chapter 1

CORPORATE FINANCE OF IGL LTD.

ACKNOWLEDGEMENT

I wish to express my to “Mr. Rajesh vedvyas” for giving me an opportunity to be a

part of such an esteem organization and for helping me to enhance my knowledge

by granting permission to do my summer training project under their guidance.

I am grateful to “Mr. Rajjat Kumar” my mentor, for his invaluable guidance and

support during the course of the project. He provided me with his assistance and

support at all the times when needed also he has been a significant being who

helped in the completion of this project.

I am also thankful to Mr. Saibal biswas, who helped me as and when required with

his big reservoir of experience and knowledge.

Santosh Kumar Gupta

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PREFANCE

MBA is a master’s degree, which equips a student with much needed corporate

comprehension & academic knowledge to ensure one’s step in corporate world

would leave a mark.

Every student of MBA, as a part of the curriculum, is required to

undergo a practical training in a reputed corporate organization for a stipulated

period of 6 to 8 weeks. This training is usually undertaken after the completion of

first year of MBA. This training period is of utmost importance for a student as it

proves to provide a firsthand expertise and understanding which in turned helps in

preparing them for corporate world.

It has been a blessing for me that for my summer training project I got an

opportunity to work with one of the esteem organization. During the shot span of

two months, I have learnt about pricing mechanism, working capital, mutual

funds, fixed maturity plan, gilt funds and other investment options.

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TABLE OF CONTENT

Chapter 1: INTRODUCTION

1.1: Need for the study……………………………………..…...6

1.2: Objectives of the study…………………………………..…7

1.3: Background………………………………………………....8

1.4: Research methodology……………………………………....9

1.5: About the company………………………………………...11

Chapter 2: INDUSTRY OVERVIEW………………………...……..15

Chapter 3: ORGANISATION STUDY

3.1: Profile of IGL………………………………………….….27

3.2: Vision of IGL……………………………………..……….29

3.3: SWOT Analysis ……………………………………...…....30

3.4: Company’s Operations…………………………….……….31

3.5: Structure of Finance Department ………………………….30

Chapter 4: WORKING CAPITAL MANAGEMENT IN IGL…...43

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4.1: Credit Management…………………………………………53

4.2: Inventory Management………………………………………68

4.3: Receivables Management……………………………………70

4.4: Investment analysis……………………………………........81

4.5: Ratio Analysis………………………………………………...84

4.6: Cash Management…………………………………………….92

4.7: Financial Analysis…………………………………………….95

Chapter 5: LIMITATIONS, CONCLUSIONS & RECOMMENDATIONS...96

Chapter 6: ANNEXURE……………………………………………..…99

Chapter 7: BIBLIOGRAPHY…………………………………………106

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CHAPTER 1:

INTRODUCTION

This project deals with the study of working capital management, what exactly is the working

capital; how the working capital requirement of a company is maintained and managed

efficiently. Every business needs funds for two purposes for its establishment and to carry out its

day- to-day operations. Long terms funds are required to create production facilities through

purchase of fixed assets such as p & m, land, building, furniture, etc. Investments in these assets

represent that part of firm’s capital which is blocked on permanent or fixed basis and is called

fixed capital. Funds are also needed for short-term purposes for the purchase of raw material,

payment of wages and other day to day expenses etc.

Working capital is a financial metric which represents operating liquidity available to a

business. Along with fixed assets such as plant and equipment, working capital is considered a

part of operating capital. It is calculated as current assets minus current liabilities. If current

assets are less than current liabilities, an entity has a working capital deficiency, also called

a working capital deficit. Net working capital is working capital minus cash (which is a current

asset) and minus interest bearing liabilities (i.e. short term debt). It is a derivation of working

capital that is commonly used in valuation techniques such as DCFs (Discounted cash flows).

Working Capital = Current Assets − Current Liabilities.

A company can be endowed with assets and profitability but short of liquidity if its assets cannot

readily be converted into cash. Positive working capital is required to ensure that a firm is able to

continue its operations and that it has sufficient funds to satisfy both maturing short-term debt

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and upcoming operational expenses. The management of working capital involves managing

inventories, accounts receivable and payable and cash.

Decisions relating to working capital and short term financing are referred to as working capital

management. These involve managing the relationship between a firm's short-term assets and

its short-term liabilities. The goal of working capital management is to ensure that the firm is

able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-

term debt and upcoming operational expenses.

This project deals with working capital management. It involves two things

I) - current assets management,

II) -financing of these current assets.

Current assets include: cash, marketable securities, bills receivable, inventory, prepaid expenses

etc. this project only cash, inventory, and bills receivable management have been reviewed for

the concern, under study.

Every business needs adequate liquid resources in order to maintain day-to-day cash flow. It

needs enough cash to pay wages and salaries as they fall due and to pay creditors if it is to keep

its workforce and ensure its supplies. Maintaining adequate working capital is not just important

in the short-term. Sufficient liquidity must be maintained in order to ensure the survival of the

business in the long-term as well. Even a profitable business may fail if it does not have adequate

cash flow to meet its liabilities as they fall due.

There are two concepts of working capital- gross and net.

Gross Working Capital focuses on

- Optimization of investment in current asset.

- Financing of current asset

Net Working Capital focuses on

- Liquidity position of the firm

- Judicious mix of short-term & long-term financing.

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1.1 Decision criteria

By definition, working capital management entails short term decisions - generally, relating to

the next one year period - which is "reversible". These decisions are therefore not taken on the

same basis as Capital Investment Decisions (NPV or related, as above) rather they will be based

on cash flows and / or profitability.

One measure of cash flow is provided by the cash conversion cycle - the net number of days

from the outlay of cash for raw material to receiving payment from the customer. As a

management tool, this metric makes explicit the inter-relatedness of decisions relating to

inventories, accounts receivable and payable, and cash. Because this number effectively

corresponds to the time that the firm's cash is tied up in operations and unavailable for other

activities, management generally aims at a low net count.

In this context, the most useful measure of profitability is Return on capital (ROC). The result is

shown as a percentage, determined by dividing relevant income for the 12 months by capital

employed; Return on equity (ROE) shows this result for the firm's shareholders. Firm value is

enhanced when, and if, the return on capital, which results from working capital management,

exceeds the cost of capital, which results from capital investment decisions as above. ROC

measures are therefore useful as a management tool, in that they link short-term policy with

long-term decision making. See Economic value added (EVA).

Management of working capital

Guided by the above criteria, management will use a combination of policies and techniques for

the management of working capital. These policies aim at managing the current

assets (generally cash and cash equivalents, inventories and debtors) and the short term

financing, such that cash flows and returns are acceptable.

Cash management. Identify the cash balance which allows for the business to meet day

to day expenses, but reduces cash holding costs.

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Inventory management. Identify the level of inventory which allows for uninterrupted

production but reduces the investment in raw materials - and minimizes reordering costs -

and hence increases cash flow; see Supply chain management; Just In

Time (JIT); Economic order quantity (EOQ); Economic production quantity

Debtor’s management. Identify the appropriate credit policy, i.e. credit terms which will

attract customers, such that any impact on cash flows and the cash conversion cycle will

be offset by increased revenue and hence Return on Capital (or vice versa); see Discounts

and allowances.

Short term financing. Identify the appropriate source of financing, given the cash

conversion cycle: the inventory is ideally financed by credit granted by the supplier;

however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors

to cash" through "factoring".

1.2:Objective

To study the concept followed in IGL regarding their management of Working Capital.

Try to design a model that can judge the efficiency of their policies regarding to the

same.

To understand the importance of Working Capital Management.

To analyze the liquidity position of the organization.

To analyze the short-term financing policies and patterns, which affect the working

capital of the organization.

To study the factor that affects the Working Capital Management at IGL.

To find out the Profitability and

Operational efficiency of the organization.

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1.3: Background

There exists a huge difference between what we study in our classroom and what actually being

followed by the corporate when it comes to the financial world.So,a summer training programme

is just a way to get interacted with the corporate world and try to adopt the working habit and try

to learn the practical applications of all the theories, procedures and techniques adopted. The

topic for the project taken i.e. Working Capital Management & Pricing Mechanism, involves the

study of the policies of management of IGL to make best use of their financial resources and the

techniques they use to do so. These policies aim at managing the current

assets (generally cash and cash equivalents, inventories and debtors) and the short term

financing, such that cash flows and returns are acceptable.

Relevance of the Project:

With the study of Working capital management of IGL, it seems that Working Capital is

important because maintaining a balance of income to debt can be difficult and owners must be

diligent to assure that it is kept. Sometimes it takes a little assistance to maintain levels of fluidity

or make major purchases.

If working capital dips too low, a business risks running out of cash. Even very profitable

businesses can run into trouble if they lose the ability to meet their short-term obligations.

Working capital financing can be used as a fast cash option to cushion the periods when the flow

is not ideal or readily available. Even when owners are meticulous in managing working capital,

finding the right levels to remain comfortable and competitive can be difficult. As IGL is one of

the largest & well-based organizations, where working capital management has efficiently

worked.

IGL has achieved the following Goals:

To ensure a healthy return on investment by maximizing operational efficiency, capacity

utilization and productivity.

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To continually improve and redesign systems, processes and practices in order to ensure

error prevention and response time.

To adopt internal customer focuses as a means to external customer satisfaction.

To treat human resource as the key to Quality Excellence and ensure development and

satisfaction in employees.

To ensure high quality of inputs through proactive interaction with suppliers.

To meet obligation towards the society as a responsible corporate citizen.

To provide value for money to all stake holders.

To follow ethical business philosophy at all time

1.4: Research Methodology:

The methodology adopted for the project is divided into two parts:

1): Qualitative Analysis

2): Quantitative Analysis.

Qualitative Analysis: It is required to study the business profile of the

Organization, its nature, its functionality, the hierarchy and the functioning of

management, the performance of the Company in last few years and what policies they

adopt and studying what role the Working Capital plays in a manufacturing, transmission

and pricing concern.

Quantitative Analysis:-

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It is required to analyze the Current Assets and the Current Liabilities position of

the Company, the statement of Working Capital Changes, estimating the Working Capital

Requirement, calculating and analyzing Operating Cycle, analyzing the Working Capital

Ratios to reveal the financial position and soundness of the business and to provide a

good basis of qualitative analysis of the financial problems and use of modern tools to

show the trend of Working Capital for future year.

Step 1- It focuses towards the preparation of the project to compile all the material

facts available on the subject like Annual Report of the company, Working Capital

information and the data about the performance of the in last few years.

Step 2- To calculate Working Capital Ratios so that the financial soundness of

company can be estimated. Further to calculate the Operating Cycle to know how

frequently its stocks gets converted into cash.

Step 3- To undertake a through SWOT analysis.

The project involves the study of current policies of IGL regarding there Working

Capital Management and analyzing the techniques of managing the working capital by

the organization in an efficient way. At last giving valuable comments and

recommendations wherever required to make their policies much more efficient. For

doing this it is important to go through the working of the organization, its current

financial status, future prospects, information regarding its financial ratios, the strategies

of competitors.

The major purpose of descriptive research is to give a description of the state of

affairs, as it exists in the present. The main characteristic of this method is that researcher

has no control over the variables. The researcher can only report what has happened or

what is happening. What, where, when, how are the researcher and why. Descriptive

Report is that subscription which answers or addresses all these questions. The study

mainly based on the secondary data which refers to that form of information that has been

already collected and is available. These include some internal sources within the

company and externally these sources include books and periodicals, published reports

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and data of HNGIL and the annual reports of the company. Interaction with the various

employees of the accounts department has also been a major source of information.

1.5:About the company:

Indraprastha Gas Limited is in retail gas distribution business supplying compressed natural gas

(CNG) to the transport sector and piped natural gas (PNG) to domestic and commercial sectors.

The Company also supplies re-gasified liquid natural gas (R-LNG) to 16 industrial consumers.

The total number of CNG stations increased from 181 to 241 between the fiscal years ended

March 31, 2009, and March 31, 2010 (fiscal 2010), which included 69 mother stations, 46 online

stations, 46 daughter booster stations and two daughter stations. The Company extended the

piped natural gas distribution infrastructure to the new areas in Delhi, which includes Sarita

Vihar, Jasola, Dwarka (Sector -1 to 12), Rohini, Pitampura, Janakpuri, Maya Enclave, Saket,

Hauz Khaz, Paschim Vihar, Vikaspuri, Dilshad Garden, Mayur Vihar, Vasant Kunj, Pushp

Vihar, Aram Bagj, Nivedita Kunj and Vasant Vihar. As of March 2010, the Company has

provided PNG connections to over 122,000 domestic and 300 commercial customers.

Investment Rationale

Demand push from favorable government regulation to pave way for expansion:

Indraprastha Gas Limited’s first mover advantage gives it a virtual monopoly in Delhi

because of its investment in gas infrastructure across the city. Due to increasing demond for

natural gas on the back of government regulation for LCVs into CNG, the company has

planned to expand geographically across Delhi and neighboring areas. Alongside, these areas

also hold huge potential to generate demand of PNG. With increase gas supply due to

commencement of KG basis gas production and capacity addition at Dahej terminal, IGL

would effectively supply PNG to satisfy industrial demand, which is facing supply

constraints.

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Financial Review:

The company has been showing consistently good financial performance both in terms of

turnover and profitability. During the year, gross turnover of the company increased by 26%

from Rs. 9621.37 million in year 2008-2009 to Rs. 12131.31 million in the year 2009-2010.

Profit after tax also went up by 25% from Rs. 1724.74 million in 2008-2009 to Rs.2154.96

million in 2009-10.

Dividend:

COMPANY’S directors are pleased to recommend dividend of 45% (Rs. 4.50 per share) as

against 40% (Rs. 4/- per share) in the last year. The proposed dividend including corporate

dividend tax would absorb Rs. 734.64 million.

Future outlook:

NCT OF DELHI

Company has drawn out plans to further consolidate its presence in the NCT of Delhi by

investing Rs. 915 million during the financial year 2010-11 for CNG expansion.

CNG being an eco-friendly and economical fuel, a large number of private car manufacturers are

introducing their CNG variants. Due to wide acceptance of CNG, there has been a large-scale

conversion of private cars into CNG mode. This segment will give a boost to CNG sales in the

coming years.

IGL has planned a large expansion in PNG segment. A capital expenditure of Rs. 1940 million

has been earmarked for augmenting infrastructure in the existing areas as well as for expansion

in new areas of Delhi during the financial year 2010-11. The company has plans to provide new

PNG connections to over 50000 domestic households.

EXPANSION PROJECTS IN NATIONAL CAPITAL REGION (NCR)

IGL has planned capital investment of Rs. 2400 million for the NCR towns of Noida, Greater

Noida & Ghaziabad to augment its CNG and PNG infrastructure.

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INDIAN PROMOTOR

45%

M.F13%F.I

3%

GOVT.5%

INSURANCE CO.3%

F.I. INVESTORS11%

CORPORATES8%

INDIVIDUALS10%

OTHERS1%

SHAREHOLDING PATTERN

PHYSICAL PERFORMANCE:

During the year, the Company recorded sales as under:

(Figures in standard Cubic Meters)

Product 2010-11 2009-10

CNG 695,127,167 605,255,608

PNG 87,310,564 54,257,774

TOTAL 782,437,731 659,513,382

FINANCIAL RESULTS:

ITEMS 2010-11 2009-2010

Net Sales & other income 10992.24 8789.91

Profit before Depreciation & Tax 4018.90 3262.94

Depreciation 774.52 674.34

Profit before tax 3244.38 2588.60

Provision for tax 1089.42 863.86

Profit after tax 2154.96 1724.74

Profit brought forward from previous year 4732.53 3835.43

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Profit available for appropriations 6887.49 5560.17

APPROPRIATIONS:

Proposed dividend 630.00 560.00

Corporate dividend tax 104.64 96.17

Transferred to general reserve 215.49 172.47

Profit carried forward 5937.36 4732.53

6887.49 5560.17

Company Description:

Incorporated in 1998, IGL took over Delhi City Gas Distribution Project in 1999 from GAIL

(India) Limited (Formerly Gas Authority of India Limited). The project was started to lay the

network for the distribution of natural gas in the National Capital Territory of Delhi to

consumers in the domestic, transport, and commercial sectors. With the backing of strong

promoters-GAIL(India)Ltd. And Bharat petroleum Corporation Ltd. (BPCL)- IGL plans to

provide natural gas in the entire capital region.

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CHAPTER 2:

INDUSTRY OVERVIEW

STRUCTURE OF INDIAN ENERGY SECTOR:

Energy has been universally recognized as one of the most important inputs for economic growth

and human development. There is a strong two-way relationship between economic development

and energy consumption. On one hand, growth of an economy, with its global competitiveness,

hinges on the availability of cost-effective and environmentally benign energy sources, and on

the other hand, the level of economic development has been observed to be reliant on the energy

demand.

Energy intensity is an indicator to show how efficiently energy is used in the economy. The

energy intensity of India is over twice that of the matured economies, which are represented by

the OECD (Organization of Economic Co-operation and Development) member countries.

India’s energy intensity is also much higher than the emerging economies—the Asian countries,

which include the ASEAN member countries as well as China. However, since 1999, India’s

energy intensity has been decreasing and is expected to continue to decrease.

This could be attributed to several factors, some of them being demographic shifts from rural to

urban areas, structural economic changes towards lesser energy industry, impressive growth of

services, improvement in efficiency of energy use, and inter-fuel substitution. Indian Energy

Sector fulfils around 90% of the energy requirements in India. The majority of India energy

needs are fulfilled by energy from coal. The inadequacy in the supply of energy is balanced out

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by energy imports from other countries. The India energy scenario shows a drift in the energy

balance mainly due to the differed energy sources in India.

The India energy policy states the measures taken by the Government of India to meet all the

energy requirements and deal with the energy crisis India might face if proper energy policy and

energy management is not undertaken.

These include mass energy conservation and efficient use of energy. Also various energy zones

have been demarcated for large-scale energy harvesting and then using it efficiently by energy

conversion to other more usable forms of energy by using various energy conversion devices.

The study of energy in India includes:

TYPES OF ENERGY:

Non-Renewable Energy: Petroleum, Natural Gas and Coal

Renewable Energy: Solar Energy, Hydroelectric Energy, Wind Energy, Nuclear Energy, Tidal

Energy, Hydrogen Energy, Wood Energy, Energy from Biomass or Bio-fuel, Chemical Energy

and Geothermal Energy.

SOURCES OF ENERGY IN INDIA

The various energy resources used in India include fossil fuels providing petroleum and

natural gas and coal mining that cater to the coal energy demands in India.

The sun is the source for solar energy that is converted to electrical energy using solar

panels.

The vast water resources in and around India are utilized by conversion of the kinetic

energy from the flowing water as in waterfalls and the dams built on various rivers into

electric energy.

The energy of the tides and tidal waves is also utilized for electrical energy harvesting.

The usage of wind energy comes in the form of windmills and huge wind energy farms

for generation of usable energy forms by transformation of the kinetic energy of the wind

into energy units.

Other sources of energy in India include biomass energy by burning bio-fuels available in

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large quantities owing to the huge domestic cattle population in India.

Energy is also derived from the vast timber resources of the country. This forms the wood

energy.

Nuclear energy or atomic energy from radioactive materials has been developed into a

vast industry in itself.

Geothermal energy is an unlimited natural energy source that utilizes the steam from hot

water springs that acts as energy boosters to drive turbines of power plants.

The various chemicals are used for chemical energy generation used in batteries.

Even the hydrogen available in large quantities in the environment has been captured and

utilized as an energy source by reacting hydrogen with oxygen.

The energy sector in India has been receiving high priority in the planning process. The total

outlay on energy in the Eleventh Five-year Plan is Rs.854123 crores (19%) at 2006/07 prices, &

for annual plan of year 2009/10 it is Rs.115574 crore.In the recent years, the government has

rightly recognized the energy security concerns of the nation and more importance is being

placed on energy independence.

In the recent years, India’s energy consumption has been increasing at one of the fastest rates in

the world due to population growth and economic development. India’s commercial energy

demand is expected to grow more than 4% per year rapidly than in the past as it goes down the

reform path in order to raise standards of living. A large part of India's population does not have

access to commercial energy. Despite the overall increase in energy demand in India is still very

low compared to other developing countries.

India is well-endowed with both exhaustible and renewable energy resources. Coal, oil, and

natural gas are the three primary commercial energy sources. India’s energy policy, till the end

of the 1980s, was mainly based on availability of indigenous resources. Coal was by far the

largest source of energy. However, India’s primary energy mix has been changing over a period

of time.

Despite increasing dependency on commercial fuels, a sizeable quantum of energy requirements

(40% of total energy requirement), especially in the rural household sector, is met by non-

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commercial energy sources, which include fuel wood, crop residue, and animal waste, including

human and draught animal power. However, other forms of commercial energy of a much higher

quality and efficiency are steadily replacing the traditional energy resources being consumed in

the rural sector.

Resource augmentation and growth in energy supply has not kept pace with increasing demand

and, therefore, India continues to face serious energy shortages. This has led to increased

reliance on imports to meet the energy demand.

With the recently held INDIA ENERGY CONGRESS in New Delhi, certain predictions were

being discussed regarding the demand and availability of energy resources in India in coming

days. The Integrated Energy Policy Report prepared by Planning Commission, Govt. of India,

has estimated Energy

supply and demand for India till 2032 and concluded that a significant d emand-supply g ap is

expected to build in future. Considering GDP growth of 8% per annum, the demand for oil is

estimated to be over 480 Million Tonne (MT) by 2032 as against production of 35 MT. With

this alarming demand-supply gap the import dependency will be rising, having an overall impact

on the economy. For Natural Gas, the demand is estimated at around 600

MMSCMD while the domestic production would meet only 50% of the demand. Coal will

continue to play a major role in meeting energy requirement of the country. Bu t even so, against

a demand of over 1000 MTOE, domestic production is expected to be only around 550 MTOE.

India is the 5 largest energy consumers in the world but per capita primary energy consumption

is only 375 kgoe, t h whereas China stands at 1511 k go e and the world average is 1687 kgoe.

India has 17% of world’s population but only 0.8% of world’s known oil & gas resources. With

the present production rate, the current recoverable reserves in oil, natural gas and coal would

serve the country for 21 yrs, 36 yrs and 114 yrs respectively. Currently over 70% of India’s

energy needs are being met by imports. The energy requirement is expected to grow in the

coming years and it is projected that India would become the 3rd

largest energy consumer by 2020, after US & China.

Recent concerns about climate change are challenging traditional thinking or approach. Energy

shortages can disrupt economic development, so a well – diversified portfolio of domestic or

imported traded fuels and energy services is required. This challenge relates to the long-term

continuity of supply as well as to the short-term quality of service

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These and other similar issues require a re-assessment of supply potential of the different energy

sources already available today or to be developed in the near future. What is the right energy

mix for the years to come?

Challenges regarding efficient use of fossil fuels:

Transforming primary energy into an end-use ready energy product is becoming an increasingly

challenging process. Given the high cost of energy, this process must be as efficient as possible.

It must also be efficient in using other natural resources, such as land and water, and be as clean

as possible. The final uses of energy, in particular, hydrocarbon-based fuels, must also be

efficient as that will also reduce the carbon emissions. There are solutions already in existence

addressing these impacts and others are being developed. Given India's fossil fuel dependence,

and the continuance of coal usage over the foreseeable future from an energy security

perspective, it is essential for the government to mandate use of more efficient and commercially

proven thermal generation technologies while also contributing to global efforts in developing

viable advanced technologies such as for carbon capture and storage, IGCC etc.

Indian scenario

India, the world’s fifth largest consumer of primary energy, is struggling to supply additional

energy to fuel its economic growth. The Indian energy requirement shall keep pace with growing

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GDP during the next few decades. Currently, coal is the primary source of energy for the nation,

followed by oil. Natural gas comes in next but with a small share in the energy basket.

The country’s heavy dependence on coal and oil for 85% of the energy is a concern from the

environment as well as energy security perspective.

Natural gas first came into picture around 1980 in India, when natural gas exploration was

started at Bombay High oil fields by ONGC. Until then, whatever natural gas was found

anywhere was flared up, in the absence of knowledge about its value. Now, companies have

even started looking for non- associated gas fields.

Share of natural gas, as a primary energy source, is expected to grow from 8 % in 2004 to around

23% in 2032 in the overall basket. As per the India Hydrocarbon Vision 2025, the natural gas.

demand is expected to be 313mmscmd by 2011- 12

While India has significant natural gas reserves, its domestic supply is not likely to keep pace

with demand and the country needs to import significant amounts of gas either as LNG or via

pipeline.

As of now (till 2009), India has been importing over 20% of its natural gas requirement. New

sources of gaseous fuel like coal bed methane (CBM) will be opened up, with the advent of the

NELP (new exploration licensing policy) and CBM policies.

INDIAN GAS SECTOR:

Owing to the climate change concerns worldwide, the emphasis on clean energy is

increasing day by day. Natural gas, with its inherent environment-friendly nature, is assuming

greater significance in the energy sector.

Share of natural gas in India’s energy basket has gradually increased to 9%. Although it is still

low, compared to the world average of 24%, the steep growth in demand coupled with recent

increase in supplies owing to the large discoveries on the east coast has instilled the confidence

that the natural gas contribution in Indian energy sector will significantly increase. The likely

increase of share of gas in consumption pattern in Indian context is further supported by the fact

that only around 20% of India’s sedimentary basin has been explored.

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Demand for natural gas has been increasing world over due to increase in energy requirements &

being environment friendly. Natural gas, accounting for 24% of the total global primary energy

supply, is the third largest contributor to the global energy basket. The global gas markets are

integrating rapidly & the new market structures are evolving. More importantly, the Asian gas

markets are leading the growth in global sector, with special investment focus on countries like

India & China. With China’s energy demand growing by 15% & India’s by 7.8%, these two

Asian giants are projected to be the leading gas consumers by the end of the year 2020.

LNG has been one of the key drivers of the global gas market integration. With an almost 75%

increase in liquefaction capacities from 87 MMTPA to more than 150 MMTPA over the past 10

years, share of LNG in global gas trade has grown from 14% to 26%. By meeting the buyers’

expectations through price & contractual flexibilities, destination flexibilities LNG trading has

emerged as a truly global & mature business.

At the same time, trans-national gas pipeline have continued to be a dominant gas supply option,

especially between contiguous nations, & have emerged as a dominant integrating factor. The

Iran-Pakistan-India pipeline & the Turkmenistan-Afghanistan-Pakistan-India pipeline are

receiving the highest attention from the concerned Governments.

MAJOR KEY PLAYERS IN INDIAN GAS SECTOR

Oil And Natural Gas Corporation (ONGC)

Hindustan Petroleum Company Ltd (HPCL)

Bharat Petroleum Corporation Ltd (BPCL)

Gail (India) Limited

Indian Oil Corporation (IOC)

Reliance India Limited (RIL)

Gujarat State Petroleum Corporation Limited (GSPCL)

British Gas Limited

Indian Oil & Gas Industry

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Recent developments in Indian oil and gas market.

In the last two years, India has reported 21 oil and gas discoveries, including major gas finds in

the Krishna-Godavari Basin by Reliance-Niko Consortium and Cairn Energy, in Vasai by

ONGC, near Surat by Niko and most recently in Rajasthan by Cairn Energy.

The total discoveries in the last two years amount to over 800 million metric tonnes of oil and oil

equivalent gas. The Cairn Energy discovery is the largest oil discovery in the country in the last

20 years. The discoveries in recent years are significant in terms of gas finds as you can replace

one energy fuel with the other. As of now, India produces around 65-70 metric million standard

cubic meters per day (MMSCMD) of gas as against the requirement of 120 MMSCMD, which is

60 per cent of the requirement.

The discoveries being more in gas, we can be buoyant and bullish about the prospects. The

discovery of gas by Reliance Industry on the eastern shore in the Krishna-Godavari basin is

estimated to be 10-14 trillion cubic feet (TCF) of gas, which translates into 25-35 MMSCMD.

This is a huge amount.

The gas in the block held by Reliance could be a little more than estimated. The second major

discovery is of (Cairn Energy’s) Lakshmi in the Gulf of Cambay with about 3 MMSCMD and

from Ravva satellite field off Andhra Pradesh coast there has been an increase in production of

gas. There have been a number of other small discoveries in the eastern shore by the Oil and

Natural Gas Corporation (ONGC), as also on the western shore.

We also have gas from Myanmar, on the border with India, to look forward to. It is estimated

that the offshore block, in which two state-owned companies have 30 per cent equity stake, is

around four to six trillion cubic feet as of now. Some estimate that this could be as much as 14-

42 TCF. We are studying to bring this gas to India and are working on the pipeline for this.

Lastly, India has developed two liquefied natural gas (LNG) terminals. One is the Petro net LNG

at Dahej, which has been commissioned to supply 17 MMSCMD gas. This could be doubled

very shortly. We also have the Shell terminal in Hazier, which would be providing us 8-10

MMSCMD gas once it is commissioned by the year-end.

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In addition, India is increasingly being viewed as an aggressive spot LNG buyer. The recent gas

discovery in the Krishna-Godavari (KG) Basin has also raised hopes of increase in domestic

natural gas production in the future.

The Iran- Pakistan-India pipeline proposal, after a long period of uncertainty, now seems to be

moving forward. As regards the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline,

India’s prospects as a partner are now looking brighter. The recent approval of a market-evolved

price for the gas from the Krishna-Godavari basin has set a good precedent for the development

of market-determined pricing for natural gas in the country.

Internationally, the petrochemicals industry has been one of the drivers of industrial

development, constituting 40% of the global chemicals market. World over, the petrochemicals

industry is integrated with the refineries/gas sector.

Although India’s present petrochemicals production and consumption is small by global

standards, it is amongst the fastest growing markets in the world. India’s per capita consumption

is 5 kg as against the world average of 25 kg.

During 2007-08, to ease the financial burden on the public sector oil marketing companies

(OMCs) arising out of controlled domestic prices of petrol, diesel, PDS kerosene and domestic

LPG in the face of spiraling crude oil and petroleum product prices in the international market,

the Government of India had raised the prices of petrol and diesel marginally.

Besides this, the Government also issued oil bonds to the OMCs to partially compensate for the

losses suffered by them on account of inadequate pass-through of prices to the consumers.

The government has issued bonds worth Rs 10,305 crores for 2008-09 to the three state-owned

oil marketing companies — Indian Oil Corporation (IOC), Hindustan Petroleum Corporation

(HPCL) and Bharat Petroleum Corporation (BPCL) — partially compensating their revenue

losses arising from the sale of fuel at government-determined rates, which are often below the

cost. The three public sector oil companies lost about Rs 103,300 crores in 2008-09 by selling

the four fuels below cost price. The government has issued oil bonds worth Rs 60,967 crores to

the three companies so far. They have also received discounts worth Rs 32,000 crores from state-

owned upstream companies ONGC, IOC and Gail India on the purchase of raw materials such as

crude oil and liquefied petroleum gas (LPG).

The prevalent scheme of subsidies and pricing has resulted in a huge price-insensitive demand

expansion for these products.

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The Ministry of Petroleum & Natural Gas has set up a corpus fund of Rs. 100 crores, with

contributions from the national oil companies and the Oil Industry Development Board, to

undertake Hydrogen research activities with Indian Oil’s R&D Centre as the nodal agency. The

proposal of setting up the Petroleum, Chemicals & Petrochemicals Investment Regions (PCPIRs)

is another important initiative by the Government of India. By offering a transparent and

investment-friendly policy and facility regime, PCPIRs aim to attract major investment, both

domestic and foreign, in these key industry segments. The Indian hydrocarbon sector spends

around Rs. 200-250 crores on R&D every year, which is meager, compared to its annual turnover

of over Rs. 4, 00,000 crores. In the context of globalization and the need for improving energy

efficiency and developing indigenous technology and alternative fuels, the expenditure on R&D

efforts needs to be scaled up substantially, with enhanced participation from the private sector

players.

Risks and concerns;

The oil and gas corporations have been suffering losses due to price controls on the four

principal petroleum products.

The subsidies received from the Government, discounts from upstream companies and

the oil bonds issued by the Government only partially offset these losses. Due to lag in

receipt of oil bonds, the borrowings have increased considerably.

However, due to the contribution of the Government and the Reserve Bank of India in

relaxing lending norms to the oil companies, the Corporations are able to maintain crude

oil imports and payment obligations.

With strain on liquidity, while there is no let-up in the ongoing projects, new projects are

being undertaken on priority and strategic need. IGL’s and IOC’s exploration &

production (E&P) business portfolio has increased steadily over the years. However, with

no major breakthrough as yet, the risks normally associated with such investments linger

till commercial discoveries are made, which are expected to be clear in another couple of

years down the line.

The other big challenge in the medium term will be to make sure that funds are available

for the large capex plans that the company needs for its strategic growth in the future.

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One big project is the 15 mt refinery-cum- petrochemical project at Paradip on the east

coast — resources need to be found to go ahead with the project

Challenges and Opportunities

A growing economy and a dynamic industry present a number of opportunities and challenges to

the Corporations as a key energy supplier. With increasing globalization and competition in the

sector, the challenge the Corporations face is in transforming into the least-cost supplier of

quality products and services to customers.

In addition, the Companies are also considering entering into other energy sub-sectors to

complement its own line of business.

With RIL’s gas flowing, Mahan agar Gas — India’s biggest city gas distributor — is in

expansion mode to transport the gas from south Mumbai to suburbs such as Bhayandar, Mira

Road, Navy Mumbai and Thane. The company is investing over Rs 2,200 carors to lay the

infrastructure and add new connections. Others like IGL, RIL, Indraprastha Gas, Sabarmati Gas,

Green Gas, Avantika Gas and HPCL are also expanding their networks.

In the recent years, the IGL has been making efforts to tap opportunities across the entire value

chain of the oil & gas business. It has forged strategic alliances in the E&P sector. Having

successfully entered the petrochemicals sector, it has ambitious plans for the future.

IGL and other oil and gas companies have a very eye on rival oil companies, globally as well as

within India, that are growing through acquisitions of oil producing companies and assets. With

oil prices at record highs, these acquisitions do not come cheap. One treasure chest that has been

held in reserve for such needs, are Indian Oil’s and IGL’s staking in sister oil company ONGC.

Worth about Rs 18,000 crores at last count, companies hope to be able to tap into this, if push

comes to shove. Overall, as we head into election year and oil price increases seem more and

more unlikely the debt funding shall increase for oil and gas companies.

GAS DEMAND

On the background of fast GDP growth, & the economic reforms process in India, the Indian

Natural Gas Sector is showing signs of accelerated growth driven by a number of demands pull

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factors. The current consumption of about 100 MMSCMD of gas in India is primarily shared by

the power & fertilizer sector to the tune of 42% & 31% respectively. This is followed by

petrochemical – 4%, city gas- 4%, CNG -- 4%.The consolidated gas demand by 2011-12 is

estimated to be 283 MMSCMD.

GAS SUPPLY

On the gas supply side, the domestic supplies would be primarily driven by the expected supply

from the KG Basin by RIL in 2009-10. The supplies projected by ONGC in the next 5 years are

expected to fall. The supplies from the private players/JVs are expected to increase primarily due

to gas supply by RIL from 2009-10 onwards & by GSPC looking at the overall demand

projections & the expected domestic supplies; there would be a supply shortfall.

GNITMS


CHAPTER 3:

ORGANISATION STUDY

Indraprastha Gas Limited (IGL) the sole supplier of Compressed Natural Gas (CNG) and Piped

Natural Gas (PNG) in the National Capital Territory of Delhi today announced its audited annual

financial results for 2010-11. The company’s gross turnover has increased to Rs. 1952 crores in

FY 11 from Rs. 1213 crores in FY 10, thereby showing a growth of 61 %. The net profit in FY

11 showed a growth of 20% going up from Rs 215.5 crores in FY 10 to Rs. 259.77 crores.

During 2010 - 11, total sales volume grew by 28% over the previous year. The average daily gas

sale during the year has gone up to 2.75 mmscmd from 2.14 in the previous year. The board has

recommended a dividend of 50% for consideration of the members in Annual General Meeting.

In Q4 of 2010-11, the company’s net profit for the quarter increased from Rs. 51.49 crore in

corresponding period last year to Rs 69.16 crore in FY’11. During this period, IGL registered a

turnover of Rs. 566 crore as compared to Rs. 324 crore in the corresponding period last year

thereby registering a sales value growth of 75% in financial terms. There has been an overall

sales volume growth of 32% over the corresponding quarter in the last fiscal. Product wise, CNG

recorded sales volume growth of 16%, while PNG recorded sales volume growth of 136% in the

quarter as compared to last year.

3.1: Company Profile

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IGL has already embarked on a massive expansion programme in NCT of Delhi as well

As NCR. There has been a major increase in demand due to all round conversion of

Vehicles to CNG and increased acceptability of PNG as a domestic fuel. Capex of over

Rs 3000 crore has been earmarked for expansion of the infrastructure in Delhi, Noida,

Greater Noida and Ghaziabad for the next five years.

IGL is currently on a fast track expansion of its infrastructure. 278 CNG stations have

already been commissioned by IGL. Over 60,000 new domestic PNG connections are

planned to be added in 2011-12 taking the total number of domestic PNG connections in

Delhi, Noida, Greater Noida and Ghaziabad to over 3lakh. Over 30 new CNG stations

have also been planned to be added in the region.

The role of IGL in checking the vehicular pollution in Delhi is well acknowledged both at

national as well as international forums. IGL has well laid out its city gas distribution

infrastructure in Delhi, Noida, Greater Noida and Ghaziabad which consists of over 4500

Kms of pipeline network. The network has connected nearly 2,50,000 households and

commercial establishments. IGL is meeting fuel requirements of over 4 lakh vehicles

running on CNG in NCR.

HISTORY:

Indraprastha Gas Limited (IGL), incorporated in 1998, is a public sector undertaking, engaged

in distribution of Compressed Natural Gas (CNG) and Piped Natural Gas (PNG) in Delhi.It is

among the top 500 Indian companies by market capitalization.

The transport sector uses natural gas as Compressed Natural Gas (CNG), the domestic and

commercial sectors use it as Piped Natural Gas (PNG) and R-LNG is being supplied to industrial

establishments.

IGL took over Delhi City Gas Distribution Project in 1999 from GAIL (India) Limited

( Formerly Gas Authority of India Limited).The Project was started to lay the network for the

distribution of natural gas in the National Capital Territory of Delhi to consumers in the

domestic, transport, and commercial sectors. The company started with 9 CNG stations and 1000

GNITMS


PNG consumers. Today, the company has crossed 163 CNG stations and 1,22,000 domestic and

300 commercial PNG customers.

IGL is amongst the first few companies in India to commercialize the use of Compressed Natural

Gas (CNG) for the automotive sector. They were the sole producer and marketer of Compressed

Natural Gas to the automotive sector in the National Capital Territory of Delhi (NCT of Delhi),

which includes the capital of India. The company has entered into a joint venture with Site

Energy to set up City Gas Distribution Projects at Son pat and Pan pat located at Haryana.

With the backing of strong promoters- GAIL (India) Ltd. and Bharat Petroleum corporation

Ltd.(BPCL)-IGL plans to provide natural gas in the entire capital region.

The two main business objectives of the company are-

To provide safe, convenient and reliable natural gas supply to its customers in the

domestic and commercial sectors.

To provide a cleaner, environment-friendly alternative as auto fuel to Delhi's residents.

This will considerably bring down the alarmingly high levels of pollution.

3.2:VISION of IGL

To be the leading clean energy solutions provider, committed to stakeholder value

enhancement, through operational excellence and customer satisfaction.

This Vision statement signifies five major attributes for the organization:

Commitment to environment.

Providing complete energy solutions thereby going beyond CNG for transport and PNG for

cooking applications.

Enhancing value for the stakeholders including customers, shareholders and employees.

Achieving excellence in our operations.

Providing satisfaction to the customers.

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MISSION:

To accelerate and optimize the effective and economic use of Natural Gas and its fractions to the

benefit of national economy.

STRATEGY:

IGL aims to further expand its core business of Natural Gas Transmission & Marketing, to

capture larger share of the growing market. IGL wishes to move upstream to secure gas supplies

for the core transmission business. Additionally, investments in petrochemicals and city gas

distribution are being planned to enhance margins and increase sources of revenue. Further, the

company is exploring and investing in international opportunities with a strategic rationale of

gaining international presence.

3.4: SWOT ANALYSIS:

Strengths:

IGL has been given marketing exclusivity in NCT of Delhi for three years w.e.f. January

1, 2011

As per the Petroleum and Natural Gas Regulatory (PNGRB) regulations. IGL has

network exclusivity up to December 2025 in the NCT area.

Supply is secured as the Company has been allocated 2.7 mmscmd of regular supply.

IGL has continuous adopted the latest technology as a result of which the quality of its

products has also improved.

Lower debt in the books along with healthy return ratios gives confidence in the

Company’s ability to raise debt for future expansion.

GNITMS


Weaknesses:

Future expansion activities would be dependent on ability to secure additional gas

supplies.

Opportunities:

CNG is replacing traditional fuels like petrol & diesel. CNG is about62% cheaper

than Petrol and about 40% cheaper than diesel.

Introduction of Radio Taxis and high capacity buses running on CNG in Delhi along

with increase in number of CNG variant models by car manufacturers presents a

significant opportunity for the company.

Shift towards usage of PNG by industrial and commercial segment.

Threats:

Competition from other players is possible after December 2011 as the company’s

marketing exclusivity is valid till December 2011 only.

Alternative modes of transport like metro rail posses a threat.

MARKET POSITION:

Indraprastha Gas Ltd (IGL) was incorporated in the year 1998. It is promoted by GAIL (India)

Ltd., Bharat Petroleum Corporation Ltd (BPCL) and Government of Delhi. IGL is into retail gas

distribution business. It supplies Compressed Natural Gas (CNG) to transport sector, Piped

Natural Gas (PNG) to domestic as well as commercial sector and Re-gasified Liquid Natural Gas

(R-LNG) to industrial sector in National Capital Territory (NCT) of Delhi and National Capital

Region (NCR) towns.

Expanding its already strong presence in New Delhi.

GNITMS


CNG-IGL supplies CNG to transport sector in NCT of Delhi and NCR towns from FY10,

company also started supplying CNG in Ghaziabad. Total number of CNG stations during FY10

went up to 241 from 181 in the previous year. IGL's CNG sales volume grew by 15% to around

695 mmscm in FY10.

PNG- Demand for PNG has been increasing due to environmental benefits, better quality, low

maintenance cost and increasing difference in price of LPG and PNG. IGL's PNG sales volume

grew by 60-92% y-o-y to 87 mmscm in FY10. As of 31st March 2010, company has provided

connections to 182000 domestic and 355 industrial customers.

GNITMS


PNG -A Typical Gas Supply Scheme

R-LNG segment-IGL provides R-LNG to industrial sector in NCT of Delhi and NCR towns in

FY10 the company supplied R-LNG to 21 customers in Delhi. It also started supplying R-LNG

to Noida and Greater Noida during FY10.

GNITMS


Secured gas supplies-

IGL has tie-ups with GAIL, BPCL, and Reliance Energy for regular gas supplies, It required

around 782 mmscm of gas during FY10 which was fulfilled by these companies.

KEY RISKS

Volatile gas prices

Government regulation in respect of price and distribution network.

Stock Performances vis-a –vis market

Returns(%)

YTD 1-m 3-m 12-

m

IGL 55 9 3 74

NIFTY 12 1 -1 19

Note;

1) YTD returns are since April 1, 2010 to Dec 20, 2010.

2) 1-m, 3-m, and 12-m returns are up to Dec 20, 2010.

BUSINESS OVERVIEW:

IGL (India) Ltd, a truly dominant gas major, has been turning out disciplined financial

performance with excellence in project management, service quality and customer satisfaction.

Building on with business strength, IGL has set its future vision to be a “Dominant company in

Natural gas business.

GNITMS


BUSINESS PORTFOLIO:

Natural Gas:

PIPELINE PROJECTS:

IGL is supplying piped gas to around 1.33 lac domestic, 313 commercial, 15 small industrial

consumers and CNG to over 2.50 lac vehicles through 164 CNG stations in Delhi. IGL is also

operating three CNG stations in Noida, two CNG stations in Greater Noida, two in Ghaziabad,

three in Faridabad and four CNG stations in Gurgaon. IGL is the largest CGD entity in terms of

CNG sales and vehicles in India and is fast spreading its CGD network beyond its existing areas

of operations. IGL has received authorization from MOPNG for CGD in Delhi & its suburbs,

viz. NOIDA (Gautam Budh Nagar), Gurgaon & Faridabad.

PNGRB has authorized IGL for CGD in NCT of Delhi. Till date, IGL has made an investment of

Rs.727 crores. In view of the competing scenario, IGL has also submitted bid for the city of

Meerut and Sonepat in the bidding process initiated by PNGRB. GAIL has 22.5% stake in the

Company along with BPCL as equal partner.

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MAJOR ACTIVITIES IN 2010-2011:

Projects:

The PNG supply has also been extended to Sector 61 in Noida and Sector Sigma, Beta I, Alpha

of Greater Noida.

Your Company also started PNG supply for the first time in the town of Ghaziabad in Ram

Prasth colony during 2009-2010.

During 2010-11, the Company plans to extend its PNG distribution network to Chitrakoot, GTB

Enclave, Dwarka (Sector-8), Paschim puri, Rajender Nagar, Patel Nagar, Kirti Nagar,

Keshavpuram, Model Town, Derawal Nagar, Gujranwala Town, Mukharjee Nagar, Hakikat

Nagar, Kingsway Camp, Tagore Park, Outram Lines, Punjabi Bagh(E), Rajouri Garden, Hari

Nagar, Ashok Nagar, Yamuna Vihar, Preet Vihar, Geeta Colony in NCT of Delhi.

In Noida, your Company has planned to spread out its network in Sectors 33, 34, 35, 39, 50, 51

and 52. And in Greater Noida Company shall extended its PNG network.

GNITMS


During the year the Company added 44,000 PNG connections and 40 commercial customers. As

on 31 st March 2010, the Company has provided PNG connections to over 182,000 domestic and

more than 355 commercial customers.

R-LNG BUSINESS:

IGL is presently supplying R-LNG to 21 industrial consumers in Delhi. Your Company has also

started supplying R-LNG to the industrial segment in Noida and Greater Noida and these cities

shall contribute major volumes of gas sale in industrial segment from 2010-2011 onwards. In the

city of Ghaziabad also, the work of extending supply to industrial and commercial segment is

progress and supplies shall commence during the year 2010-11.

IGL has already tied up with GAIL and BPCL for gas supply for meeting the demand of this

segment.

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FUTURE OUTLOOKe:

NCT OF DELHI:

IGL has drawn out plans to further consolidate its presence in the NCT of Delhi by investing

Rs.915 million during the financial year 2010-11 for CNG expansion.

CNG being an eco-friendly and economical fuel, a large number of private car manufacturers are

introducing their CNG variants. Due to wide acceptance of CNG, there has been a large-scale

conversion of private cars into CNG mode. This segment will give a boost to CNG sales in the

coming years.

IGL has planned a large expansion in PNG segment. A capital expenditure of Rs.1940 million

has been earmarked for augmenting infrastructure in the existing areas as well as for expansion

in new areas of Delhi during the financial year 2010-11. The Company has plans to provide new

PNG connections to over 50000 domestic households.

EXPANSION PROJECTS IN NATIONAL CAPITAL REGION (NCR):

IGL has planned capital investment of Rs. 2400 million for the NCR town of Noida, Greater

Noida & Ghaziabad to augment its CNG and PNG infrastructure.

IGL plans to tap prospective industrial users of natural gas in industrial segment in these towns

in the coming years.

PRICING MECHANISM OF NATURAL GAS:

SOURCING OF GAS: GAIL THE SOLE SUPPLIER

On the gas-sourcing front, which is an important aspect of the CGD business, IGL has a supply

agreement with GAIL. GAIL is the sole supplier of Administrative Price Mechanism (APM)

natural gas to the company. IGL has signed a Gas Purchase Agreement for 2.0 MMSCMD (1.9

MMSCD for CNG and 0.1 MMSCMD forPNG) with GAIL , which was valid till CY 2010 and

extendable on mutually agreed terms.

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GAS SOURCE FOR IGL:

Suppliers Region Contracted Supply (MMSCMD)

GAIL NCT OF Delhi 2

GAIL Noida, Greater Noida 0.2

GAIL Faridabad 0.25

GAIL Gurgaon 0.25

RIL - 0.15

BPCL - 0.24

IGL has further been allocated 0.7 MMSCMD of natural gas by the Ministry of Petroleum and

Natural Gas (MoPNG) to expand in NCR cities. Gas is received at various points of the Hazira-

Bijaipur-Jagdishpur (HBJ) pipeline around Delhi. As the gas cost is denominated in Rupee

terms, IGL is insulated from exchange risks. The gas is currently available at subsidized prices,

which is called APM prices. However, as per the gas pricing order, APM prices are to be revised

upwards by 20% p.a. for four years to align it with market determined prices.

IGL’s pricing Strategy in CNG and PNG segment

The selling price of CNG/PNG is determined by adding network changes and marketing margin

to the cost of natural gas. Government does not interfere in fixing the selling price. The gas

regulator Petroleum and Natural Gas Regulatory Board (PNGRB) has capped the return rate on

the pipeline network operation at 14% of capital employed on a pre-tax basis.

CNG pricing details as on February 2011:

Particulars Unit Delhi

Gas cost (A) Rs./Kg 12.95

Network charges (B) Rs./Kg 4.6

Compression Charges (c) Rs./Kg 6.66

Corporate Tax (D) Rs./Kg 0.23

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Marketing Margin (E=F-A-B-C-D) Rs./Kg 0.85

Selling price (F) Rs./Kg 25.29

Excise 14.42% Rs./Kg 3.66

Consumer price(charged to customers) Rs./Kg 29.00

Similarly, in the domestic PNG segment the price is indexed to the administered retail selling

price of domestic LPG (14.2 Kg) cylinder in the NCT. In the small commercial users segment,

PNG is indexed to commercial LPG (19Kg) cylinder in the NCT of Delhi, taking in to account

the respective heating values of natural gas and LPG. Large commercial users are the PNG users

replacing Light Diesel Oil (LDO) and commercial LPG. Thus, price in the segment is indexed to

weighted average price of LDO and commercial LPG in the NCT taking into account the

respective heating values of gas, LPG and LDO.

INVESTMENT RATIONALE:

Marketing exclusivity makes IGL a monopoly player until jan 2012:

In January 2009 PNGRB (Petroleum and Natural Gas Regulatory Board) has allotted to the

Company marketing exclusivity for Compressed Natural Gas Distribution for 3 years in the NCT

of Delhi, Also the company was allotted network exclusivity for 25 years.

Strong demand for CNG in NCT-Delhi:

The Government of NCT of Delhi has directed all Light Commercial Vehicles (LCVs) operating

in NCT of Delhi to convert to CNG mode. The company has drawn up plans to augment its

infrastructure to meet the growing demand of CNG.

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Ability to pass on cost inflation:

In the past IGL has successfully been able pass on the incremental cost to the end users. It has

gradually hiked the CNG prices from Rs 19/kg in June 2009 to Rs 29/Kg currently. Even post

price hike, CNG is much cheaper than Petrol and Diesel retail prices.

Robust Capex plan to tap the market:

Indraprastha Gas has 3 years marketing exclusivity and also has 25 years of network exclusivity.

Hence the company has taken an aggressive capex plan. The company has planned a capex of Rs

6.0 billion in FY 11 and also Rs 6 billion each in FY 12 and FY 13E for the expansion of its

CNG as well as its PNG network.

Margin differential to remain a key entry barrier for new players:

The government has allocated 2MMSCMD of gas to Indrapratha Gas ltd at APM rate of USD

4.2 per MMBTU. The current market rate for natural gas is around USD 12 to 13 per MMBTU.

Post the lapse of the marketing exclusivity clause in NCT-Delhi for Indrapratha gas it will

continue to be a margin differentiator between IGL and the new players.

Valuation:

We have valued the stock on weighted average of stock price arrived based on three different

valuation parameters. On a PE basis we arrived at a value of Rs 370/share @ 25% weight; On

Discounted Cash Flow based analysis we arrived at value of Rs 365/share @ 50% weight. On the

third parameter EV/EBITDA we arrived at a value of Rs 360/share @ 25% weight. Based on the

weighted average target stock price thus arrived, at Rs. 365 per share, we recommend BUY on

Indraprastha Gas Ltd. With an investment horizon of 12 to 15 months.

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CHAPTER-4

WORKINK CAPITAL MANAGEMENT:

“Working capital, also called net working current assets, is the excess of current liabilities .All

organizations have to carry working capital in one form or the other. The efficient management

of working capital is important from the point of view of both liquidity and profitability. Poor

management of working capital means that funds are unnecessarily tied up in idle assets hence

reducing liquidity and also reducing the ability to invest in productive assets such as plant and

machinery, so affecting the profitability.”

Working Capital Management may be defined as the management of firm’s sources and uses of

working capital in order to maximize the wealth of the shareholders. The proper working capital

management requires both the medium term planning (say upto three years) and also the

immediate adaptations to changes arising due to fluctuations in operating levels of the firm.

A firm should maintain a sound working capital position and there should be optimum

investment in working capital, working capital refers to the administration of current assets,

namely cash, marketable securities, debtors, stock (inventories) and current liabilities.

Working Capital Management is the process of planning and controlling the levels and

mix of Current Assets of the company as well as financing the asset. It may be regarded as the

life blood of the business, its effective provision can do much to ensure the success of a business,

while its inefficient management may lead not only to loss of profits but loss to ultimate

downfall in a going concern.

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Analysis of working capital is of major importance to internal and external analysis

because it is closely related to the current day to day operations. Many times Working Capital

refer to Circulating Capital. Here circulating capital means those assets changed with relative

rapidity from one form to another.

The importance of Working Capital can better be understood by the word of

V.E.Ramamurthy:- “Working capital is one segment of capital structure of the business and

constitutes an inter woven part of the total integrated business system.”

Concepts of Working Capital:

There are two concepts of Working Capital generally we take into account. Such as Gross

Working capital and Net Working Capital.

Gross Working Capital:

It refers to the firm’s investments in Current Assets. Current Assets ate the assets which

can be easily converted into cash within an accounting year. It includes Cash, Short-term

securities, debtors and Bills receivables.

Net Working Capital:

It refers to the difference between Current Assets and Current Liabilities. Current

liabilities are those claims of outsiders which are expected to mature for payment within an

accounting year and includes Creditors (accounts payables) , Bills payable, outstanding

expenses.

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On the basis of time:

Fixed or permanent working capital:

The volume of investment in current assets an change over a period of time. But always

there is minimum level of current assets that must be kept in order to carry on the business. This

is the irreducible minimum amount needed for maintaining the operating cycle. It is the

investment in current assets. Which is permanently locked up in the business, and therefore

known as permanent working capital.

Variable/temporary working capital:

It is the volume of working capital. Which is needed over and above the fixed working

capital in order to meet the unforced market changes and contingencies. In other words any

amount over and about the permanent level of working capital is variable or fluctuating working

capital. This type of working capital is generally financed from short ter souse of finance such as

bank credit because this amount is not permanently required and is usually paid back during off

season or after the contingency.

BALANCED WORKING CAPITAL POSITION

The firm should maintain a sound working capital position. It should have adequate working

capital to run its business operations. Both excessive as well as inadequate working capital

positions are dangerous from the firm’s point of view.

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Excessive working capital means holding costs and idle funds, which earn no profits for the firm.

The dangers of excessive working capital are as follows:

• It results in unnecessary accumulation of inventories. Thus, chances of inventory

mishandling, waste, theft and losses increase.

• It is an indication of defective credit policy and slack collection period. Consequently,

higher incidence of bad debts results, which adversely affects profits.

• Excessive working capital makes management complacent which degenerates into

managerial inefficiency

• Tendencies of accumulating inventories tend to make speculative profits grow. This may

tend to make dividend policy liberal and difficult to cope with in future when the firm is

unable to make speculative profits.

DETERMINANTS OF WORKING CAPITAL

Nature of business:

The working capital requirement of the firm is closely related to the nature of its business. A

service firm, like an electricity undertaking or a transport corporation, which has a short

operating cycle and which sells predominantly on cash basis, has a modest working capital

requirement. On the other hand, a manufacturing concern like a machine tools unit, which has a

long operating cycle and which sells largely on credit, has a very substantial working capital

requirement.

Seasonality of Operations:

Firms, which have marked seasonality in their operations usually, have highly fluctuating

working capital requirements. If the operations are smooth and even throughout the year the

working capital requirement will be constant and will not be affected by the seasonal factors.

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Production policy:

A firm marked by pronounced seasonal fluctuations in its sales may pursue a production policy,

which may reduce the sharp variations in working capital requirements.

Market Conditions:

The market competitiveness has an important bearing on the working capital needs of a firm.

When the competition is keen, a large inventory of finished goods is required to

Promptly serve customers who may not be inclined to wait because other manufacturers are

ready to meet their needs. In view of competitive conditions prevailing in the market, the firm

may have to offer liberal credit terms to the customers resulting in higher debtors. Thus, the

working capital requirements tend to be high because of greater investment in finished goods

inventory and account receivables. On the other hand, a monopolistic firm may not require larger

working capital. It may ask customer to pay in advance or to wait for some time after placing the

order.

Condition of Supply:

The time taken by a supplier of raw materials, goods, etc. after placing an order, also determines

the working capital requirement. If goods as soon as or in a short period after placing an order,

then the purchaser will not like to maintain a high level of inventory of that good. Otherwise,

larger inventories should be kept e.g. in case of imported goods.

Business Cycle Fluctuations:

Different phases of business cycle i.e., boom, recession, recovery etc. also affect the working

capital requirement. In case of recession period there is usually dullness in business activities and

there will be an opposite effect on the level of working capital requirement. There will be a fall

in inventories and cash requirement etc.

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Credit policy:

The credit policy means the totality of terms and conditions on which goods are sold and

purchased. A firm has to interact with two types of credit policies at a time. One, the credit

policy of the supplier of raw materials, goods, goods, etc., and two, the credit policy relating to

credit which it extends to its customers. In both the cases, however, the firm while deciding the

credit policy has to take care of the credit policy of the market. For example, a firm might be

purchasing goods and services on credit terms but selling goods only for cash. The working

capital requirement of this firm will be lower than that of a firm, which is purchasing cash but

has to sell on credit basis.

Operating Cycle:

Time taken from the stage when cash is put into the business up to the stage when cash is

realized. Thus, the working capital requirement of a firm is determined by a host of factors.

Every consideration is to be weighted relatively to determine the working capital requirement.

Further. The determination of working capital requirement is not once a while exercise; rather a

continuous review must be made in order to assess the working capital requirement in the

changing situation. There are various reasons, which may require the review of the working

capital requirement e.g., change in credit policy, change in sales volume, etc.

Objectives of Working Capital Management:

There is a twofold objective of the Working Capital Management.

• Maintenance of Working Capital and

• Availability of ample funds at the time of need.

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The basic goal of Working Capital Management is to manage each of the firm’s Current Assets

and Current Liabilities in such a way that an acceptable level of net working capital is always

maintained in the business. As a matter of fact, a business can not survive in the absence of a

satisfactory ratio between its current assets and current liabilities. Management is setting policies

with respect to general operations, purchasing, financing, expansion and dividend must work

with the limitation set by the working capital position.

Thus, the objective is to ensure the maintenance of satisfactory level of working capital in such a

way that it is neither inadequate nor excessive. It should not only be sufficient to cover the

current liabilities but should ensure a reasonable margin of safety also.

ESTIMATING WORKING CAPITAL NEEDS

• Current Assets Holding Period. To estimate working capital requirements on the basis

of average holding period of current assets and relating them to costs based on the

company’s experience in the previous years. This method is essentially based on the

operating cycle concept.

• Ratio of Sales. To estimate working capital requirements as a ratio of sales on the

assumption that current assets change with sales.

• Ratio of Fixed Investment. To estimate working capital requirements as a percentage of

fixed investment.

Risks in working capital management

Two types of risk are inherent in Working Capital Management such as risk of liquidity and

opportunity loss. A firm has to take judicious mix of these risks and plan for contingencies.

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Liquidity risk:

It is the non availability of cash to pay liabilities that falls due. Even so it can cause not only loss

of reputation but also make condition favourable for getting the best terms on transactions with

outside world. Hence the need for:

Cash forecasting or Cash budgeting to plan short term supply and demand;

Inventory of cash and near cash quick assets;

Power to draw or borrow in emergency situations- planned instant resources for

contingencies;

Opportunity loss:

The other risk in the working capital management is the risk of opportunity loss-the risk of

having too much or too little inventory to maintain production and sales, the risk of not granting

adequate credit for realizing the achievable level of sales. In other words, the risk of opportunity

loss is the risk of not being able to produce more or sale more on both. And therefore not being

able to earn the potential profit, because there were not enough funds to support locked up or

deployed in the four stock variables of the gross operating cycle- the three inventories of raw

material, work-in-process and finished goods and book debts. The higher is the cost of funds

deployed and therefore lesser the profit.

Thus, management of these four types of assets or working capital involves trade-off between

risk and profitability.

Sources of working capital

The company can choose to finance its current assets by

• Long term sources

• Short term sources

• A combination of them.

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Long term sources of permanent working capital include equity and preference shares,

retained earnings, debentures and other long term debts from public deposits and financial

institution. The long term working capital needs should meet through long term means of

financing. Financing through long term means provides stability, reduces risk or payment. And

increases liquidity of the business concern. Various types of long term sources of working capital

are summarized as follows:

Issue of shares:

It is the primary and most important sources of regular or permanent working capital.

issuing equity shares as it does not create and burden on the income of the concern. Nor the

concern is obliged to refund capital should preferably raise permanent working capital.

Retained earnings:

Retain earning accumulated profits are a permanent sources of regular working capital. It

is regular and cheapest. It creates not charge on future profits of the enterprises.

Issue of debentures:

It creates a fixed charge on future earnings of the company. Company is obliged to pay

interest Management should make wise choice in procuring funds by issue of debentures.

Long term debt:

Company can raise fund from accepting public deposits, debts from financial institution

like banks, corporations etc. the cost is higher than the other financial tools. Other sources sale of

idle fixed assets, securities received from employees and customers are examples of other

sources of finance.

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Short term sources of temporary working capital:

Temporary working capital is required to meet the day to day business expenditures. The

variable working capital would finance from short term sources of funds. And only the period

needed. it has the benefits of ,low cost and establishes closer relationships with banker.

Some sources of temporary working capital are given below:

Commercial bank:

A commercial bank constitutes a significant sources for short term or temporary working

capital . This will be in the form of short term loans, cash credit, and overdraft and though

discounting the bills of exchanges.

Public deposits:

Most of the companies in recent years depend on these sources to meet their short term

working capital requirements ranging from six month to three years.

Various credits:

Trade credit, business credit papers and customer credit are other sources of short term

working capital. Credit from suppliers, advances from customers, bills of exchanges, promissory

notes, etc helps to raise temporary working capital

Reserves and other funds:

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Various funds of the company like depreciation fund. Provision for tax and other provisions kept

with the company can be used as temporary working capital. The company should meet its

working capital needs through both long term and short term funds. It will be appropriate to meet

at least 2/3 of the permanent working capital equipments form long term sources, whereas the

variables working capital should be financed from short term sources. The working capital

financing mix should be designed in such a way that the overall cost of working capital is the

lowest, and the funds are available on time and for the period they are really required.

Some of the decision taken in Working Capital Management is:-

• An adequate supply of raw materials.

• Cash to meet the operational payments.

• The ability to grant credit to customers.

• The capacity to wait for market for its finished products.

• Investments in various current assets.

• Appropriate source of fund to finance current assets.

• Proportion of long term and short term funds to finance.

Working Capital Limits

FUND BASED CREDIT LIMITS:

4.1. CASH CREDIT/ PACKING CREDIT:

The cash credit facility is similar to the overdraft arrangement. It is the most popular method of

bank finance for working capital in India. Under the cash credit facility, a borrower is allowed to

withdraw funds from the bank up to the cash credit limit. He is not required to borrow the entire

sanctioned credit once, rather, he can draw periodically to the extent of his requirement and

repay by depositing surplus funds in his cash credit account. Cash credit limits are sanctioned

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against the security of current assets. Cash credit is the most flexible arrangement from the

borrower’s point of view.

2. DISCOUNTING OF BILLS

Under the purchase or discounting of bills, a borrower can obtain credit from a bank against its

bills. The bank purchase or discounts the borrower’s bills. The amount provided under this

agreement is covered within the overall cash credit or overdraft limit. Before purchasing or

discounting the bills, the bank satisfies itself as creditworthiness of the drawer. Though, the item

“bills purchased” implies that the bank becomes owner of the bill. In practice, bank hold bills as

security for the credit. When a bill is discounted, the borrower is paid the discounted amount of

the bills, (visa, full amount of bill minus the discount charged by the bank). The bank collects

full amount on maturity.

NON FUND BASED CREDIT LIMITS:

1. LETTER OF CREDIT

Commonly used in international trade, the letter of credit is now used in domestic trade as well.

A letter of credit, or L/C, is used by a bank on behalf of its customers (buyer) to the seller. As per

this document, the bank agrees to honor drafts drawn on it for the supplies made to the customer

if the seller fulfills the conditions laid down in the L/C.

The L/C serves several useful functions:

• It virtually eliminates credit risk, if the bank has a good standing.

• It reduces uncertainty, as the seller knows the conditions that should be fulfilled to

receive payment.

• It offers safety to the buyer who wants to ensure that payment is made only in conformity

with the conditions of the L/C.

2. BANK GUARANTEE

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Bank Guarantee is very similar to Letter of credit but it is provided for much longer period

compared to letter of credit. Bank Guarantee funds very small portion of working capital

BANK FINANCE FOR WORKING CAPITAL

Banks are the main institutional sources of working capital finance in India. After trade credit,

bank credit is the most important source of financing working capital requirements. A bank

considers a firm’s sales and production plans and the desired levels of current assets in

determining its working capital requirements. The amount approved by the bank for the firm’s

working capital is called credit limit. Credit limit is the maximum funds which a firm can obtain

from the banking system.

In the case of firms with seasonal businesses, banks may fix separate limits for the peak level

credit requirement and normal, non-peak level credit requirement indicating the periods during

which the separate limits will be utilized by the borrower. In practice, banks do not lend 100

percent of the credit limit; they deduct margin money. Margin requirement is based on the

principle of conservatism and is meant to ensure security. If the margin requirement is 30

percent, bank will lend only up to 70 percent of the value of the asset. This implies that the

security of bank’s lending should be maintained even if the asset’s value falls by 30 percent.

Forms of Bank Finance

A firm can draw from its bank within the maximum credit limit sanctioned. It can draw funds in

the following forms:

• Overdraft

• Cash credit

• Bills purchasing or discounting

• Working capital loan

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Overdraft. Under the overdraft facility, the borrower is allowed to withdraw funds in excess of

the balance in his current account up to a certain specified limit during a stipulated period.

Though overdrawn amount is repayable on demand, they generally continue for a long period by

annual renewals of the limits. It is a very flexible arrangement from the borrower’s point of view

since he can withdraw and repay funds whenever he desires within the overall stipulations.

Interest is charged on daily balances – on the amount actually withdrawn – subject to some

minimum charges. The borrower operates the account through cheques.

Cash credit. The cash credit facility is similar to overdraft arrangement. It is the most popular

method of bank finance for working capital in India. Under the cash credit facility, a borrower is

allowed to withdraw funds from the bank up to the sanctioned credit limit. He is not allowed to

borrow the entire sanctioned credit once; rather, he can withdraw periodically to the extent of his

requirements and replay by depositing surplus funds in his cash credit account. There is no

commitment charge, therefore, interest is payable on the amount actually utilized by the

borrower. Cash credit limits are sanctioned against the security of current assets.

Purchase or discounting of bills. Under the purchase or discounting of bills, a borrower can

obtain credit from a bank against its bills. The bank purchases or discounts the borrower’s bills.

The amount provided under this agreement is covered within the overall cash credit or overdraft

limit. Before purchasing or discounting the bills, the bank satisfies itself as to the

creditworthiness of the drawer. Though the term ‘bills purchased’ implies that the bank becomes

owner of the bills, in practice bank holds bills as security for the credit. When a bill is

discounted, the borrower is paid the discounted amount of the bill (viz., full amount of bill minus

the discount charged by the bank). The bank collects the full amount on maturity.

Letter of credit. Suppliers, particularly the foreign suppliers, insist that the buyer should ensure

that his bank would make the payment if it fails to honour its obligation. This is ensured through

a letter of credit (L/C) arrangement. A bank opens an L/C in favour of a customer to facilitate his

purchase of goods. If the customer does not pay to the supplier within the credit period, the bank

makes the payment under the L/C arrangement.

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Working capital loan. A borrower may sometimes require ad hoc or temporary accommodation

in excess of sanctioned credit limit to meet unforeseen contingencies. Banks provide such

accommodation through a demand loan account or a separate non-operable cash credit

account.

Security Required in Bank Finance

Banks generally do not provide working capital finance without adequate security. The following

are the modes of security which a bank may require.

Hypothecation. Under hypothecation, the borrower is provided with working capital finance by

the bank against the security of movable property, generally inventories. The borrower does not

transfer the property to the bank; he remains in the possession of property made available as

security for the debt. Thus, hypothecation is a charge against property for an amount of debt

where neither ownership nor possession is passed to the creditor.

Pledge. Under this arrangement, the borrower is required to transfer the physical possession of

the property offered as a security to the bank to obtain credit. The bank has a right of lien and

can retain possession of the goods pledged unless payment of the principle, interest and any other

expenses is made. In case of default, the bank may either

• Sue the borrower for the amount due, or

• Sue for the sale of goods pledged, or

• After giving due notice, sell the goods.

Mortgage. Mortgage is the transfer or a legal or equitable interest in a specific immovable

property for the payment of a debt. In case of mortgage, the possession of the property may

remain with the borrower, with the lender getting the full legal title. The transferor of interest

(borrower) is called the mortgager, the transferee (bank) is called the mortgagee, and the

instrument of transfer is called the mortgage deed.

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Lien. Lien means right of the lender to retain property belonging to the borrower until he repays

credit. It can be either a particular lien or general lien. Particular lien is a right to retain

property until the claim associated with the property is fully paid. General lien, on the other

hand, is applicable till all dues of the lender are paid. Banks usually enjoy general lien.

REGULATION OF BANK FINANCE

Banks have been following certain norms in granting working capital finance to companies.

These norms have been greatly influenced by the recommendations of various committees

appointed by the Reserve Bank of India from time to time. The norms of working capital finance

followed by bank since mid 70’s were mainly based on the recommendations of the Tandon

Committee. The Chore Committee made further

Recommendations to strengthen the procedures and norms for working capital finance by banks.

TANDON COMMITTEE

In August 1975, Reserve Bank of India appointed a study group under the chairmanship of Mr.

P.L. Tandon, to make the study and recommendations on the following issues:

• Can the norms be evolved for current assets and for debt equity ratio to ensure

minimum dependence on bank finance?

• How the quantum of bank advances may be determined?

• Can the present manner and style of lending be improved?

• Can an adequate planning, assessment and information system be evolved to ensure a

disciplined flow of credit to meet genuine production needs and its proper supervision?

The observations and recommendations made by the committee can be considered as below:

• Norms: The committee suggested norms for inventory and accounts receivables as many

as 15 industries excluding heavy engineering industry. These norms suggested, represent

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maximum level of inventory and accounts receivables in each industry. However, if the

actual levels are less than the suggested norms, it should be continued.

The norms were suggested in the following forms:

• For Raw Materials: Consumption in months.

• For Work in Progress: Cost of production in months.

• For Finished Goods: Cost of sales in months.

• For Receivables: Sales in months.

It was suggested that the industrial borrowers having an aggregate limits of more than Rs. 10/-

Lakhs from the banks should be subjected these norms initially and later it can be extended even

to the small borrowers.

• Methods of Borrowings: The committee recommended that the amount of bank credit

should not be decided by the capacity of the borrower to offer security to the banks but it

should be decided in such a way to supplement the borrower’s resources in carrying a

reasonable level of current assets in relation to his production requirement. For this

purpose, it introduced the concept of working capital gap, i.e., the excess of current

assets over current liabilities other than bank borrowings. It further suggested three

progressive methods to decide the maximum limits according to which banks should

provide finance.

Method I: Under this method, the committee suggested that the banks should finance maximum

to the extent of 75% of working capital gap, remaining 25% should come from long-term funds,

i.e., own funds and term borrowings.

Method II: Under this method, the committee suggested, that the borrower should 25% of

current assets out of long-term funds and the banks provide the remaining finance.

Method III: Under this method, the committee introduced the concept of core current assets to

indicate permanent portion of current assets and suggested that the borrower should finance the

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entire amount of core current assets and 25% of the balance current assets out of long-term funds

and the banks may provide the remaining finance.

It was further suggested that if the actual bank borrowings are more than the maximum

permissible bank borrowings, the excess should be converted into a term-loan to be amortized

over a suitable period depending upon the cash generating capacity.

• Style of Lending: The committee suggested that the cash credit limit should be

bifurcated into two components, i.e., Minimum level of borrowing required throughout

the year should be financed by way of a term loan and the demand cash credit to take care

for fluctuating requirements. It was suggested that both these limits should be reviewed

annually and that the term loan component should bear slightly a lower arte of interest so

that the borrower will be motivated to use least amount of demand cash credit. The

committee also suggested that within overall eligibilities, a part of the limits may be in

the form of bill limits (to finance the receivables) rather than in the form of cash credit.

• Credit Information Systems: In order to ensure the receipt of operational data from the

borrowers to exercise control over their operations properly, the committee recommended

the submission of quarterly report system, based on actual as well as estimations, so that

the requirements of working capital may be estimated on the basis of production needs.

As such, the borrowers enjoying total credit limits aggregating Rs. 1 crore and above

were required to submit certain statements in addition to monthly stock statements and

projected balance sheet and profit and loss account at the end of the financial year. The

working capital limits sanctioned were to be reviewed on annual basis. Within the overall

permissible level of borrowing, the day-to-day operations were to be regulated on the

basis of drawing power.

• Follow up, Supervision and Control: In order to assure that the assumptions made

while estimating the working capital needs still hold good and that the funds are still

being utilised for the intended purpose only. It was suggested that there should be proper

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system of supervision and control. Variations between the projected figures and actuals

may be permitted to the extent of 10% but variations beyond that level will require prior

approval. After the end of the year, credit analysis should be done in respect of new

advances when the banks should re-examine terms and conditions and should make

necessary changes. For the purpose of proper control, it suggested the system of borrower

classification in each bank within credit rating scale.

Norms for Capital Structure: As regards the capital structure or debt equity ratio, the

committee did not suggest any specific norms. It opined that debt equity relationship is a relative

concept and depends on several factors. Instead of suggesting any rigid norms for debt equity

ratio, the committee opined that if the trend of debt equity ratio is worse than the medians, the

banker should persuade the borrowers to strengthen the equity base as early as possible.

Action taken by RBI

According to the notification of RBI dated 21st August, 1975, RBI accepted some of the main

recommendations of the committee.

• Norms for Inventories and Receivables: Norms suggested by the committee were

accepted and banks were instructed to apply them in case of existing and new borrowers.

If the levels of inventories and receivables are found in excessive than the suggested

norms, the matters should be discussed with the borrower. If excessive levels continue

without justification, after giving reasonable notice to the borrowers, banks may charge

excess interest on that portion which is considered as excessive.

• Coverage: Initially, all the industrial borrowers (including small scale industries) having

aggregate banking limits of more than Rs. 10/- Lakhs should be covered, but it should be

extended to all borrowers progressively.

• Methods of Borrowing: RBI instructed the banks that all the covered borrowers should

be placed in Method I as recommended by the committee. However, all those borrowers

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who are already complying with requirements of Method II should not slip back to

Method I. As far as Method III is concerned, RBI has not taken any view. However, in

case of the borrowers already in Method II, matter of application of Method III may be

decided on case-to-case basis.

• Style of Credit: As suggested by the committee, instead of granting entire facility by

way of cash credit, banks may bifurcate the limit as (i) Term loan to take care of

permanent requirement and (ii) fluctuating cash credit. Within the overall limits, bill

limits may also be considered.

Information System: Suggestions made by the committee regarding the information system

were accepted by RBI and were made applicable to all the borrowers having the overall banking

limits of more than Rs. 1 Crore

The primary objective of working capital management is to ensure that sufficient cash is

available to:

• meet day-to-day cash flow needs;

• pay wages and salaries when they fall due;

• pay creditors to ensure continued supplies of goods and services;

• pay government taxation and providers of capital â€“ dividends; and

• Ensure the long term survival of the business entity.

It is critical to understand that Profit is not Cash. A company can be very profitable but it can

collapse simply because it has insufficient cash/liquidity to pay its relevant bill (as stated

above),any company liabilities are settled with cash and not by profit.

Decisions relating to working capital and short term financing are referred to as working capital

management. These involve managing the relationship between a firm's short-term assets and its

short-term liabilities.

As above, the goal of Corporate Finance is the maximization of firm value. In the context of long

term, capital investment decisions, firm value is enhanced through appropriately selecting and

funding NPV positive investments. These investments, in turn, have implications in terms of

cash flow and cost of capital.

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The goal of Working capital management is therefore to ensure that the firm is able to operate,

and that it has sufficient cash flow to service long term debt, and to satisfy both maturing short-

term debt and upcoming operational expenses. In so doing, firm value is enhanced when, and if,

the return on capital exceeds the cost of capital; See Economic value added (EVA).

Adequate working capital

As I stated bout keeping adequate working capital is the mantas towards the success of

financial management. The term adequate working capital refuters to the amount of working

capital to be kept with the organization to met its daily operations. Large investment in fixed

assets not sufficient to run a business successfully. Adequate working capital is equally

important. Without working capita fixed assets are like a gun, which cannot shoot, as there are

no cartridges.

It is said that “inadequate working capital is a disastrous: where as redundant working

capital is a criminal waste.” It is clear that the company can’t invest all its funds in current assets

to increase working capital. at the same time it requires to keep sufficient funds with it. So a

proper leverage between both ends is needed to assure proper running of the business. It needs to

keep adequate working capital with it. Neither less nor more than needed.

Advantages of adequate working capital:

Adequate working capital provides certain benefits to the company they are:

• Increase in debt capacity and goodwill:

Adequate working capital represents the financial soundness of the company. If one

company is financially sound it would be able to pay its creditors timely and properly. It will

increase company’s goodwill. It crests confidence among investors and creditors. Thus a firm

with adequate working capital can raise requisite funds from market, borrow short term credit

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form banks, and purchases inventories of raw material etc., for the smooth operations of its

business.

Increase in production inefficiency:

With adequate working capital the firm can smoothly carryout research and development

actives and thus adds to it production efficiency.

Exploitation of favorable opportunities:

In the presence of adequate working capital, a company can avail the benefits of

favorable opportunities. Adequate working capital will help the company to have bulk purchases,

Seasonal storage of raw material etc., which would reduce the cost of production, thus adds to its

profit.

Meeting contingencies adverse changes:

A company can easily face certain business and economic crises a company having

adequate working capital can successfully meet contingencies such as business oscillations,

financial crisis arising from heavy losses etc.,

Available cash discount:

Maintenance of adequate working capital enables a company to avail the advantage of

cash discount by making cash payment for to the suppliers of raw materials and merchandise.

Obviously it will reduce the cost of production and increase the profit of the company.

Solvency and efficiency fixed assets:

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It helps to maintain the solvency of the company. So that payments could be made in

time as and when they fall due. Likewise, adequate working capital also increases the efficiency

for fixed assets insofar as their proper maintenance depends upon the availability of funds.

Attractive dividend to shareholders:

It enables the company to offer attractive dividend to the shareholders so that sense of

security and confidence will increase among them. It also increases the market values of its

shares.

Demerits of inadequate working capital:

Having inadequate working capital les to so many of dangers as it doesn’t fulfill its purpose.

Some are given below:

Loss of goodwill and creditworthiness :

As the firm fails to on or its current liabilities it loses it goodwill and creditworthiness

among its creditors. Consequently, the firm finds it difficult to procure the requisite funds for its

business operations on easy terms, which ultimately results in reduced profitability as well as

production interruption.

Firm can’t make use of favorable opportunities:

The firm fails to undertake the profitable projects, which not only prevent the fir from

availing the benefits of favorable opportunities but also stagnate its growth.

Adverse effects of credit opportunities:

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The firm also fails to avail the attractive credit opportunities but also stagnate its growth.

Operational inefficiencies:

In leads the company to operating inefficiencies, as day to day commitments cannot be met.

Effects on financial capacity:

Inadequacy of working capital also weakness the shock absorbing capacity of the firm

because it cannot meet the contingencies arising form business oscillations, financial losses, due

to shortage of working capital.

Non achievement of profit target:

The firm cannot implement operational plans due to unavailability of fund. Which will

lead to non achievement of profit margin?

Dangers of redundant working capital:

As the inadequate working capital is dangerous to the firm, redundant working capital

also brings hazardous condition in to the company. Let us discuss the dangers of redundant

working capital to the company.

Low rate of return on capital:

Excessive or redundant working capital implies the presence of idle funds that earn no

profit to the firm. So it cannot earn a proper rate of return on its total investments, whereas

profits are distributed on its total investment, whereas profits are distributed on the whole of its

capital.

Decline in capital and efficiency:

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Since the rate of return on capital is low the company tempts to make some adjustment to

inflate profit to increase the dividend. Sometimes this unearned dividend paid out of the

company’s capital to keep up the show of prosperity by window dressing of accounts. Certain

Provision, such as provision for depreciation, repairs and renewals are into made. This leads to

decline in operating efficiency of the firm.

Loss of goodwill and confidence:

Lower rate of return leads to lower dividend available to share holder. This leads to down

fall in market value of the company’s share and markets the shareholder lose their confident in

company.

Evils of over capitalization:

Excessive working capital is often responsible for giving birth to the situation of

overcapitalization in the company with all its evils. Over capitalizations is not only disastrous to

the smooth survival of the company but also interests of those associated with the company.

Destruction of turnover ratio:

It destructs the control over turnover ratio. Which is commonly used in the conduct of an

efficient business?

It is evident from the foregoing discussion that a company must have adequate working

capital pursuant to its requirements. It should neither be excessive not inadequate. Both

situations are dangerous. While inadequate working capital adversely affects the business

operations and profitability. Excessive working capital remains idle and earns no profits for the

company. So company must assure its working capital is adequate for its operations.

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Considering Working Capital of IGL, I have analyzed three things such as Inventory

management, Receivable management and Cash management of IGL in order to get its

short term financial position.

4.2: Inventory Management :

As we very well know that IGL is the producer of NATURAL GAS & is in business of

the same, it has a strong demand for these products both in domestic markets. So it has to

maintain proper inventory in order to meet the demand of the products.

Inventory management in general involves a trade-of between the costs associated with

keeping inventory versus the benefit of holding inventory. Higher inventory results in increased

cost from storage, insurance, spoilage and interest on borrowed funds needed to finance

inventory acquisition. However, an increase in inventory lowers the possibility of loss of sales

due to stock outs and the incidence of production slowdowns from inadequate inventory.

Just-in-time (JIT) requires that the specified materials be in the place of manufacture or

assembly at the appropriate time to minimize excess inventory and to reduce wastage and

expense. JIT succeeds when there are a limited number of transactions; few “disturbances” due

to unscheduled downtime, depending instead on periodic maintenance; the grouping of

production processes to reduce the movement of work-in-process; and a significant focus on

quality control (QC). QC minimizes downtime and the holding of buffer or safety stock to

replace defective materials. In traditional JIT, the company owns the inventory of components

and parts, assuring access as the next production operation begins. New economy JIT places the

materials at the manufacturing or assembly site, but title remains with the vendor until

production begins. This relationship requires suppliers to optimize the stock of inventory,

holding only those items that have been specified or are known to be required based on a

statistical analysis of purchasing history. Both the provider and the user of materials are forced to

develop a strong partnering attitude and minimize the adversarial stance often observed between

purchasing counterparties.

Objectives of Inventory Management in IGL:

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• To ensure continuous supply of materials, spares & finished goods.

• To avoid both over-stocking & under-stocking of inventory.

• To maintain investments in inventories & the optimal level as required by the operational

& sales activities.

• To keep material cost under control so that they contribute in reducing cost of production

& overall costs.

• To eliminate duplications in order or replenishing stocks. This is possible with the help of

centralizing purchases.

• To minimize loses through deterioration, pilferage wastage and damages.

• A clear cut accountability should be fixed at various level of organization.

Effective Inventory Management:-

• A system to keep track of inventory

• A reliable forecast of demand

• Knowledge of lead times

Reasonable estimates of

• Holding cost

• . Ordering costs

• . Shortage costs

- A classification system

Raw Materials/Purchased Components.

Product Diversity. The greater the variety of products that a company manufactures, the greater

the amount of raw materials and components that it must keep on hand. For each type of product,

the company needs to have a minimum stock of materials and components on hand. This is

especially true when the company’s finished products have few if any components in common.

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Commonality of components contributes considerably to the minimization of inventory. An

excellent example of this is the automobile industry. Many different models of cars actually

have many components, including the frames, in common. In fact, there are many different

models of cars that are actually the same car, despite different appearances and perceptions of

quality.

Supply Chain Management. Technology has had a dramatic impact on inventory management

and has resulted in drastic reductions in all forms of inventory. When a company goes online

with its vendors; its product needs are automatically communicated to those vendors

electronically. This shortens lead times, reduces mistakes, and accelerates the supply process.

Greater competitive intensity forces suppliers to provide faster delivery of high-quality products.

Safety stock can be reduced when quality problems are reduced.

Concentration / Diversity of Vendors Technology, especially the business-to-business (B2B)

capabilities of the Internet, has created both incredible supply chain turmoil and incredible

opportunity at the same time. Internet hookups between vendor and customer give that vendor a

considerable competitive advantage, assuming that the vendor’s performance remains at the

highest quality levels. On the other hand, product web sites and transportation logistics have

created a nationwide supply market. Companies used to buy product from relatively local

vendors. Now they can access the Internet and locate suppliers all over the country. The intensity

of the resulting competition, along with very dependable transportation support from companies

like Federal Express and UPS leads to lower purchase costs, shorter lead times, and less

inventory.

4.3: Accounts receivables :

It arises due to the credit sales affected by the firm. While it may appear advisable to sale

against cash only, conditions in the market like a highly competitive one, might compel a

company to give credit in order to affect sales. Moreover, extending the credit often result in

higher sales and hence higher profits. These receivables are influenced by a number of factors

like credit policy, market strategy, pricing policy, type of buyers, credit allowed by the

competitors, etc.

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Receivable management in IGL:

IGL has strong demands of products both in domestic markets. The Company is generating

60% of total sales through export sales and remaining through domestic sales. As per the sale

order dispatch instruction received from the marketing office for export/domestic sale the

dispatch department segregates and prepares the materials for dispatching the same by Pipelines

for domestic sale & through ship in case of foreign sales. The material is handed over to the

transporter. On completion of dispatch of the consignment as per dispatch advice, the dispatch

department sends all the dispatch documents with delivery invoice & copy of L.R. to the finance

department. On the basis of this the finance department makes commercial invoice which takes

care of taxes and other duties over and above the cost of product and sends it to the marketing

office which may be in the form of Banker’s cheque, bank draft or in the form of letter of credit

opened by the buyer. The buyer opens a letter of credit with its banker and sends to the banker of

IGL for execution of sales order.

SHORT-TERM INVESTMENTS-

WORKING CAPITAL LOAN:

Now a day RBI plays a role of regulator, rather than exercising a great deal of control over the

functioning of commercial banks. It lays down policies and frames broad guidance within which

the banks are allowed to formulate their own policies for implementation at their end.The broad

guidance of RBI to various areas of functioning such as deposits, cash management and credit. In

earlier days, when credit was scarce RBI controlled the bank in a significant manner through

various control measures. Credit authorization scheme which come into operation way back in

nov, 1965 was one such scheme which directly exercised a check on advances granted by banks

to large borrowers. Under the scheme prior authorization from RBI was necessary before

sanctioning any fresh credit limit of Rs 1.00 cr or more to any single party or limit that would

take the total limit enjoyed by such party to entire bank system to Rs 1.00 Cr or more. The main

objectives to the scheme were as under:

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• To ensure that additional bank credit is in conformity with the approved and priorities

and that the bigger borrowers do not preempt scarce resources.

• To enforce financial discipline on the larger borrowers, where necessary, on uniform

principles.

• Where borrowers are financed by more than one bank, to ensure that the customer’s

proposal is assed in the light of the information available with banks.

• To bring about improvement in the techniques of credit appraisal by banks and their

system of follow up.

As a major policy changed announced by RBI on 8th Oct 1988, the existing system of prior

authorization by RBI under credit authorization scheme for sanction of working capital limits/

term loans above the prescribed cut-offs point was renamed as ‘Credit Monitoring Arrangement’

(CMA) and reserve bank assumed to sanction of term loans as

Well as working capital limits beyond stipulated level. Thus banks were required to report to the

RBI for post sanction scrutiny any sanction/renewal of credit limits to borrowers enjoying

working capital facilities (funded) of Rs 10 Cr and above and sanction of additional limits to the

existing borrowers which would take their total fund based limits from the entire banking system

to Rs. 10 Cr and above. Similarly, reporting for post sanction scrutiny was compulsory for all

sanctions of term loans of Rs. 5 Cr and above from entire banking system.

The reporting under CMA was basically to serve the same objective as was being served under

CAS. However, due to changing scenario banks were given more and more freedom to carry out

their operations. On the basis of recommendation of three groups set up bye RBI and also the

internal inventories as also receivables keeping in view the production/processing cycle of the

industry as well as financial and other relevant parameters of the borrowers. Guidelines relating

to the mandatory formation of consortium were withdrawn and banks were given the discretion

to adopt the consortium/ syndication or multiple banking routes. The cash credit system which

facilitated to some extent preemption of credit was replaced by the loan system in the case of

large borrowers. Consistent with these measures, operational freedom to banks in more and more

areas granted and even the earlier prescription in of MPBF based on minimum current ratio

1.33:1 was withdrawn.

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New System of Reporting

In order to have database in relation of flow of bank credit to borrowers in various industries, a

new system has been brought into effect replacing earlier CMA. As per this system, bank should

report to reserve bank, in respect of borrowers availing of working capital credit or term loan

(including deferred payment guarantee) limit of Rs 10 Cr or above from the entire banking

system, on a fortnightly basis (i.e. from 1st to 15th and 16 th to last date of month)

additional/enhancement in credit limits or reduction therein effected, in prescribed Performa. In

respect of borrowers availing of working capital credit term loan limit (including deferred

payment guarantee) of Rs 1 Cr or above but less than 10 Cr from banking system, bank should

report monthly basis, again in prescribed proforma, giving industry wise break up of net

additional credit limits sanctioned. The fortnightly statement covering sanctions made during the

fortnight (i.e. between 1st and 15thand 16th to end of month) should be sent as to reach reserve

bank of India( IECD) positively by the end of the following week and the monthly statement

should be sent as to reach as to reach reserve bank before 15th of the month following the month

to which the report relates

How does IGL arrange working capital Loans from the banks?

Step 1:

• It approaches a bank for sanctioning of Working Capital Loan.

• For this the company has to submit the performance sheets for the last three years

& the Annual Report.

• Apart from this Company Profile, Industry Overview is to be submitted.

• 5 year CMA reports & other documents are also required to submit.

• Then Credit Rating Agency rates it worthiness as to find riskiness of repayment of

the Loan.

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Step 2:

• After the submission of all the relevant document the bank prepares Appraisal

Memorandum Note, in which It shows all the required information regarding the

company like –

• Company Background.(Company, group, promoters)

• Company’s operations & products.

• Production, sales information, manufacturing facolities.

• Key customers.

• Financial performance.

• Industry Scenario- Inter Company comparison.

• Working Capital Assessment.

• Historical Analysis.

• Loan policy guidelines.

• Deviations from Loan policy.

• Corporate governance practices.

• Credit Risk Factor & their mitigation.

Step 3:

• Bank delivers Sanction Letter with the discounted rates that are applicable to the

Company.

• Firstly the Bank mortgages on Company’s Inventories and Receivables as the

security of Working Capital Loan.

• Secondly it takes mortgage on Fixed Assets.

Then it instruct the Company to prepare –

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• Stock Statements for different Plants as per different Products produced by the

Company.

• Financial Follow up Report I- which is prepared quarterly basis.

• Financial Follow up Report II- which is prepared half yearly.

Documentation:

There are various documents need to be signed at the time of renewal or inducting any bank to

the consortium. The various documents are as below:

• Loan Agreement

• Hypothecation agreement for movable machinery

• Hypothecation agreement for movables and book debts

• Counter Indemnity

The above are the standard agreements asked for by the banks. There may be other additional

agreements asked for by some of the banks as per their internal guidelines. But no personal

guarantee papers should be signed.

The common seal has to be affixed on the documents, wherever necessary. The common seal has

to be witnessed by the Company Secretary and one of the directors of the Company.

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Joint Documentation:

Joint documentation is executed between the company and the consortium of banks for the

working capital facilities extended by the consortium to the company. The documents

comprising joint documentation are:

1) Working capital consortium agreement

2) Joint Deed of Hypothecation

3) Inter se Agreement between bankers

4) Letter of Authority to lead bank by other consortium banks

5) Letter of Authority to second lead bank by other consortium banks

6) Undertaking to create charge on the assets of the company.

After taking into all the provisional formalities JSL has to go for credit rating of its financial

instruments in order to check the credibility of the company to repay back the loan taken from

the Banks or from other Financial Institutions.

Documentation:

There are various documents need to be signed at the time of renewal or inducting any bank to

the consortium. The various documents are as below:

• Loan Agreement

• Hypothecation agreement for movable machinery

• Hypothecation agreement for movables and book debts

• Counter Indemnity

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The above are the standard agreements asked for by the banks. There may be other additional

agreements asked for by some of the banks as per their internal guidelines. But no personal

guarantee papers should be signed.

The common seal has to be affixed on the documents, wherever necessary. The common seal

has to be witnessed by the Company Secretary and one of the directors of the Company.

Joint Documentation:

Joint documentation is executed between the company and the consortium of banks for

the working capital facilities extended by the consortium to the company. The documents

comprising joint documentation are:

1) Working capital consortium agreement

2) Joint Deed of Hypothecation

3) Inter se Agreement between bankers

4) Letter of Authority to lead bank by other consortium banks

5) Letter of Authority to second lead bank by other consortium banks

6) Undertaking to create charge on the assets of the company.

After taking into all the provisional formalities JSL has to go for credit rating of its financial

instruments in order to check the credibility of the company to repay back the loan taken from

the Banks or from other Financial Institutions.

OPERATING CYCLE:

OPERATING CYCLE is the time duration required to convert sales, after the conversion

of resources into inventories, into cash.

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FINANCIAL PERFORMANCE OF IGL:

Gross turnover of 12131.31 million for the year ended March 31, 2011 showed a growth of 36%

over the previous year turnover of Rs.9621.37 million.

Profit before tax has been Rs.3244.38 million as against Rs.2588.60 million in the previous year.

Profit after tax has been Rs.2154.96 million as compared to Rs.1724.74 million in the previous

year.

SHARE CAPITAL:

Share capital of The IGL comprises Equity Share Capital of Rs.1,400 million.

RESERVES & SURPLUS:

Reserve & surplus of the IGL were Rs.7985.29 million as at March 31, 2011 as against

Rs.6854.49 million as at March 31, 2010 million as at against Rs.5434.17 million as at March 31,

2009.

EARNING PER SHARE:

Earnings per share for the financial year 2010-2011 have been Rs.15.39 compared to Rs.12.32 in

the previous

Indraprastha Gas Ltd Detailed Annual Results (2004 - 2011):

Standalone

ParticularsMar-11

(Rs.Cr)

Mar-10

(Rs.Cr)

Mar-09

(Rs.Cr)

Mar-08

(Rs.Cr)

Mar-07

(Rs.Cr)

Mar-06

(Rs.Cr)

Mar-05

(Rs.Cr)

Mar-04

(Rs.Cr)

Mar-03

(Rs.Cr)

Gross Sales 1,952 1,213 962 810 706 600 450 419 307

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Other Income 3 15 22 16 10 5 8 9 2

Total Income 1,754 1,099 879 729 624 526 458 428 309

Total Expenditure 1,252 697 553 406 359 307 266 250 189

PBIDT 502 402 326 323 265 219 192 178 120

Interest 13 0 0 0 0 2 3 7 8

PBDT 489 402 326 323 265 217 189 171 112

Depreciation 103 77 67 63 60 57 48 42 26

Tax 126 106 89 93 73 57 47 30 17

Deferred Tax 0 3 -3 -6 -5 -3 1 16 15

Reported Profit

After Tax 260 216 172 174 138 106 93 82 54

Extra-ordinary

Items 0 0 0 0 0 0 0 0 0

Adjusted Profit

After Extra-

ordinary item

260 216 172 174 138 106 93 82 54

EPS (Unit Curr.) 18.6 15.4 12.3 12.5 9.9 7.6 6.6 5.9 3.9

EPS (Adj) (Unit

Curr.) 18.6 15.4 12.3 12.5 9.9 7.6 6.6 5.9 NA

Calculated EPS

(Unit Curr.) 18.6 15.4 12.3 12.5 9.9 7.6 6.6 5.9 3.9

Calculated EPS

(Adj) (Unit Curr.) 18.6 15.4 12.3 12.5 9.9 7.6 6.6 5.9 NA

Calculated EPS

(Ann.) (Unit

Curr.)

18.6 15.4 12.3 12.5 9.9 7.6 6.6 5.9 3.9

Calculated EPS 18.6 15.4 12.3 12.5 9.9 7.6 6.6 5.9 NA

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(Adj) (Ann.) (Unit

Curr.)

Book Value (Unit

Curr.) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Dividend (%) 50.0 45.0 40.0 40.0 30.0 25.0 20.0 15.0 5.0

Equity 140 140 140 140 140 140 140 140 140

Reserve &

Surplus 863.9 685.5 543.4 436.5 327.5 238.7 172.5 111.8 53.3

Face Value 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0

Non-Promoter

Holding

Shares(Mn)

77 77 77 77 77 77 77 77 77

Non-Promoter

Holding (%) 55.00 55.00 55.00 55.00 55.00 55.00 55.00 55.00 55.00

PBIDTM(%) 28.77 37.28 38.26 45.82 43.21 42.01 42.72 42.40 39.21

PBDTM(%) 28.01 37.28 38.26 45.82 43.21 41.59 42.03 40.68 36.58

PATM(%) 14.89 19.99 20.22 24.71 22.47 20.38 20.60 19.60 17.59

4.4: INVESTMENT ANALYSIS:

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Mutual fund in India is a kind of instrument for investment of money. In mutual fund in India, a

large number of investors function through a fund manager who buys bonds or stocks.

The advantages of Mutual fund in India are that they are easy to make investments in and are

also very cost efficient. Depends on the objective of the funds like long term growth and low risk

factore or high income growth with high risk factor or low growth rate and stability of principal,

fund manager invests in respective fields on behalf of shareholders. For individual investors it is

very easy type of investment because someone else manages their funds, take care of accounts

and invest money over many different available securities.

TYPES OF MUTUAL FUND SCHEMES:

Open-ended mutual funds:

A fund operated by an investment company which raises money from shareholders and invests in

a group of assets, in a group of assets, in accordance with a stated set of objectives.

Open-end funds raise money by selling shares of the fund to the public, much like any other type

of company which can sell stock in itself to the public. Benefits of open-end funds include

diversification and professional money management.

Open-end fund offer choice, liquidity, and convenience, but charge fees and often require a

minimum investment.

Why Funds close:

An open-end mutual fund’s value is determined by the value of the underlying securities. In

cases where the share volume is determined to be excessive and unmanageable, the fund can be

closed with a new one then opened to investors.

Time Frame:

Open-end mutual funds have no time frame required for investors to remain in the fund.

Close-Ended schemes:

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Close-end mutual funds are mutual funds that trade like securities. As opposed to issuing new

shares when someone sends more money in for purchase, the buyer must find a seller usually

through a broker the same way she would buy or sell an individual stock. When open-end mutual

funds become too large, they can be closed and traded on a supply-and-demand scenario and

hold a price according to that demand and its profitability.

Short-term Investments -

Repurchase agreements (repo) A holder of securities sells these securities to an investor with

an agreement to repurchase them at a fixed price on a fixed date. The security “buyer”

effectively lends the “seller” money for the period of the agreement. Most repos are overnight.

Commercial paper Issued by large corporate borrowers and backed by the Credit worthiness of

the issuer. An alternative mechanism for borrowing that is usually less costly and more flexible

than bank loans.

U.S. Treasury bills The most liquid money market security, issued in maturities to one year, and

backed by the full faith and credit of the U.S. government. Other forms of U.S. Treasury

obligations include notes (with maturities of two to 10 years) and bonds (with maturities of 10 to

30 years).

Returns as on 10 June,

2011:

S

NO

.

SCHEME NAME AUM AS

ON 31ST

MARCH

2011

FUND

RATIN

G

PRE-TAX

RETURN (14

DAYS -

ANNUALISE

POST-

TAX

RETUR

N

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D)

1 DWS Ultra Short Term Fund-IP* 1621.06**

Crisil-

AAAf 9.08 6.86

2 Kotak Flexi Debt-IP* 1414.36

ICRA-

mfAAA 8.89 6.71

3

Principal Near Term Fund

Conservative* 1080.41

ICRA-

mfAAA 8.84 6.67

4 HDFC FRIF-STF-WP* 1736.68

ICRA-

mfA1+ 8.84 6.67

5

Sundaram Ultra Short Term-Super

IP* 1173.48

CARE-

AAA 8.82 6.66

6 Kotak Floater-Long Term* 2708.33

ICRA-

mfAAA 8.81 6.65

7

ICICI Prudential Flexible Income

Plan-Premium Plan* #######

Crisil-

AAAf 8.80 6.64

8

Canara Robeco Treasury

Advantage Fund-Super IP* 2294.09

ICRA-

mfAAA 8.78 6.63

9

Templeton Ultra Short Term

Bond Fund - Super IP* 3024.41

ICRA-

mfA1+ 8.77 6.62

10 Reliance Money Manager-IP* 8809.17

ICRA-

mfA1+ 8.73 6.59

11

HDFC Cash Mgmt-Treasury

Advantage-Wholesale* #######

ICRA-

mfAAA 8.69 6.56

12

UTI Treasury Advantage Fund-

IP* 9896.64

ICRA-

mfAAA 8.67 6.55

13 DSP Money Manager Fund-IP* 2275.01

ICRA-

mfAAA 8.65 6.53

14 L&T FI - STF - IP* 1352.90

Crisil-

AAAf 8.62 6.51

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* Funds with the new tax structure of 32.45% effective

from 01 june, 2011

** Aum as on 30th april, 2011

4.5: FINANCIAL RATIOS:

RATIOS: AN OVER VIEW

Financial ratio analysis is the calculation and comparison of ratios, which are derived from the

information in a company's financial statements. The level and historical trends of these ratios

can be used to make inferences about a company's financial condition, its operations and

attractiveness as an investment.

Financial ratios are calculated from one or more pieces of information from a company's

financial statements. For example, the "gross margin" is the gross profit from operations divided

by the total sales or revenues of a company, expressed in percentage terms. In isolation, a

financial ratio is a useless piece of information. In context, however, a financial ratio can give a

financial analyst an excellent picture of a company's situation and the trends that are developing.

A ratio gains utility by comparison to other data and standards. Taking our example, a gross

profit margin for a company of 25% is meaningless by itself. If we know that this company's

competitors have profit margins of 10%, we know that it is more profitable than its industry

peers which are quite favorable. If we also know that the historical trend is upwards, for example

has been increasing steadily for the last few years, this would also be a favorable sign that

management is implementing effective business policies and strategies.

RATIO ANALYSIS OF JSL

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Ratio Analysis is one of the powerful tools for financial analysis. I have studied and analyzed the

following ratio of JSL.

a. Liquidity Ratios

a. Activity Ratios

A. Liquidity Ratios : Liquidity ratios measure the short-term solvency, i.e., the firm’s

ability to pay its current dues and also indicate the efficiency with which working capital is

being used. Commercial banks and short-term creditors may be basically interested in the

ratios under this group.

Current Ratio= Current Assets

Current Liabilities

Quick Ratio = Current assets- Inventories

Current Liabilities

Inventory Turnover Ratio:

Inventory Turnover Ratio= Cost of goods Sold

Average Inventory

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Particulars FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E

Profitability Ratio

EBDITAM 45.4% 38.1% 37.2% 29.7% 28.2% 25.0%

PATM 25.3% 19.7% 20.0% 14.7% 13.3% 11.0%

ROCE 43.0% 35.7% 36.1% 27.4% 26.7% 23.2%

ROE 31.3% 24.8% 26.4% 25.2% 24.7% 21.7%

Capital structure ratios

Debt-Equity Ratio 0.00 0.00 0.00 0.30 0.36 0.42

Solvency Ratios

Current Ratio 1.58 1.69 1.27 1.33 1.08 1.11

Interest Coverage ratio 114.32 108.91 32.45 15.62 11.50

Valuation ratios

EPS (Rs) 12.89 12.12 15.55 18.06 21.03 22.73

CEPS (Rs) 17.36 16.93 21.08 26.59 33.26 37.26

BV/Share 41.17 48.82 58.98 71.74 87.88 104.76

Price/BV 5.26 4.18 3.40 2.85

P/E 19.93 16.74 14.0 12.9

OBJECTIVE OF RATIO ANALYSIS:

A ratio is a numerical relationship between one item and another. For the purpose of financial

statement analysis ratios are calculated between different items given in the financial statements.

• The ratio analysis would enable the computation of not only the present earning of the

business enterprises but also the estimation of the future earning capacity as well.

• The ratio analysis would also enable the management to find out the overall as well as

department wise efficiency of the firm on the basis of the available financial information.

• The management can easily locate the areas of efficiency.

• The solvency of the firm can be determined with help of ratio analysis.

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• Ratio analysis of past results in respect of earning and financial position of the enterprise

is of great help in forecasting the future results. Ratio analysis thus helps in preparing the

budgets.

• It is easy to understand the financial position of a business enterprise in respect of short-

term solvency, capital structure position etc.

• Ratios enable the users of the financial information to determine the liquidity, solvency,

profitability etc of a business firm since information is useful.

SA firm cannot only compare its results with other firms in the same industry but also its own

performance over a given period of time. Accounting ratios calculated and tabulated for a no of

years enable the users of financial information to determine the future results on the basis of past

trends

Factors Affecting Working Capital Management:

Some of the factors that can affect a firm’s working capital level are:

Type/Nature Of Business

• Working capital level is generally higher in manufacturing

based versus service base organizations

Some of the factors that can affect a firm’s working capital level

are:

Type/Nature Of Business

• Working capital level is generally higher in

manufacturing based versus service base

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organizations

Depends on the Volume of Sales

• The higher the sale, the higher is the level of working

capital required

Seasonality

• Peak seasons like festive seasons require a higher

level of working capital

Length of Operating And Cash Cycle

• A longer operating and cash cycle increases the level

of working capital

Policies:

For a firm, it can exercise a few options/policies when considering

the risk return aspect when managing its working capital.

The following describe the different policies:

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(1) MATCHING OR HEDGING

APPROACH/POLICY

• This approach or policy is a moderate policy

that matches assets and liabilities to maturities.

• Basically, a firm uses long term sources

to finance fixed assets and permanent current

assets and short term financing to finance

temporary current assets

• Simple illustration:

• A fixed asset/equipment which is expected to

provide cash flow for 8 years should be financed

by say 8 years long-term debts

• Assuming a firm needs to have additional

inventories for 2 months, it will then sought short

term 2 months bank credit to match it.

(2) CONSERVATIVE APPROACH/POLICY

• Conservative because the firm prefers to have

more cash on hands

• Fixed and part of current assets are financed by

long-term or permanent funds

• As permanent or long-term sources are more

expensive, this leads to “lower risk lower return”

• Having excess cash at off-peak period hence the

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need to invest the idle or excess cash to earn

returns.

(3) AGGRESSIVE APROACH/POLICY

• The firm want to take high risk where short term

funds are used to a very high degree to finance current

and even fixed assets

Depends on the Volume of Sales

• The higher the sale, the higher is the level of working

capital required

Seasonality

• Peak seasons like festive seasons require a higher level of

working capital

Length of Operating And Cash Cycle

• A longer operating and cash cycle increases the level of

working capital

Policies:

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For a firm, it can exercise a few options/policies when considering the risk return aspect when

managing its working capital.

The following describe the different policies:

(1) MATCHING OR HEDGING APPROACH/POLICY

• This approach or policy is a moderate policy

that matches assets and liabilities to maturities.

• Basically, a firm uses long term sources to finance fixed

assets and permanent current assets and short term

financing to finance temporary current assets

• Simple illustration:

• A fixed asset/equipment which is expected to provide

cash flow for 8 years should be financed by say 8 years

long-term debts

• Assuming a firm needs to have additional inventories for

2 months, it will then sought short term 2 months bank

credit to match it.

(2) CONSERVATIVE APPROACH/POLICY

• Conservative because the firm prefers to have more cash

on hands

• Fixed and part of current assets are financed by long-

term or permanent funds

• As permanent or long-term sources are more expensive,

this leads to “lower risk lower return”

GNITMS


• Having excess cash at off-peak period hence the need

to invest the idle or excess cash to earn returns.

(3) AGGRESSIVE APROACH/POLICY

• The firm want to take high risk where short term funds are

used to a very high degree to finance current and even fixed

assets

4.6: CASH MANAGEMENT:

Importance of Cash:

• Cash is the balancing figures between debtors, stock and creditors.

• Without adequate cash to meet working capital demands, it is impossible to extend credit,

order stock or pay creditors.

Managing Cash or Cash management involved the following:

• Efficient banking-making sure money received is banked as soon as possible, making

payments the most efficient way, and ensuring any surplus balances are put to interest

earning use. Here the liquidity, risk and return of investment must all come into play with

the length of time before funds are needed playing an important role.

The basic in cash flow control is to ensure funds are available when needed.

For the immediate short term trend:

Weekly or monthly forecasts are prepared for comparison with actual results. If these forecasts

indicate unacceptable balances or deficits are likely at some point, it will be necessary to decide

how these can be covered. Immediate solutions will include increased borrowing, rescheduling

plans and payments, or even sale of an asset.

For the longer term trend:

Longer term cash flow control will include all aspects of the business including working capital

and fixed capital control, capitalisation, trading and dividend policy. For example it may be able

GNITMS


to improve cash flow by improvements in operating efficiency or higher sales prices, improved

working capital control, or revised fixed asset investment plans.

Cash flow forecasts:

An integral part of the budgeting process.

The objectives of the cash budget are to:

• integrate trading and capital expenditure budgets with cash plans;

• anticipate cash surpluses and deficits in time to generate plans to deal with these; and

• provide a facility for comparison between budget and actual outcomes.

Accountant’s role in Working Capital management:

Accountants have an important part to play in all aspects of working capital management from

internal control procedures like invoice authorization through reporting processes (such as

production of aged debtors lists and cash flow forecasts).

They use various types of ratio analysis as important indicators of working capital strength which

can be applied internally or external.

INVENTORY MANAGEMENT:

The objective of Managing Stock is to:

establish the proper stock control levels so as to ensure that excessive stocks are never carried

(and working capital thereby sacrificed) but that they never fall below the level at which they can

be replenished before they run out.

Failing to maintain proper stock level will mean that working capital is tied up in the business.

Keeping levels to the minimum required for efficient operations will keep costs down. Stock

control involves in many aspects like the controlling of buying, handling, storing, issuing, and

recording stock.

Some of the major factors to consider when establishing the control levels are:

• working capital available and the cost of capital;

• average consumption or production requirements;

GNITMS


• reordering periods-the time between raising an order and receiving delivery of goods;

• storage space available;

• market conditions;

• economic order quantity (including discounts available for quantity);

• likely life of stock bearing in mind the possibility of loss through deterioration or

obsolescence; and

• The cost of placing orders including generating and checking the necessary paperwork as

well as physical checking and handling procedures.

AT IGL:

1.Raw materials and Finished products arevalued at cost or net realisable value,whichever is

lower. Finished productsinclude excise duty and royalty whereverapplicable.

2. Stock in process is valued at cost or net realisable value, whichever is lower. It is valued at

cost where the finished products in which these are to be incorporated are expected to be sold at

or above cost.

• Stores and spares and other material for use in production of inventories are valued at

weighted average cost or net realisable value, whichever is lower. It is valued at weighted

average cost where the finished products in which they will be incorporated are expected to

be sold at/or above cost.

• Surplus / Obsolete Stores and Spares are valued at cost or net realisable value, which ever is

lower. Machinery spares, which can be used only in connection with an item of fixed asset

and their use is expected to be irregular, are capitalised with the cost of that fixed asset and

are depreciated fully over the remaining useful life of that asset.

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4.7:WORKING CAPITAL FINANCING:

1.WAGES & TAXES:

a. All short term employee benefits are recognized at their undiscounted amount in the

accounting period in which they are incurred.

b. Employee Benefits under Defined Contribution Plan in respect of provident fund is recognized

based on the undiscounted obligation of the company towards contribution to the fund. The

same is paid to the provident fund which is administered through a separate trust.

c. Employee Benefits under Defined Benefit Plans in respect of leave encashment, compensated

absence, post retirement medical scheme, long service award and other terminal benefits are

recognized based on the present value of defined benefit obligation, which is computed on the

basis of actuarial valuation using the Projected Unit Credit method. Actuarial liability in excess

of respective plan assets is recognized during the year.

d. Provision for current tax is made as per the provisions of the Income Tax Act, 1961. Deferred

Tax Liability / Asset resulting from 'timing difference' between book and

taxable profit is accounted for considering the tax rate and laws that have been enacted or

substantively enacted as on the Balance Sheet date. Deferred Tax Asset, if any, is recognized and

carried forward only to the extent that there is virtual certainty that the asset will be realized in

future.

CHAPTER-5

SCOPE, LIMITATION, CONLUSION AND RECOMMENDATIONS

GNITMS


The policy employed by the company with regard to its working capital should clearly defined

and documented. An adequate organization installed as meta-management can aver impact

across all functions and processes. Responsibilities and processes have to be defined, whereby

working capital objectives aver to be integrated into the company’s incentive system. For

monitoring the financial lows, it is advisable to set adequate working capital targets periodically

on the company’s wide basis and to institutionalized control and reporting mechanism. Many

companies consider working capital as very important. It has been seen that size of company can

also be related to working capital of the company. The main objectives of every business are

maintaining liquidity. A high level of trading activity characterizes liquidity. It is safer to invest

in liquid assets than illiquid ones because it is easier for you to get money out of the investment.

The industry requires a huge infusion of capital investment for upgrading and rebuilding of its

Furnaces and machines. To keep pace with the latest technological development for up gradation

of technology, a constant review is also required

Since this industry is very elastic in terms of cost and any upward revision in cost has a big toll

on its profitability. Major investment is in fixed capital or working capital. It is not an easy task

to gather such a huge capital for setting up a glass industry. Relatively the process of setting of

Glass Industry is very time consuming as it requires huge technical set up taking much longer

period of gestation before the final production.

Scope and limitations of study

• The study is strictly based on the mathematical interpretation of the figure.

• Limited time period, so extensive study of the topic is not possible.

• The undertaken research work would be confined to the operational & financial

performance of IGL INDIA Ltd.

• All the work is dependable on the secondary data being provided by IGL INDIA Ltd...

GNITMS


The study is for eight weeks, from 19 APRIL to 18 JUNE 2011

CONCLUSION:

The company seems to be plagued with high inventory and poor liquidity position which is

rendering the company its position where the company has to resort borrowing from financial

institution adding to interest cost of production. The company has also has a very low turnover

ratio indicating that inventory holding is very high as can be seen from the aging of the

inventory. The Companies will concentrate on optimizing the individual process chains as well

as on the subject of reporting and incentive system. The main task is to develop an enterprise –

wide concept in view with working capital management.

There is always a scope of improvement. Although the processes followed in the company for

the management of current assets are well defined and efficient, yet after an intensive study of

the same it was found that some lacunae existed in the same. Different remedies have been

suggested for them in the recommendations. Also a survey of different people of the finance

department of the company at different hierarchical levels was undertaken for their opinions

regarding their field of expertise, the existing method of working and the changes they would

like to incorporate to increase the efficiency. The answers have then been analyzed and stated.

Current assets management forms a major part of the working capital management. And at HCL

due importance has been given to it .Much emphasis is laid on efficient management of the

current assets of the company in order to increase the profitability of the company.

RECOMMENDATIONS

As the Company enjoys as the largest producer of gas and are in transmission business

also & having enough Funds after IOCL (Indian Oil Corporation Limited). It should focus on its

GNITMS


fund requirements from open market also which could provide cheaper source of funds as

compared to Bank financing. Short term funding can be done through Commercial Papers,

Money market instruments, Certificate of deposits etc. which could provide less risky funds with

high rate of liquidity.

Another important segment is that it has a strong order book both in domestic market as

well as foreign markets. It should have to devote its production in a more efficient manner

without compromising on the quality of the products.

Each and every field of activity involves certain degree of risk. IGL might face risk of

rise in price of raw material like steel etc. but it has to maintain its cost within a limit in order to

put its stand among its competitors. Cost efficiency with high class productivity with the help of

improved technology will make the pipe giant a global performer.

CHAPTER-6

ANEXXURE

Financial Analysis

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EBIDTA/SCM (Standard cubic meter) to sustain though, EBIDTA Margins to fall

To sustain the higher growth in volume, IGL would have to source more of R-LNG, which will

put pressure on its EBIDTA margins. As per our estimates, EBIDTA margins would decline

from 37.2% in FY10 to 25.0% in FY13E. However, IGL is expected to continue to maintain its

EBIDTA/SCM.

High Depreciation and Interest cost to hurt Profit margin

During FY2005-10, IGL posted 18.3% CAGR in net profit. Despite increase in CNG Sales

volumes in future, over FY2010-13E, we expect IGL’s net profit to increase to 3,182.7 mn from

2,528.9 mn at a CAGR of 14.2%.

GNITMS


This is mainly on account of increase in gas cost, marginal increase in realizations and higher

depreciation due to estimated cap-ex of ` 30,000 Mn in coming 5 years. On account of higher

depreciation and interest cost, PAT margins would fall from 20% in FY10 to 11.0% in FY13E.

Roe to decline over long term but would manage to stay above 20%

Historically, IGL’s Roe has been around 30.0% levels. In future, due to the expected increase in

gas costs, high depreciation, we expect Roe to contract to 21.7% in FY13E. Though, we expect,

increase in realizations would help Roe to stay above healthy 20%.

GNITMS


Sensitivity Analysis of Effect of Price variation on EPS

To protect its margins IGL has to pass on the incremental cost of gas to its consumers. Being a

monopoly player in Delhi and NCR region IGL has always been passing on the incremental

input cost price hike to its customer and we believe IGL will continue to do so in the coming

years as well. We have carried out a sensitivity analysis on EPS to show the impact of change in

price.

Scenario-1: If IGL is not passing on the increase/decrease in cost of gas The following table

shows EPS sensitivity to change in purchase price without any accompanying increase/decrease

in the selling price. In the given set of assumptions, with every 1% change in price, EPS changes

by ~2.2% in FY12E and ~2.4% in FY13E.

FY12EEPS FY13EEPS FY12E FY13E

Purchase price variation Rs. Rs. Change(%) Change(%)

-5% 24.5 28.4 12.6 16.1

Base case 21.0 22.7

5% 19.0 19.1 -12.5 -16.1

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10% 16.3 15.4 -25.1 29.0

Scenario-2: If IGL is passing on the increase/decrease in cost of gas

The following table shows EPS sensitivity to change in selling price with accompanying

increase/decrease in purchase price. In the given set of assumptions, with every 1% change in

selling price, EPS changes by ~2.4% in FY12E and ~2.6% in FY13E.

FY12EEPS FY13EEPS FY12E FY13E

Selling Price variation Rs. Rs. Charge(%) Charge(%)

-5% 19.2 19.9 -13 -14

Base Case 21.0 22.7

5% 24.5 28.0 12.8 14.5

10% 27.3 29.3 25.6 29.0

Key Concerns:

High entry barriers outside Delhi:

GAIL has set up six more JVCs (Joint Venture Companies) for CGD projects in various cities.

GAIL Gas has submitted EoI (Expression of interest) for 7 cities (Kota, Jhansi, Matura, Sonipat,

Dewas, Gwalior and Ghaziabad). GAIL Gas won 4 cities viz Dewas, Kota, Meerut and Sonepat

in the first round of bidding of PNGRB. These initiatives by GAIL could increase entry barriers

for IGL for expanding city gas distribution business to other cities.

GNITMS


Spurt in LNG prices:

Since only 2.7 MMSCMD of APM gas has been allocated to IGL in its area of operation, IGL

has to depend more on R-LNG sourced from Petronet LNG, as the expected demand is expected

at ~4.35 MMSCMD by FY13E. Any adverse impact on sourcing of R-LNG can derail the

volume growth plans of IGL. If the global LNG prices firm up further, it could lead to very

significant increase in input costs, which it has to pass on to the end consumers.

Regulatory hurdles:

IGL has a mandate for operating in Delhi, Greater Noida and Ghaziabad. Despite the initial

mandate, final approval is pending for Noida and Ghaziabad. Though 50% of the FY11-15E cap-

ex is still in Delhi region, IGL is aggressively rolling out in other NCR areas as well (excluding

Faridabad & Gurgaon) which could expose IGL to risks it future plan.

Peer Group Comparison

Being a pure city gas distribution company, IGL is comparable only to Gujarat Gas Corporation

Ltd. (GGCL), which is operating in Gujarat State. GGCL is India’s largest private sector player

in the City Gas distribution business in India and supplies gas to more than 230,000 domestic,

commercial, industrial customers and serve over 80,000 compressed natural gas users. At current

market price (CMP) of ` 299, IGL is trading at 14.0x its FY12E EPS as compared to 19.6x for

GGCL. On P/BV basis also, IGL (3.5x) is cheaper than ascompared to its closest peer, GGCL

(4.7x).

Company Sales(Rs

mn)

Net

profit(Rs

mn)

EBITDAM

%

PATM% ROCE% ROE%

Indraprastha

Gas

17,089.7 2421.7 29.5 15.9 36.1 26.4

Gujarat Gas 18,421.7 2590.1 24.1 14.1 28.8 23.4

GNITMS


Outlook and Valuation

Given its monopoly in NCR region, strong volume growth in CNG and PNG segment, and the

aggressive expansion plans for establishing the CNG and PNG infrastructure in the operational

areas, we believe IGL is in a favorable position to exploit the growing opportunity in the CGD

segment. We expect the revenues to register a CAGR of 30% during FY10-13E and bottom line

to register a 13% CAGR during the same period. We have valued the company based on DCF

methodology. The rationale behind opting for DCF method over other valuation methodology is

because of the predictability of the cash flows. Our EPS estimate of ` 21.0 and ` 22.7 for FY12E

and FY13E respectively, imply earnings CAGR of 14% over FY10-13E. At current level of `

299, the stock is trading at 14.0x and 12.97x FY2012E and FY2013E earnings. IGL has

historically traded in the range of 13-16x of its one year Forward Earnings. Hence, we initiate

our coverage on IGL with a “BUY” recommendation with a price targetof ` 357, which is a 19%

upside from the current price level.

DCF Valuation Summary Valuation Summary

Rs Mn 2011E 2012E 2013E 2014

E

2015

E

2016

E

2017

E

2018

E

2019E

Sales

Revenue

17,151.7 22894.

7

28936 30961 33128

.9

35447

.9

37929

.2

40584

.3

43,425.2

EBITDA 5,088.2 6465.2 7236.6 8669.

23

9276.

08

9925.

41

10620

.18

11363

.60

12159.0

5

Depreciat

ion

393.93 532.53 671.13 918.0

5

977.0

8

1040.

25

1107.

84

1180.

16

1257.55

Cap-ex 6100.00 6100.0 6100 1857. 1987. 2126. 2275. 2435. 2605.51

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69 73 87 75 06

Charge in

WC

253.55 -517.55 222.56 50.70 55.77 61.35 67.48 74.23 81.65

FCFF -2630.9 -798.64 -883.3 4818.

04

5148.

56

5502.

05

5880.

13

6284.

49

6716.95

Note: Free Cash Flow to firm=EBITDA(1-t)+(Depratiation*t)-(Cap-ex)-(Net change in Working

Capital).

Terminal Value (Rs Mn) 96399.56

Present Value (Rs Mn) 51620.82

Less: Net Debt (Rs Mn) 1,607.00

Equity Value (Rs Mn) 50,013.82

No of shares (Mn) 140.0

Per Share Value (Rs) 357

WACC Assumptions

Beta 0.76

Market Risk Premium 4.0%

Risk free Rate 8.5%

WACC 10.7%

Terminal Growth Rate 3.0

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chapter 1

Documents

management of working

working capital deficiency

working capital requirement

net working capital

working capital deficit

derivation of working

positive working capital

fixed capital