - -
Less : accumulated depreciation 8,554.08 7,640.77 6,817.64 6,141.85 5,449.53
Net block 11,654.55 11,929.28 8,820.84 7,337.40 6,943.64
Capital work-in-progress 5,001.27 3,315.95 4,243.56 2,363.88 786.84
Investments 14,196.47 6,837.05 7,127.47 4,027.64 1,756.84
Net current assets
Current assets, loans & advances 16,262.69 19,495.39 11,589.93 11,089.78 9,576.36
Less : current liabilities &
13,629.18 14,227.68 11,665.62 9,419.13 8,437.48
provisions
Total net current assets 2,633.51 5,267.71 -75.69 1,670.65 1,138.88
Miscellaneous expenses not
- - - - -
written
  Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05
Total 33,485.80 27,349.99 20,116.18 15,399.57 10,626.20
Notes:
Book value of unquoted
1,026.39 610.56 574.11 354.13 354.13
investments
Market value of quoted
12,948.34 8,068.12 7,094.89 4,458.23 2,354.23
investments
Contingent liabilities 5,588.88 6,450.22 7,176.59 6,768.48 3,481.65
Number of equity
3386.27 3386.27 3393.30 3393.30 3393.30
sharesoutstanding (Lacs)

Profit loss account

  Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05
Income
Operating income 1,24,934.83 1,04,312.99 89,725.03 71,430.62 60,164.55
Expenses
Material consumed 1,16,474.02 98,080.49 82,632.14 66,533.17 54,379.55
Manufacturing
435.23 316.28 275.28 308.93 247.05
expenses 
Personnel expenses 1,137.19 867.66 729.42 690.77 671.64
Selling expenses 2,520.87 2,206.01 2,588.71 2,190.11 1,941.20
Adminstrative
1,076.50 995.87 980.74 892.70 822.64
expenses
Expenses capitalised - - - - -
Cost of sales 1,21,643.81 1,02,466.31 87,206.29 70,615.68 58,062.08
Operating profit 3,291.02 1,846.68 2,518.74 814.94 2,102.47
Other recurring
867.15 710.67 481.69 298.42 245.05
income
Adjusted PBDIT 4,158.17 2,557.35 3,000.43 1,113.36 2,347.52
Financial expenses 2,084.13 794.30 426.34 160.82 82.68
  Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05
Depreciation  981.29 850.82 704.00 688.97 658.38
Other write offs - - - - -
Adjusted PBT 1,092.75 912.23 1,870.09 263.57 1,606.46
Tax charges  275.92 382.40 698.97 99.52 510.38
Adjusted PAT 816.83 529.83 1,171.12 164.05 1,096.08
Non recurring items -380.53 218.09 91.02 21.53 34.14
Other non cash
138.68 386.96 309.03 220.05 147.11
adjustments
Reported net profit 574.98 1,134.88 1,571.17 405.63 1,277.33
Earnigs before
8,369.65 8,027.01 7,757.80 6,343.27 6,545.52
appropriation
Equity dividend 177.78 101.59 610.80 101.80 509.00
Preference dividend - - - - -
Dividend tax 30.21 17.26 97.75 14.28 71.15
Retained earnings 8,161.66 7,908.16 7,049.25 6,227.19 5,965.37

Cost of equity:-

For 2009:-

Dividend = 177.78 net profit = 574.98

Cost of equity = 177.78/ 574.98 = 0.309

For 2008:-

Dividend = 101.59 net profit = 1134.88

Cost of equity = 101.59/1134.88 = 0.089

For 2007:-

Dividend = 610.80 net profit = 1571.17

Cost of equity = 610.80/1571.17 = 0.38

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

For 2006:-

Dividend = 101.80 net profit = 405.63

Cost of equity = 101.80/405.63 = 0.25

For 2005:-

Dividend = 509.00 net profit = 1277.33

Cost of equity = 509.00/1277.33 = 0.39

Cost of debt:-

For 2009:-

Interest = 2084.13 net profit = 574.98 tax = 275.92

Cost of debt = 2084.13/ 574.98*(1- 275.92) = 996.5

For2008:-

Interest = 794.30 net profit = 1134.88 tax = 382.40

Cost of debt = 794.30/1134.88*(1-382.40) = 266.9

For 2007:-

Interest = 426.34 net profit = 1571.17 tax = 698.97

Cost of debt = 426.34/1571.17*(1-698.97) = 189.39

For 2006:-

Interest = 160.82 net profit = 405.63 tax = 99.52

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

Cost of debt = 160.82/405.63*(1-99.52) = 39.06

For 2005:-

Interest = 82.68 net profit = 1277.33 tax = 510.38

Cost of debt = 82.68/1277.33*(1- 510.38) = 32.97

WACC:-

Ko =Kd(1-T)Wd +Ke(We)

For 2009:-

Kd = 996.5 tax = 275.92 Wd = 0.679 Ke = 0.309

We = o.32

Ko = 996.5(1- 275.92) 0.679 + 0.309(0.32) = 59525.64

For 2008:-

Kd = 266.9 tax = 382.40 Wd = 0.613 Ke = 0.089

We = 0.38

Ko = 266.5(1-382.40)0.613 +0.089(0.38) = 23676.77

For 2007:-

Kd = 189.39 tax = 698.97 Wd = 0.52 Ke =0.38 We = 0.47

Ko = 189.39(1-698.97)o.52 + 0.38(0.47) = 32307.05

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

For 2006:-

Kd = 39.06 tax = 99.52 Wd = 0.432 Ke =0.25 We = 0.56

Ko = 39.06(1-99.52)0.43 + 0.25(0.56) = 926.78

For 2005:-

Kd = 32.97 tax = 510.38 Wd = 0.205 Ke = 0.39 We = 0.79

Ko = 32.97(1-510.38)0.20 + 0.39(0.79) = 2653.80

Relationship between WACC and PAT:-

The WACC is an approach to determining a discount rate. The WACCmethod
determines the subject company’s actually cost of capital by calculating the
weighted average of the company’s cost of debt and cost of equity. The WACC
must be applied to the subject company’s net cash flow to total invested capital.

In the case of Gail…………….

Average cost of equity is 34.204 ,and Average cost of debt is 48.424. so, the
companys financial condition is not very good.this shows the company is in loss,
in that condition company uses debt.

In case of Hpcl………

Average cost of equity is 0.2836, and Average cost of debt is 304.964.this

shows that the company financial condition is bad. This shows the company is
in heavy loss.they uses so much debt.

When we talk about the Pat:-

Profit after tax of gail is 2,857.47(2009) 2,591.53(2008) 2,038.50(2007)

2,389.17(2006) 1,956.89(2005).

Profit after tax of Hpcl is 816.83(2009) 529.83(2008) 1,171.12(2007) 164.05

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

(2006) 1,096.08(2005).

This shows that the PAT of Gail is more than of HPCL in each and every year. So
we say the financial condition of GAIL is much better than the HPCL. this means
that G uses less and less debter compare than the hpcl. So, in between 2005 to
2009 the company Gail is more profitable than the company Hpcl.

COMPARATIVE ANALYSIS OF GAIL AND HPCL:-

When we talk about the net operating income of GAIL, we find the income
neither continuously increasing nor decreasing. As 187.51(09) , 213.00(08),
189.64(07), 193.40(06) and 160.89(05). Here we conclude that the net
operating income is max in 2008. This means that the company is in good
condition. The company is financially strong in 2008 when we compare from
2005 to 2009.

Now net operating income of HPCL, from 2005 to 2009 is per

share (Rs) 3,689.45(09) 3,080.47(08) 2,644.18(07) 2,105.05(o6) 1,773.04(05). In
this situation the net operating income of the company is maximum in 2009.

NET PROFIT MARGIN:-

Net profit margin of GAIL is from 2005 to 2009 is 11.40 % in 09, 14.01% in 08,
14.39%in 07, 13.74%in 06 and 14.00% in 05.

Also the net profit margin of HPCL is from 2005 to 2009 is 0.45%
in 09, 1.08%in08, 1.74%in07, 0.56% in 06 and 2.11% in 05.

In this case average net profit margin of GAIL is more

and more better than average net profit margin of the HPCL. The maximum net
  Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05

profit margin of GAIL is in 2007.which is 14.39%. and the average net profit
margin of HPCL is in 2005, which is 2.11%.

So we says that GAIL is in better condition.

LEVARAGE RATIO:-

Long term debt / Equity of GAIL is from 2005 to 2009 is 0.08 in 09, 0.09 in 08,
0.11 in 07 , 0.19 in 06 and 0.23 in 05.

Long term debt/ equity of HPCL is from 2005 to

2009 is 1.79 in 09, 1.19 in 08, 0.89 in 07 , 0.50 in 06 and 0.02 in 05.

On the basis of levarage ratio of both the company

we conclude that the company HPCL is more financially risky than the company
GAIL.

CONCLUSION:- on the basis of above mention all the things like cost of equity,
cost of debt, WACC, and PAT, I conclude that the company GAIL in more
financially strong than the company HPCL. In HPCL a lot of debt compare than
the GAIL, and HPCL uses debt more than the GAIL.

So, finally we say that the GAIL is in more profit than the
HPCL.
  Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05