INVESTMENT MANAGEMENT

FUNDAMENTAL ANALYSIS

OIL & GAS SECTOR

Mentor: Dr. Pinku Paul

By: Apoorva Rastogi

15PGPM16

EXECUTIVE SUMMARY

Oil and gas sector is one of the core industries that play an important role in determining the
economy of the country. Indias economic growth is closely related to energy demand;
therefore the need for oil and gas is projected to grow more, thereby making the sector quite
conducive for investment.
The fundamental analysis would help in analysing the economy of the country with respect to
the performance for a particular year. The industry analysis with the help of various
parameters helps to select the sector in which we can observe the prospects of making an
investment.
The company analysis done helped to compare the top three companies of a particular sector.
On the basis of the financial performance of the company, the most suitable company has
been chosen that is best fit for investing into.

INTRODUCTION: FUNDAMENTAL ANLAYSIS

Fundamental technique is the method to determine the stocks current fair and also predicts
its future value. The fundamental analysis caters to the few basic questions. The may be as
follows:
1.
2.
3.
4.

Is the companys revenue growing?

Is company making profits?
Will it be able to return its debt?
Is the company suitable to make investments?

The fundamental analysis is performed by taking various critical factors that include: intrinsic
value of the stock, earnings of the company the growth rate, risk involved.
The fundamental analysis can further be divided into three steps:
1. Economic Analysis
2. Industry Analysis
3. Company Analysis

Economic Analysis

Industry Analysis

Company Analysis

Stock
value

The above figure shows the stock valuation by EIC analysis. This helps to know why the
particular economy and industry has been taken and under company analysis, comparative
analysis is done to know the best company in which the investor can invest.

ECONOMIC ANALYSIS
Economic Analysis is the study of all the economic factors that affect the pricing of the stock.
The growth in economy shows the increase in stock valuation. The growth creates the
increase in demand for the investments. The relation between the growth of economy and
company investment goes hand in hand. Increase in one would witness increase in the other
factor.
Various factors that are taken into consideration during economic analysis are:

Gross Domestic product

Savings & Investments
Inflation
Interest Rate
Budget & Fiscal Deficit
Tax Structure
Balance Of Payments
Foreign Direct investments
Investments made by foreign investors
International Economic conditions
Business Cycle and investors pyschology
Monsoon & Agriculture
Infrastructure facilities
Demographic factors

INDUSTRY ANALYSIS
This analysis involves the perrformance, prospects and the problems of the industry of
interest. It show the the return and risks involved of the industries and help to select the
respective industry for the investor on the basis of the risk apetite of the investor and the
required rate of return. The financials of the company help to understand the performance of
the company.
Factors that are taken into consideration during the Industry analysis are:

Growth of Industry
Cost of Structure and profitability analysis
Nature of product by the industry
Nature of the competitions among the industries
Policies by the Government of India
Labour
Reseach and Development
Pollution Standard
SWOT analysis

 Porters Five Force Model analysis

COMPANY ANALYSIS

It refers to the evaluation of financial performance of the company on the basis of qualitative
and quantitaive factors. It helps to assess on what factors that influence the value of the stock.
To understand the importance of the earnings of the company that is required to make
invest,ent decisions by analysing the financial statements of the company.

Factors that are taken into consideration during company analysis are
Financial Performance:
Competitive edge: market share, growth of sales, stability of sales
Earnings of the company
Capital structure: Debt to equity ratios, interest coverage ratios, asset limit to
debt ratio
Management
Ability to get along with people
Leadership quality
Analytical Competence

Ability to get things done

Judgement Capability
Knowledge/ Idea about the company

RESULTS & INTERPRETATION

Economic analysis: the factors for the study of economic analysis done are:
Gross Domestic product
Inflation Rate
Interest Rate
Indias Balance of Trade

GROSS DOMESTIC PRODUCT

A high GDP growth rate shows a good mark for the stock market. It tells about the prospects
of
a
particular
industry
and
what
an
investor
can
expect.

1. Real GDP grew by 7.2% in first half

2. growth may or may not support the industrial sector and the return investors can
expect from investments is also uncertain
3. shows mixed signals which might or might show a positive direction

INFLATION RATE
Inflation is the rise in prices of the product. Inflation and stock market are inversely
proportional. Inflation if increases with increase in GDP growth rate show a very low real
rate. Inflation is caused due to factors like: high raw material cost, low earnings.

1. Inflation Rate in India averaged 7.67 percent from 2012 until 2016, reaching an all
time high of 11.16 percent in November of 2013 and a record low of 3.69 percent in
July of 2015.
2. Stock market will be affected.
3. Real rate of growth is low with increase in GDP
4. Directly affect the companys performance

INTEREST RATE
The interest rate indicates about the cost of borrowing the funds. Decrease in the interest
shows the low cost of funding in the firms that results in increased profitability.

1. Interest rate have direct impact on economy

2. Low interest rate provides finance to firms at a lower cost
3. Decrease in interest rate provide the loan easily
4. Ease of doing business

5. Rise in share prices of the company

INDIAS BALANCE OF TRADE

This refers to the record of the countrys money receipt from abroad and payments to
other countries. It shows about the strength of the Indian rupee. The volatility shows
affects the investors by the foreign institution investors.

1. The trade deficit in India declined 25 percent year-on-year to USD 8.12 billion in June
of 2016
2. Balance of Trade in India averaged -2126.93 USD Million from 1957 until 2016,
reaching an all time high of 258.90 USD Million in March of 1977 and a record low
of -20210.90 USD Million in October of 2012
3. This increases the foreign exchange volatility which affects the FIIs in Indian Stock
Market, having a negative effect.
Hence, Indian economy has been selected.

INDUSTRY ANALYSIS
The factors that have been taken for industry analysis are as follows:

Growth of industry
Porters five force model
Government Policy

GROWTH OF INDUSTRY: INDIAN OIL & GAS SECTOR

The Indian oil and gas sector can be divided into upstream and mid stream and
downstream.

TRENDS SEEN IN INDIAN & OIL GAS SECTOR:

1. Oil consumption is estimated to expand at CAGR of 3.3%
2. Expected strong growth in demand that may lead to increase in oil imports
3. Due to rapid economic growth,
increased

demand for oil

production and transportation

GOVERNMENT POLICIES
Various steps have been taken by the government to enhance the oil and gas sector. For the
year 2015-16 the initiatives taken are give below.
1. Government has approved HELP.
2. Hydrocarbon vision 2030 for North East India has been released in February, 2016
3. Discovered Small Fields Policy announced in March, 2016 for monetization of 67
discoveries thorough international competitive bidding.
4. Hydrocarbon vision 2030 for North East India has been released in February,
2016The Union Cabinet has approved the National Mineral Exploration Policy

(NMEP), which will pave the way for auction of 100 prospective mineral blocks to
attract private sector in exploration, besides involving state-run agencies.
5. The government has launched a pilot programme, aimed at introducing compressed
natural gas (CNG) as fuel for two-wheelers.
6. The Ministry of Petroleum and Natural Gas is seeking to enhance India's crude oil
refining capacity through 2040 by setting up a high-level panel, which will work
towards aligning India's energy portfolio with changing trends and transition towards
cleaner sources of energy generation.

PORTERS FIVE FORCE ANALYSIS

The profitability of the company is indicated by the companys structure. It may be different
for different industry. Five factors that determine the overall position and profitability of a
particular industry are: Entry of new competition, threat of substitute, bargaining power of
the suppliers, bargaining power of the buyers, rivalry among the existing firms. The figure
below shows the five force analysis of the oil and gas industry.

C o m
Low threat because of capital
intensive nature of industry and
p e t it i
economies of scale
B a r g a in i v e
n g
R iv a l
Medium
Po w e r o f ry
because of
lesser no. of
s u p p lie r
players.TThere
h re a
T h re a t
is also delay of
s
subsidyt
o f
o f
payments to
B a r g a in
oil companies
S u b s ti
N e w
that increases
in g
tu te s
E n tra
P o w e r Low othernalternatives
ts
like water
solar
etc
are
less
developed
o f
B u y e rs

 With the entire above mentioned factor, Oil and gas industry has been selected
for further analysis.

COMPANY ANALYSIS
After performing the industry analysis, the top three companies of the oil and gas sector have
been chosen for further analysis on the basis of their financial position in the market.
Companies selected for
further analysis:
Indian Oil Corporation
Limited
Reliance Industries
Bharat Petroleum
Corporation limited

Factors that have been taken into considerations are as follows:

Competitive Edge
Financial Performances(Ratio Analysis)
Capital Structure

Sales turnover-IOCL

Sales Turnover-BPCL

Sales Turnover
489,389.86

Sales Turnover

516,963.62

271,037.35

486,040.59

253,254.86

250,649.26
1.00
2013

2.00
2014

3.00
2015

2013

2014

2015

Sales Turnover-Reliance
Sales Turnover
446,339.00
408,392.00

388,494.00

2013

2014

2015

Each of the three companies has seen decrease in the overall sales turnover of the companies
in 2015 as compared to increase in 2014. However, the turnover is still highest for IOCL in
comparison to BPCL and Reliance.

Net Sales-IOCL

Net Sales-BPCL

488,344.93

Net Sales
260,060.53

Net Sales

461,779.67

449,508.66

2013

2014

2015

240,115.75

2013

238,086.90

2014

2015

Net Sales-Reliance
Net Sales
434,460.00
397,062.00
375,435.00

2013

2014

2015

Through Net sales for all three companies, it is observed that the there has been a little
change in the figures for last three years. In the year 2015 the net sales remains highest for
IOCL and it is lowest for BPCL.

Net Profit Margin (%)-IOCL Net Profit Margin(%)-BPCL

Net Profit Margin(%)
2 1.48
3

Net Profit Margin(%)

3
2.13
2
1.56

1.2

1 1.11

1 1.1

2013

2014

2015

2013

2014

2015

Net Profit Margin(%)-Reliance

Net Profit Margin(%)
6.9
5.82

2013

5.63

2014

2015

The net profit margin is continuously increasing for BPCL and Reliance from 2013-15. For
companies IOCL, the net profit margin has decreased in the years by 19%. There is lowest
profit margin despite IOCL with highest sales turnover. It can result due to high expenses
incurred by the company in the last three years.
Ratio Analysis

EPS: All the three companies have seen continuous growth in the EPS. A high EPS with
continuous growth rate helps to determine the company has outperformed or not. BPCL has
highest growth rate in among all three companies. Reliance has shown greatest EPS in 2015.
PE ratio- the company having the highest PE ratio is said to perform better in coming years.
However, among the given three years, the Reliance has witnessed continuous increase in PE
ratio from year 2013 to 2015. Even though IOCL and BPCL has shown, better PE ratio in
2015, there has been great dip in year 2014.
Growth in Earnings: It influences the value of the stock. It tells about the earning retained and
reinvestments. IOCL has the lowest retained earnings in last three years. BPCL has witnessed
highest growth in earnings in last three years. Reliance has shown increase in earnings.
Debt Equity ratio- indicates long term debt funds borrowings. IOCL has the highest Debt
equity ratio for last three years. The Reliance Company has least debt equity ratio. It has fund
borrowings of the firms assets to be least. Since the long term borrowing for Reliance is less
as compared to other companies, it will be able to clear its debt soon.
Interest Coverage ratio- it indicates that the company is able to pay its interest completely.
Interest coverage more than 1.5 usually is considered to be good by the investors as it
indicates that the company is earning much more in order to make its timely payments of
interest. Reliance has greatest interest coverage ratio for last three years. On the other hand
IOCL shows least interest coverage ratio from year 2013-15.

CONCLUSION

With the analysis mentioned above, the Company that has been chosen to make investments
is Reliance because of the financial stability of the company. The company has witnessed
growth for last three years 2013 to 2015.