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Management Discussion  
Indian Oil Corporation Ltd.
 
BSE Code 530965
ISIN Demat INE242A01010
Book Value(Rs.) 121.29
NSE Code IOC
Dividend Yield % 14.85
Market Cap(Rs. in millions) 1373735.51
P/E 5.93
EPS 23.87
Face Value(Rs.) 10  
Year End: March 2015
 

MANAGEMENT'S DISCUSSION & ANALYSIS

(Forming part of the Directors' Report for the year ended 31st March, 2015)

ECONOMIC OVERVIEW & OUTLOOK Global Economic Situation

During the period under review, the international landscape was marked by many critical political, geo-political, business, policy and diplomatic developments and these affected the performance of the global economy considerably. The Ukraine-Russia stand-off, followed by sanctions on Russia; ISIS crisis in Iraq; tensions in many other MENA countries; progress on Iran's nuclear deal with global powers; escalation of Greece debt crisis and its implications on the future of Euro Area; OPEC's decision to abandon price targeting; phasing out and ending of US Federal Reserve's Quantitative Easing(QE); expansion of Bank of Japan's QE programme and beginning of QE by the European Central Bank were some of the major developments.

During the period under review, global economy's performance as a whole was modest and growth was uneven across groups. In 2014, global output expanded by 3.4 per cent, which was the same as the growth recorded in 2013. However, growth in the advanced economies group picked up to 1.8 per cent from 1.4 per cent, while that in the emerging markets and developing economies group fell to 4.6 per cent from 5 per cent in 2013.

The US economy posted an accelerated GDP growth of 2.4 per cent and industrial production growth of 4.1 per cent, up from 2.2 per cent and 2.9 per cent recorded in 2013, respectively. There was a sizeable drop in the unemployment rate, which fell from 7.4 per cent in 2013 to 6.2 per cent in 2014, which is the lowest since the 5.8 per cent recorded in 2008. However, in the first quarter of 2015, GDP contracted in the US by 0.2 per cent due to harsh winter.

In the Euro Area, the pickup in growth continued albeit at a slow pace, GDP grew by 0.8 per cent in 2014 after declining by 0.4 per cent in 2013. Moderation in unemployment rate was witnessed too. Industrial production also picked up in the Euro Area; after declining by 0.7 per cent in 2013, it rose by 0.8 per cent  in 2014.

Within the emerging markets & developing economies group, growth slowed down in most of the emerging markets, India being an exception. The slowdown in China's growth being witnessed since the last quarter of 2013, furthered and during the year Chinese GDP growth slipped to 7.4 per cent, the lowest since 1991. This was mainly on account of a slowdown in investment, particularly in the real estate sector. This had a sobering effect on the overall global growth.

During the year, there was a moderation in commodity prices, a continuation of the fall in prices being witnessed since 2012. However, what differentiated this year from the brvious one was the dramatic decline in international crude oil price in the latter half of 2014. Brent prices fell by 55 per cent between July 2014 and January 2015. The decline was seen to be primarily driven by surplus supply in the face of weak demand.

During the year, the US Federal Reserve ended the Quantitative Easing in view of improvements in the performance of the US economy. On the other hand, Bank of Japan (BoJ) scaled up its Quantitative and Qualitative Easing programme to a total of ¥ 80 trillion per year to counter the downward brssure on price and achieve the target of 2 per cent inflation rate. Similarly, European Central Bank (ECB) in March 2015 commenced its sovereign debt purchase programme of € 60 billion per month (till September 2016). In many emerging economies, central banks went in for rate cuts as inflationary brssures eased

Portfolio capital flows to emerging markets economies were robust in 2014 despite weakening of economic activity in these economies. Portfolio flows rose to US$ 216 billion from US$ 196 billion in 2013.

Looking ahead, global growth in 2015 is expected to be more or less the same as that of 2014 and pick up in 2016. Weak growth in the first quarter of 2015 in the US, a more than expected rise in oil prices in the second quarter of 2015 and risk related to the uncertainty around the future of Greece are expected to affect recovery in 2015. However, generally low oil prices and accommodative monetary policies are expected to provide support to growth in 2016.

Indian Economic Situation

The year began with the coming in of a new Government at the Centre, after a decisive electoral mandate. Along with this came in a new reforms agenda and major thrust on infrastructure development. The year witnessed a rise in the confidence of the international investors in the Indian growth story. Indian stock markets touched new highs and rating agencies upgraded the Indian economy. The Government introduced several policy initiatives as well, 'Make in India' being one such, to transform India into a manufacturing hub. The year was marked by the return of growth and macroeconomic stability in the economy.

recorded in 2013-14, based on the new methodology and new base year of 2011-12. Growth in industrial and services sectors moved up, while agricultural growth, affected by weak monsoons, took a hit. The services sector recorded double-digit growth of 10.2 per cent, up from 9 per cent recorded in the brvious fiscal. Industrial growth moved up to 6.1 per cent from 4.5 per cent brviously and agricultural growth declined to a mere 0.2 per cent from 3.7 per cent recorded in the brvious fiscal.

High-frequency real sector indicators broadly exhibited an overall improvement barring a few monthly fluctuations. The Index of Industrial Production (IIP) grew by 2.8 per cent during 2014-15. Accelerated growth was seen in all sub-sectors, viz., electricity, mining and manufacturing. Accelerated growth was posted by all segments of vehicles, with the commercial vehicles segment being the only exception. The Purchasing Manager's Index for Indian manufacturing was throughout in the expansion zone in the year. The turnaround in air traffic growth strengthened further as both passenger and cargo traffic growth scaled up significantly. Port and railway traffic growth was upbeat as well.

In terms of demand side analysis of growth, private consumption expenditure growth accelerated to 6.3 per cent from 6.2 per cent in the brvious fiscal, and Government consumption expenditure grew at a slower pace this year; at 6.6 per cent, it was lower than 8.2 per cent recorded in 2013-14. Investment growth also received a fillip during the year, and rose to 5.4 per cent after declining by 2.4 per cent in the brvious year. However, the rate of investment in the country, measured as a percentage of GDP has been declining; in 2014­15, it fell to 33.1 per cent from 33.7 per cent in the brvious year and 36.9 per cent in 2012-13.

Infrastructure deficit in India has been stark and is well recognised to be a major drag on the economy. During the year, a number of policy initiatives, announcements and reforms were taken forward to ramp up the investment climate in the country. In the budget 2015-16, a sizeable increase in outlays of roads and railways, establishment of National Investment and Infrastructure Fund, and issuance of tax-free infrastructure bonds for the projects in the rail, road and irrigation sectors were announced. In addition, National Industrial Corridor Authority was formed. Since, it is well recognised that private sector is required to play the leading role in infrastructure development in the country; the Government is placing significant thrust on PPP mode.

Respite on the inflation front came in as a very positive development as both CPI and WPI moderated in the latter half of the year. CPI inflation fell to 5.9 per cent from 10 per cent in 2013-14, and WPI inflation dipped to 2 per cent from 6.0 per cent in 2013-14.

Monetary Policy stance through most of the year remained anti-inflationary. Between April-December 2014, RBI kept the policy rates unchanged. Only upon a definitive decline in the inflation numbers, RBI went in for policy rate cuts in the last quarter of the year.

There was improvement on the fiscal front as well. Both Fiscal Deficit and Revenue Deficit are estimated to have contracted to 4.1 per cent and 2.9 per cent of GDP from 4.4 per cent and 3.1 per cent of GDP respectively in  2013-14.

On the external sector front, India's merchandise trade deficit position was comfortable. Trade deficit in 2014-15 rose slightly to US$ 137.0 billion from US$ 134.0 billion. Overall, India's exports declined by 1.8 per cent to US$ 309.3 billion in 2014-15. The drastic fall in international crude oil prices affected the petroleum exports realisation. Imports fell for the second year in a row in 2014-15, falling marginally by 0.4 per cent. However, gold and other non-oil imports exhibited strong growth. It was the fall in oil imports, again owning to low oil prices, that drove the decline in total imports. As regards services exports segment, net inflows from service exports rose by 3.7 per cent. As a result, CAD deficit fell to 1.3 per cent of GDP in 2014-15 from 1.7 per cent of GDP in 2013-14, the lowest level witnessed since 2008-09.

Foreign investment flows received a fillip during the year. Net investments from Foreign Institutional Investors rose to US$ 46 billion in 2014-15 from US$ 9 billion in 2013-14. Net FDI flows also revived, rising to US$ 33 billion in 2014-15 from US$ 21.6 billion in 2013-14. With flush of funds on the capital account, India's forex reserves rose to an all-time high of US$ 341 billion at the end of 2014-15.

During the year, the Rupee-Dollar exchange rate exhibited stability, averaged slightly higher at r 61.16/US$ as compared to r 60.47/US$ in 2013-14. Rupee debrciated on an average basis by 1 per cent vis-a-vis a 10 per cent debrciation experienced in 2013-14.

Looking ahead, international agencies are optimistic about the Indian economy. As per IMF's projections, India is set to surpass China in 2015 and emerge as the fastest growing large economy.

INDUSTRY STRUCTURE & DEVELOPMENTS

Oil Market-International

On the supply side, the overall oil supply in 2014 increased to 93.6 mbpd (million barrels per day) from 91.4 mbpd in 2013. The entire increase in the global oil supply came from incremental non-OPEC supply, which saw a major scale-up from 54.6 mbpd in 2013 to 57 mbpd in 2014. US crude oil production, owing to the shale oil revolution, has grown from 6.8 mbpd in 2008 to a level of 11.6 mbpd in 2014. In fact, in 2014, US crude oil production rose by 1.6 mpbd, making it the largest producer of oil in the world, surpassing Saudi Arabia. OPEC supply remained unchanged at 36.7 mbpd.

In comparison, the world oil demand increased modestly by 0.6 mbpd to 92.5 mbpd in 2014. Oil consumption among OECD countries, after rising by 0.2 mbpd in 2013, again fell in 2014 by 0.5 mbpd and reached a level of 45.6 mbpd. Non-OECD demand grew by 1.1 mbpd to reach a level of 46.9 mbpd.

In the first quarter of 2014-15, international oil prices had hardened to US$ 109.8/bbl mainly on the back Ukraine-Russia stand-off and geo-political concerns in Iraq. This was followed by one of the most dramatic declines in international crude oil prices. In the four year period that brceded, monthly average oil prices had fluctuated in a band of US$ 93 to US$ 118 per barrel. On an average, Brent prices fell by 20.6 percent to an average of US$ 85.4 per barrel in 2014-15 from US$ 107.6 per barrel in 2013-14.

An over-supplied market was at the crux of the decline. Since the beginning of 2014, demand fell short of supply. Weak economic conditions and slower growth, especially in China, on the one hand and growing oil supplies, especially that of shale oil from US, formed a wedge between demand & supply that put brssure on the prices. This was further accentuated when, in November 2014, OPEC decided to maintain their collective production ceiling of 30 mbpd and abandoned price targeting. These events triggered a massive slide in crude oil prices. The strengthening of the US Dollar in the latter half on 2014 also further deepened the oil price fall.

The falling oil prices came as a welcome development. International Monetary Fund estimates that declining oil prices will increase global output by a range of 0.3 per cent to 0.7 per cent this year and more for big oil importers such as

India. The fall in oil prices also brsented a unique opportunity to reduce or do away with the difficult oil subsidies and bring in better targeted programmes.

Falling oil prices particularly hit E&P companies. In 2015, many oil majors slashed their capital expenditures. The falling oil prices also affected the rig count in the US, which witnessed a fall since December 2014. However, latest reports have shown that the US shale oil producers have adapted to lower oil prices through optimising costs of production. EIA estimates that US crude oil production averaged 0.3 mbpd higher in the first half of 2015 than the average production during the fourth quarter of 2014.

Refining

During 2014, global crude distillation capacity was largely unchanged, with a marginal rise by 0.03 mbpd to 92.5 mbpd. In terms of regions, the largest increase was witnessed in East Asia, where capacity rose by 0.68 mbpd, other regions that saw an increase in capacity were, South Asia, Middle East, Africa & FSU East. On the other hand, there were refinery closures on the OECD countries, with the starkest fall being seen in OECD Asia to the tune of 0.52 mbpd.

In the next two years, by 2017, global crude distillation capacity is set to rise by around 3.5 mbpd to reach a level of 96.1 mbpd. East Asia will account for 1.1 mbpd rise, Middle East for another 1.1 mbpd, South Asia to add 0.64 mbpd, Central and South America to move up by 0.5 mbpd and North America will add 0.5 mbpd. North America has a distinct advantage in terms of low energy and feedstock costs that are supporting margins, which is working in favour of the project economics. Closures to the tune of 0.2 mbpd and 0.4 mbpd in Europe and OECD Asia, respectively, are likely by 2017.

As far as the refining sector was concerned, the fall in crude oil prices had a positive effect on cracks. As per EIA, there was a rise in gasoline crack sbrads, with the main factors being lowest crude oil prices in several years, robust U.S. gasoline consumption and exports, and higher-than-expected demand for liquid fuels in Europe and some countries outside the OECD.

Oil Market-Domestic

Demand Side

Refined petroleum products demand was buoyant, grew by 4.2 per cent to 165 MMT (million metric tonnes, or 3.3 mbpd) after a subdued performance in the brvious year. Top performers were MS, LPG & petcoke that registered accelerated growth in the double-digit range.

MS sales were supported by the price cuts in the domestic retail price as a pass- through of decline in international oil prices supported by the surging sales of two-wheelers that account for over 60 per cent of MS consumption.

LPG growth received a fillip from the increase in the number of subsidised LPG cylinders from 6 to 12 and release of new connections. Petcoke growth was supported by buoyancy in user sectors such as those of aluminum and copper.

In addition to these high-growth products, a major push to the growth in petroleum products consumption was given by the upturn in HSD sales this year. HSD accounts for more than 40 per cent share in the Indian fuel basket. After declining by 1 per cent in the brvious year, HSD consumption turned around and grew at 1.5 per cent. Deregulation of HSD prices in October 2014, and the consequent fall in the retail prices of diesel as international oil prices declined, helped pump up diesel sales. Moreover, HSD sales also benefited from a pickup in industrial activity in the country. In the remaining products, the performance was lacklustre.

During the year, petroleum exports fell in both value and quantity terms. At 63.9 MMT, exports were 6.0 per cent lower than the 67.9 MMT level achieved in 2013-14. In value terms, the fall was starker as product prices fell in line with falling crude oil prices. India's petroleum exports forex earnings fell by over 22 per cent to a level of US$ 47.1 billion. For public sector refiners, however, the main focus being the domestic market, exports are mostly post-absorption by the domestic market.

Supply Side

The domestic crude oil production scene continued to be downcast as crude oil production declined by 0.9 per cent to 37.5 MMT. For some years now, crude oil production by National Oil Companies (NOCs) has been falling. Moreover, this year, a worrisome observation was that of fall in production by private companies, led by falling onshore production.

Performance of the Indian refineries sector was muted. Refinery throughput grew marginally by 0.4 per cent, mainly because of planned shutdowns by big refiners.

Crude oil imports continued to be high but did not exhibit growth, were more or less same at the level of 189 MMT. The crude oil price crash helped tone down the import bill to US$ 113 billion in 2014-15 from US$ 143 billion in  2013-14.

Financials

The Government decontrolled the retail diesel prices in October 2014, making it market-linked. This move, coupled with the falling international crude oil and  petroleum product prices, enabled Oil Marketing Companies (OMCs) to reduce diesel prices. Consequent to deregulation, under-recovery on diesel has been wiped out. This development augurs well for the sector; it would not only improve the financial health of the public sector OMCs but also increase competition in the market. Under-recovery for the sector almost halved to X 72,314 crore in 2014-15, from X 139,869 crore in the brvious year.

Gas Market-International

Global natural gas production rose by 1.6 per cent in 2014, rising to 3,461 BCM following a 0.8 per cent growth in 2013. In the US, the largest producer of gas in the world with a share of around 21 per cent, the total marketed gas production growth accelerated to 6.1 percent vis-a-vis around 1.2 per cent growth recorded in 2013. US accounted for 77 per cent of the net global growth in gas production. On the other hand, production declined in many countries, with largest absolute declines witnessed in Russia & The Netherlands.

On the consumption front, global natural gas consumption stood at 3,393 BCM (Billion Cubic Metres) in 2014. Growth was lacklustre, growth in world natural gas consumption decelerated to a mere 0.4 per cent in 2014 from 1 per cent growth recorded in 2013. In both the years, growth continued to be below the 10-year average of 2.4 per cent.

The natural gas market is undergoing rapid change as the North American shale revolution has transformed the global energy picture. North American LNG is expected to be available in Asia from 2016, with sizeable volumes expected only from 2019-2020 onwards. For the next few years, however, Asia will continue to rely on LNG from its traditional supply sources such as the Middle East, Australia and Russia.

Gas Market-Domestic

In India, domestic gas production continued to decline during the year. It was 33.7 BCM, which was 4.9 per cent lower due to declining offshore production.

LNG imports rose to 11.5 MMT (15.6 BCM) in 2014-15 from 10.8 MMT (14.8 BCM) in the brvious year. Spot LNG price for India fell from US$ 16.24/MMBTU (Million British Thermal Units) in April 2014 to US$ 7.83/MMBTU in March 2015. In comparison, the long-term LNG price for Qatar gas, which is the main source for LNG in India, continued to be high as it is based on a formula linked to five-year average of Japan Crude Cocktail (JCC) price.

Domestic LNG import infrastructure is to witness a major scale-up in the coming years. A number of LNG import terminal projects are under implementation and the capacity is expected to increase significantly in the coming years.

Key Policy Initiatives & Issues in Oil & Gas Sector

The Indian oil & gas sector is at a critical juncture. In the liberalisation period, the sector witnessed many big reforms and now the time has come for the next round of big reforms.

Deregulation of Retail Diesel Prices: Deregulation of diesel prices during the year was a much-awaited and a major policy change.On 19th October, 2014, the Goverment of India deregulated diesel prices at the retail level. With this, diesel prices have become fully deregulated (bulk diesel price had been dergulated earlier in January 2013). This decision paved the way for greater competition level in the market.

PAHAL (DBTL): During the year, a landmark scheme for nation-wide direct transfer of cash subsidy on LPG was launched. Under the scheme, LPG cylinders are sold at market price and the entitled consumers get the subsidy directly in their bank accounts. This is done through either an Aadhaar linkage or a bank account linkage. It covers 11.89 crore LPG consumers (as on 05.03.2015) and is one of the largest cash-transfer programmes in the world.

Revision in the Gas Pricing Formula: Gas pricing is critical to the development of the gas sector in the country. The Government revised the earlier approved gas pricing formula, raised the natural gas price to $5.6/MMBTU from $4.2/ MMBTU effective November 2014. This price, based on the revised formula, was much lower than the initially proposed $8.4/MMBTU. Gas prices will be revised semi-annually instead of the earlier proposed quarterly revisions.

E&P Policy Review: India's exploration acreage continues to be largely unexplored. It is pertinent to raise the attractiveness of investment opportunities in the E&P sector in India. During the year a number of initiatives were taken, viz.-

• Reforms in Production-Sharing Contracts to push Investment in Exploration: The Government ironed out a number of rigidities in production-sharing contracts.

• Reassessment of Hydrocarbon Potential: Plan to reassess hydrocarbon resources in India's sedimentary basins, which will provide greater clarity to future investors on the prospects of the basins.

• National Data Repository (NDR) being set up in the Directorate General of Hydrocarbons (DGH)

• Project for Survey of Un-appraised Sedimentary Basins of India: A project has been undertaken to appraise about 1.5 million sq. km area in 24 sedimentary basins where scanty geo-scientific data is available.

Further to this, the Government is contemplating to replace NELP with a Uniform Licencing Policy (ULP). The Government is also reviewing the brsent profit-sharing model vis-a-vis revenue-sharing model.

Gas Grid: The cross-country gas pipeline network needs a scale-up. In addition to the existing 15,000-km gas pipeline network, another 15,000 km has been planned by the Government for completion of the gas grid.

STRENGHTS, WEAKNESSES, OPPORTUNITIES AND CHALLENGES

The Corporation has been the bellwether of the Indian downstream oil industry. From its humble beginnings more than half a century ago, the Corporation has grown from strength to strength. Today, it has the largest refining capacity in the country, has a pan-India marketing and pipeline network with total solutions for the customer needs.

Indian economy is set to emerge as the fastest growing large economy by surpassing China in this very year and is being envisioned to become a manufacturing powerhouse. Industrial activity and infrastructure development  are all set to witness unbrcedented scaling up. The 'Make in India' initiative of the Government, coupled with the industrial and economic corridors being conceptualised and the ambitious 100 smart cities programme, would give a big push to hydrocarbons and petrochemicals demand in the country. As a flagship energy supplier and as a major petrochemicals player in India, opportunities for growth of business are plentiful and, in fact, multiplying.

Refining

With a group refining capacity of 65.7 MMTPA (million metric tonnes per annum), IndianOil currently operates 10 of India's 22 refineries, and is the country's largest refiner. The twin objectives of the Corporation's refining business are to meet customer aspirations with quality products while protecting its margins. The operations of these refineries in themselves have supported an ecosystem that leads to the growth of downstream infrastructure of oil & gas marketing in the country. The brsence of IndianOil's refineries has over the years successfully contributed to significant economic value addition in their respective regions.

The Corporation's state-of-the-art 15 MMTPA coastal refinery at Paradip has entered the commissioning phase with successful intake of crude oil on 12 March, 2015. One of the most modern refineries in the world, Paradip refinery will rank among the best refineries on major performance parameters, viz., distillate yield, complexity factor and energy consumption. Once commissioned, it will increase the competitiveness of the Corporation, provide enhanced operational flexibility with its configuration to process heavy and high-sulphur crude oil varieties along with the capability to produce futuristic Euro-V standard fuels. A major constraint for the Corporation in the past has been the fact that it has land-locked refineries. However, with the coming of Paradip Refinery, this disadvantage would be somewhat offset. The Corporation is simultaneously planning to augment the capacity of its existing refineries to meet the growing demand.

The Corporation is committed to providing quality fuels, compliant with fuel quality specifications. BS-IV quality grades have been implemented in 63 cities in a staggered manner till 31st March, 2015. The entire country is to be BS-IV compliant in a phased manner by 1st April, 2017. Further, the Auto Fuel Quality Vision and Policy 2025 report has laid down the roadmap for introduction osft BS-V/VI quality auto fuels, with the entire country to be BS-V compliant by 1s April, 2020, and BS-VI compliant by 1st April, 2024. As per Auto Fuel Quality Vision and Policy 2025, auto fuel specifications to meet BS-V and BS-VI emission standards remain same. Only vehicle manufacturers need to upgrade their design and technology to meet the stringent emission norms. In order to make all the refineries of the Corporation 100 per cent BS-V compliant, modifications with significant capital investment worth several thousand crores is being planned.

Operational excellence has been at the core of our business processes. The Corporation has always been striving towards the highest levels of excellence, working especially, to control its costs, and maximise value from inputs. In this context, the Corporation has been working on raising its distillate yield, controlling fuels & loss and lowering specific energy consumption. In fact, significant improvement on these three parameters during 2014-15 contributed considerably to the profitability of the Corporation. Another initiative, in this pursuit has been to process low cost, opportunity crude oil varieties. The Corporation is also undertaking an initiative to increase asset reliability and reduce the number of unplanned shutdowns. In this context, long-term strategic initiatives to improve asset reliability are under implementation.

Marketing

The Corporation has been a market leader and its pan-India network is its key strength. It dominates the industry with an overwhelming 50.5 per cent share in the industry-marketing infrastructure. With the commissioning of Paradip refinery, commensurate marketing infrastructure in the States of Odisha, Chhattisgarh and Jharkhand are also being readied to further strengthen the supply chain network.

Over the past couple of years, the domestic petroleum products market has been witnessing major structural changes owing to ushering in of price deregulation, initially of petrol, followed by bulk diesel and finally, deregulation of retail prices of diesel in October 2014. Therefore, layers of competition are on a constant rise and are expected to increase in the coming years. In terms of growth potential, the market is ripe and has a modest growth lined up in conjunction with the growing energy demand of the country. It is in this milieu that the Corporation has to protect its market share in this growing market.

On the marketing front, the Corporation enjoys the unique distinction in its endeavours to reach petroleum products to the far-flung and remotest parts of the country, meeting the inherent logistics challenges of these regions. This hard-earned recognition of its services has been possible due to vast infrastructure supports created over a period of time through assiduous efforts.

The Corporation places significant thrust on automation and IT-led innovations to improve productivity, add ease and convenience to work processes, and enhance collaboration with stakeholders, whether it is employees, customers or channel partners.

During the year, the Corporation's share in the retail space of MS amongst PSUs rose, while that of HSD in retail space amongst PSUs fell. On industry basis, for both MS and HSD, share in retail space dropped marginally due to entry of private players. The Corporation is committed to a retail strategy for maintaining its market leadership.

Enriched customer experience over time converts into customer loyalty. Automation, modernisation of the dispensing units, improving visual identity of retail outlets and imparting training to dealers and pump attendants are key steps being taken by the Corporation to enhance customer experience. The Corporation has modernised more than 85 per cent of eligible A & B site Retail Outlets (ROs) and in 2015-16, emphasis will be on achieving cent per cent modernisation of the balance eligible A and B site ROs. Further, thrust is also being placed on strengthening of XTRAREWARDS loyalty cards in urban centres by increasing the reach from the existing 1,412 ROs.

A key initiative, Project 'Chetna', directed towards improving customer delight is under implementation. Under this, customer attendants at retail outlets are being trained to provide improved service experience to customers; more than 98,000 attendants have been trained under the project so far.

Another tenet of the retail strategy is market coverage. To maintain its position of a lead supplier in the growing market, the Corporation recognises the need to commensurately expand its network. During 2014-15, the Corporation commissioned 947 ROs, which is 46.8 per cent of commissioning by PSU  OMCs.

Within this overall strategy, the Corporation has a two-pronged approach. For the urban centres it has "Urban Proposition" strategy, which has been focussing on commissioning ROs in strategic sites of metros and major towns. During 2014-15, 10 ROs at strategic sites were commissioned. The "Rural Proposition" strategy focuses on the untapped potential of the rural market. The Corporation has been a pioneer in catering to this market with its special-format Kisan Seva Kendra (KSK) outlets. During 2014-15, 369 KSK outlets were commissioned, taking their total to 6,230.

Highway retail outlets form a major revenue-generating segment of the Corporation's retail outreach. For this segment, the Corporation has a "Highway Proposition" strategy. To maintain leadership in highway retail business, as a short-term strategy, the Corporation is working towards "networking" select ROs initially on the Golden Quadrilateral and North-South & East-West Corridors in the first phase, and subsequently on all major national highways and select high-potential State highways in order to provide an end-to-end fuelling solution to the Inter-State fleet operators. As a part of this short-term highway strategy, 1,000 ROs on all national highways and select high-potential State highways were identified for networking. As on 1st April, 2015, the Corporation has already  networked 850 ROs, which will have 16 standard facilities and uniform service levels, including automation and XTRAPOWER fleet card facilities. As part of long-term strategy, greenfield large-format ROs are planned to be developed to offer state-of-the-art facilities to highway motorists. The Corporation has also introduced a loyalty programme for fleet drivers through the "Driver Card," and for the farmers through the "Kisan Card."

Consumer sales is a another major segment where the Corporation has a strong hold as a reliable and ethical business partner, supported by a wide network of supply points and sales offices. During the year, the Corporation beat competition in market share and raised its share in bulk HSD customer business more than offsetting its marginal fall in the retail market share leading to an overall positive market share growth of 0.09 per cent in industry for total HSD sales. The Corporation's efforts for improving the core value proposition and making value delivery mechanism smarter have clearly reaped results.

On the operations and supply chain front, the objective is to be the least-cost supplier for all customer segments. Accordingly, the Corporation continued to pursue many automation and IT-led innovations during the year 2014-15 to improve productivity, add ease and convenience to work processes, and enhance collaboration with stakeholders, whether it is employees, customers or channel partners. The Corporation received excellent support and cooperation from the collectives in this focus area - in implementing a host of measures, including optimum utilisation of existing manpower, restructuring, re­deployment, elimination of unproductive work practices, cost-reduction measures, and safety measures. In this connection, the concept of 'smart terminals' was introduced during the year to strengthen the Corporation's core competency. Such terminals will replace manual interface with technology-enabled interface for stock accounting; tank-truck planning; recording of the density, batch, flash point and tank number on the invoice; etc.

Pipelines

The Corporation has the largest crude oil and product pipeline network in the country. It is a major source of strength as it facilitates cost-effective, reliable, safer and environment-friendly transportation. Further, compared to roads, pipelines also reduce significant road congestion, which can be gainfully utilized for movement of other goods/passenger traffic.

During the year, significant progress was achieved in creating evacuation facilities synchronising with the commissioning of Paradip Refinery. When ready, the two major pipelines, viz., Paradip-Raipur-Ranchi pipeline and Paradip-Hyderabad pipeline, will further strengthen product availability in eastern and southern regions of the country.

The Corporation is steadily raising the contribution of heavy crude oil grades in its refinery crude mix. Therefore, it is pertinent that its crude oil pipelines are also in a position to pump these heavy crude varieties. The Corporation brsently has three crude oil pipelines, out of which two are already pumping heavy crudes as well as Rajasthan crude (10-15 per cent) in admixture with normal crude oil. In 2014-15, 1.44 MMT of Rajasthan crude has been pumped through the above pipelines in addition to about 1.17 MMT of heavy crude oil grades. Further, augmentation of Salaya-Mathura pipeline (SMPL) and Paradip-Haldia-Barauni pipeline (PHBPL) is under implementation. Upon completion of this augmentation, the Corporation's pipeline system would be ready to supply heavy crude oil grades as per the processing capacity of its refineries.

One of the major thrust areas in this segment is to scale up LPG pipelines infrastructure. LPG positioning cost through pipelines is significantly cheaper as compared to road transportation. However, LPG pipelines infrastructure is limited and is an area where substantial expansion in the pipeline network has been planned. LPG imports account for around 40 per cent of India's product imports and building a nationwide LPG pipeline grid for bringing imported LPG and domestic LPG to the consuming centres is a special area of focus for the Corporation.

The Corporation's first LPG pipeline from Panipat to Jalandhar was commissioned in 2008. A number of LPG pipeline projects are brsently under implementation. Upon commissioning of the Paradip-Haldia-Durgapur LPG pipeline, evacuation through pipeline would be possible from refineries at Paradip and Haldia and also from Haldia port. Further, extension of this pipeline up to Patna and Muzaffarpur, along with construction of LPG import facility at Paradip, has been approved by the Corporation's Board recently. In addition to this, Ennore-Trichy-Madurai pipeline, which is also under implementation, would be used for LPG evacuation from the newly commissioned Ennore import facility.

Natural gas pipelines are increasingly emerging as a new opportunity for the Corporation. At brsent, gas pipelines capacity in the country is low at 350.5 mmscmd (million metric standard cubic metres per day), with majority of the infrastructure confined to the north and western parts of the country. Having built its stronghold in the petroleum pipelines, the Corporation is aiming to occupy a significant position in the national natural gas grid, development of which is receiving significant policy thrust. The Corporation, in consortium with GSPL, BPCL and HPCL, is participating in setting up three gas pipelines.

Petrochemicals

The currently low levels of polymer consumption in India, the advantage of high population and projected high economic growth, all point to the high growth potential of the petrochemicals business. Today, with an extensive product portfolio and a countrywide logistics and marketing set-up, the Corporation has emerged as the second largest player in the petrochemicals business in the country. Petrochemicals business has steadily emerged as a major contributor to the Corporation's bottom-line and is fulfilling the vision of downstream integration.

Going forward, the Corporation has ambitious plans to penetrate further and leverage the growth opportunity in this business space. Presently, the Corporation is implementing a new Polypropylene plant of 680 KTA (kilo tonne per annum) capacity at Paradip at an estimated investment of Rs. 3,150 crore. The project is expected to be commissioned by 2017-18.

Besides, further growth opportunities are being constantly explored. The Corporation plans to consolidate its existing business of LAB, PTA, MEG and polymers by the de-bottlenecking of existing facilities and by adding new capacities. Various such projects are in br-feasibility/feasibility studies stages and will be implemented subject to their techno-commercial feasibility.

Another element of the petrochemicals growth strategy is to enter into niche and chemical segments. The Corporation plans to enter into niche segments of business, viz., Acrylic Acid/Acrylates at Vadodara, C4/C5 derivatives from Panipat Naphtha Cracker, etc., based on the feedstock available from its own system.

Gas

Low penetration of natural gas in the Indian energy mix (7 per cent share), coupled with significant scaling up of supply sources, make this segment a candidate for high growth in the future. The Corporation has brsence across the gas value chain and plans to expand its horizon further in the gas business.

The Corpoartion is implementing the 5-MMTPA import, storage and re-gassificiation terminal at Kamarajar Port (Ennore) near Chennai. The project has been accorded approval of the Board with an investment cost of Rs.5,151 crore through a joint venture company. The terminal is targeted for completion in 2018.

The Corporation has been marketing R-LNG and intends to scale this up. In this context, it envisages booking capacities in other upcoming terminals and lining up long-term sourcing contracts. The Corporation wants to enter building of gas infrastructure in the country in a big way. In pursuit of this, it has entered into construction of cross-country gas pipelines and city gas distribution networks and plans to scale these up significantly.

E&P

The Corporation has been consolidating its foray into the E&P space. Its drive for acquisition of overseas producing assets is going strong. A major recent breakthrough has been the taking up of 10 per cent participating interest by the Corporation in the multi-billion dollar integrated upstream and LNG project, the Pacific Northwest LNG, in Canada. This is the Corporation's biggest overseas acquisition so far. The total approved investment on cash-sink basis in this project is CAD 3.9 billion

Production of oil & gas production has already started from the Corporation's Niobrara Shale Project (USA), PNW LNG Project (Canada) and Carabobo Project (Venezuela).

The Corporation has three discovered blocks overseas, one each in Libya, Gabon and Nigeria. During the year, hydrocarbon discoveries in the two Gujarat-Kutch Offshore NELP-VIII blocks were intimated to the Ministry of Petroleum & Natural gas. With these, the number of domestic blocks with oil & gas discoveries has now increased to five, the other three being in Assam, Mizoram & Mahanadi.

In addition to these, the Corporation has two CBM blocks in Jharkhand (BK-CBM-2001/1 and NK- CBM- 2001/1). During the year, a major milestone was reached as the Development & Production Phase of the two CBM blocks began after obtaining sustained gas flow from the test wells in both the blocks.

Exploration activities have been progressing in the other four blocks. This includes one overseas block in Yemen and three domestic blocks. Domestic blocks include one PI block in Mehsana, Gujarat, and two operatorship blocks.

Looking forward, the Corporation plans to make further headway in its search for quality producing/near-producing assets for its E&P portfolio. In pursuit of this, the Corporation is in various stages of dialogue with potential strategic partners internationally. The brvailing low oil prices and the expectation of supbrssed prices for the next few years offers the Corporation an opportunity to acquire assets at good valuations.

R&D

The Corporation places significant emphasis on knowledge and research-based growth. In the context of the vagaries of the international crude oil prices and changing domestic pricing regime, R&D is viewed as a key competitive advantage driver for the Corporation. Investment in proprietary research in lubricants, catalysts, refinery & pipelines operations and product offerings is viewed as a thrust area for the Corporation. IndianOil R&D is extending competitive edge to the Corporation's new businesses of petrochemicals, polymers and alternative energy. In addition to this, R&D in CO2-to-fuel, nanotechnologies, gasification of coal, pet-coke and biomass are also emerging as other focus areas for the Corporation.

RISKS & CONCERNS

Crude oil price fluctuation: During 2014-15, there has been very sharp movement in the crude oil and product prices in the international market. During this period, Brent crude prices moved between $115-$45/barrel. As the Corporation is required to hold large crude oil inventory at any given time in its refinery tanks, pipelines feeding inland refineries and in transit from supplier countries, any sharp variation in prices results in huge inventory gain/loss depending upon the price movement.

Exposure to borrowings and foreign exchange fluctuations: Instability in the global economy, volatility in exchange rate movement and capital flows pose a risk to the Corporation. Given the high dependency on import of crude oil and exposure to foreign borrowings, sharp fluctuations in these have a bearing on the Corporation's financials.

Safety and security of assets and people: The huge risk potential of the hazards in the hydrocarbon industry calls for brventive actions in our processes and work culture. Behaviours and human factors are widely recognised as having an important effect on accident causation and its brvention. Therefore, in addition to strict compliance with the existing safety systems and procedures, improvement in safety culture and personal safety behaviour is required to be addressed effectively for sustenance of safe working environment. Similarly, increased sensitivity towards physical and cyber security also entails appropriate technological and human interventions.

Pipeline pilferage: This is emerging as a major area of concern for the Corporation. Pipeline pilferage poses a major risk to the smooth and safe management of the supply chain of the Corporation. Pilferages in pipelines lead to disruptions in crude oil and product supplies and put at risk life and property. The Corporation is taking a number of pro-active initiatives to curtail such incidents of pilferage, such as round-the-clock monitoring, physical monitoring of right-of-way, engagement with villagers, electronic surveillance and engagement with local police.

Risk Review: The Corporation recognises that risk is an integral part of business and is committed to managing the risk in a proactive and effective manner. The Corporation's Enterprise Risk Management involves Risk Identification, Assessment and Categorisation (based on risk appetite) and is reviewed through risk owners to optimise risks with appropriate mitigation plan.

FINANCIAL REVIEW

Revenue from Operations

The Corporation clocked net revenue from operations of Rs. 4,37,526 crore in the year 2014-15 as against Rs. 4,73,210 crore in the brvious year. The turnover of your Corporation (inclusive of excise duty and sale of services) was Rs. 4,50,756 crore as compared to Rs.4,57,571 crore in the brvious year.

Profit Before Tax

The Corporation has earned a Profit Before Tax of Rs. 7,995 crore in 2014-15 as compared to Rs. 9,926 crore in 2013-14.

Provision for Taxation

An amount of Rs. 2,722 crore has been provided towards income tax for 2014-15 considering the applicable income tax rates as against Rs. 2,907 crore provided during 2013-14.

Profit After Tax

The Corporation has earned a Profit After Tax of Rs. 5,273 crore during the current financial year as compared to Rs. 7,019 crore in 2013-14.

Debrciation & Amortisation

Debrciation & Amortisation for the year 2014-15 was Rs. 4,529 crore as against Rs. 5,760 crore for the year 2013-14. The reduction in debrciation is on account of adoption of useful life of asset as per Schedule II of the new Companies Act 2013.

Finance Cost

Finance Cost of the Corporation for the current year was Rs. 3,435 crore as against Rs. 5,084 crore during 2013-14. The reduction is mainly due to reduction in working capital owing to low oil prices and reduction in dues from Government.

Borrowings

The borrowings of your Corporation were Rs. 55t248 crore as on 31st March, 2015, as compared to Rs. 86,263 crore as on 31s March, 2014. The Total Debt to Equity ratio as on 31s March, 2015, works out to 0.81:1 as against 1.31:1 as on 31s March, 2014, and the Long Term Debt to Eqmty ratio stands at 0.56:1 as on 31st March, 2015, as against 0.57:1 as on 31st March, 2014.

Capital Expenditure

Gross Fixed Assets (includinsgt Capital Works in Progress) increased from Rs. 1,46,488 crore as on 31 March, 2014, to Rs. 1,57,966 crore as on 31s March, 2015. Capital advances for LSTK projects have gone down from Rs. 992 crore in 2013-14 to Rs. 955 crore in 2014-15.

Investments

Investments as on 31st March, 2015, were Rs. 23,899 crore as compared to Rs. 23,594 crore as on 31s March, 2014. The increase in investments during the year is mainly due to investment in subsidiaries ands joint ventures. The aggregate market value of quoted investments as on 31s March, 2015, i.e., investments made in ONGC Ltd., GAIL (India) Ltd., Oil India Ltd., Chennai Petroleum Corporation Ltd., Petronet LNG Ltd. and Lanka IOC PLC., is Rs. 25,454 crore (as against the acquisition price of Rs. 3,828 crore).

Earnings Per Share

Earnings Per Share works out to Rs. 21.72 for the current year as compared to Rs. 28.91 in the brvious year.

Earnings in Foreign Currency

During the year, the Corporation earned Rs. 16,010 crore in foreign currency as against Rs. 21,608 crore in 2013-14, which is mainly on account of export of petroleum/petrochemical products.

A. Segment Revenue comprises Turnover (Net of Excise Duties), Net Claim/(Surrender) of SSC, Subsidy & Grants received from the Government of India and Other Operating Income.

B. Other Businesses segment of the Corporation comprises Sale of Gas, Oil & Gas Exploration Activities, Explosives & Cryogenic Businesses and Wind Mill & Solar Power Generation.

INTERNAL CONTROL SYSTEMS

The Corporation has well-established internal control systems for its operations. Detailed manuals and well-documented policies are in place on various aspects of business activities. The internal processes are continuously reviewed, strengthened and revision of policies and guidelines carried out from time to time to align with the changing needs.

The Corporation has put in place the process of e-tendering for its procurements. The IT team continuously works with various departments to provide solutions to internal and external customers, and extends IT-enabled services across the entire procurement-to-pay process.

The Corporation has an independent Internal Audit Department headed by an Executive Director (below Board-level), who reports to the Chairman. The Internal Audit Department has a mix of officers from Finance and technical functions. The audit assignments are carried out as per the Annual Audit Programme approved by the Chairman and the Audit Committee. Internal Audit carries out extensive audits throughout the year covering each and every aspect of the business activities. The Statutory Auditors, during the process of financial audit, check the internal control efficacy. Significant observations, corrective actions and good practices suggested by the Statutory and Internal Auditors are reviewed by the management and the Audit Committee for appropriate implementation in order to strengthen the controls on various business processes. The Audit Committee reviews the recommendations and observations of the Internal Audit Department regularly.

HUMAN RESOURCES/INDUSTRIAL RELATIONS

The Corporation recognises the importance of human capital for the success of its business. The Corporation endeavours to acquire the best talent in the country from leading institutes and universities. It has been working towards nurturing and retaining talent. Job rotation and inter-location transfers throughout the organisation facilitate planned development of careers and broaden outlook.

The industrial relations climate in the Corporation remained harmonious, peaceful and cordial during the year. Employees' participation has been ensured through information-sharing with employees regularly, seeking their support, suggestions and cooperation. The Corporation continues to align its HR strategies with organsisational strategies. The employee strength of the Corporation as on 31s March, 2015, was 32,962, which includes 15,298 executives.

Information regarding Corporate Social Responsibility, Environmental Protection & Conservation, Technological absorption & adoption, Renewable Energy Developments, Foreign Exchange Conservation has been included in the Director's Report and annexure thereto.

CAUTIONARY STATEMENT

Statements in the Management's Discussion & Analysis describing the Company's objectives, expectations or anticipations may be forward looking within the meaning of applicable securities, laws and regulations. Actual results may differ materially from the expectations. Important factors that could influence the Company's operations include global and domestic demand and supply conditions affecting selling prices of products, input availability and prices, changes in Government regulations/tax laws, economic developments within the country and factors such as litigation and industrial relations.

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