“BREAK EVEN ANALYSIS WITH REFERENCE TO GAS

AUTHORITY OF INDIA LIMITED (GAIL) FOR THE YEARS 2014-15,

2015-16 AND 2016-17”

FINAL DRAFT SUBMITTED IN THE FULFILLMENT OF THE COURSE

TITLED-

FINANCIAL MANAGEMENT

SUBMITTED TO- SUBMITTED BY-

Mr. KAMESHWAR PANDEY NAME: AMOL VERMA

FACULTY OF FINANCIAL MANAGEMENT COURSE: B.B.A, LL.B (Hons.)

ROLL NO: 1813

SEMESTER: 2nd

SESSION- 2017-2022

CHANAKYA NATIONAL LAW UNIVERSITY NYAYA NAGAR,

MITHAPUR, PATNA-800001

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 DECLARATION

I, hereby, declare that the work reported in the B.B.A., LL.B (Hons.) Project Report entitled
“Break Even Analysis with reference to Gas Authority of India Limited (GAIL) for the
years 2014-15,2015-16 and 2016-17” submitted at Chanakya National Law University is
an authentic record of my work carried out under supervision of Mr. Kameshwar Pandey.. I
have not submitted this work elsewhere for any other degree or diploma. I am fully
responsible for the contents of my project report.

SIGNATURE OF CANDIDATE

NAME OF CANDIDATE: AMOL VERMA

CHANAKYA NATIONAL LAW UNIVERSITY

SESSION- 2017-2022

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 ACKNOWLEDGEMENT

I would like to thank my faculty Mr. Kameshwar Pandey whose guidance helped me a lot
with structuring my project.

I owe the present accomplishment of my project to my friends, who helped me immensely

with materials throughout the project and without whom I couldn’t have completed it in the
present way.

I would like to extend my gratitude to my parents and all those unseen hands that helped me
out at every stage of my project.

THANK YOU,

NAME: Amol Verma

COURSE: B.B.A., LL.B. (Hons.)

ROLL NO: 1813

SEMESTER – 2nd SESSION- 2017-2022

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 TABLE OF CONTENTS

S.No. Particulars Page No.

1. INTRODUCTION 5-8

2. NATURE AND FUNCTIONS OF FINANCIAL MANAGEMENT 10-24

_ FINANCE AND ECONOMICS 11

_ FINANCE AND ACCOUNTING 11

_ NATURE OF FINANCIAL MANAGEMENT 12

_ FUNCTIONS OF FINANCIAL MANAGMENT 15

3 BREAK EVEN ANALYSIS 25-31

4 COST VOLUME PROFIT ANALYSIS 32-41

5 COMPANY PROFILE 42-59

6 DATA ANALYSIS FOR THE FINANCIAL YEARS 2014-15, 2015-16 60-75

AND 2016-17

- MARGINAL INCOME STATEMENT 60

- COST STRUCTURE OF GAS AUTHORITY OF INDIA LIMITED. 61

- PROFIT VOLUME RATIO 62

- BREAK EVEN CHART 64

- MARGIN OF SAFETY 68

- BREAK EVEN ANALYSIS THROUGH GRAPHICAL 71 -75

REPRSENTATION FOR THE YEARS 2014-15, 2015-16 AND 2016-17

7 LIMITATIONS OF BREAK EVEN ANALYSIS 76

8 CONCLUSION 77

9 BIBLIOGRAPHY 78

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1. INTRODUCTION:

Management is a universal phenomenon. It is a very popular and widely used term. All
organizations - business, political, cultural or social are involved in management because it is
the management which helps and directs the various efforts towards a definite purpose.
According to Harold Koontz, “Management is an art of getting things done through and with
the people in formally organized groups. It is an art of creating an environment in which
people can perform and individuals can co-operate towards attainment of group goals”.
According to F.W. Taylor, “Management is an art of knowing what to do, when to do and see
that it is done in the best and cheapest way”.

SCOPE OF MANAGEMENT

Generally, the scope of management hovers around the following functional areas:

Ø Production management

Ø Marketing management

Ø Financial management

Ø Personal management

Our research work deals with the functional area of financial management.

Finance and accounting management:

Financial and accounting management deals with managerial activities related to procurement
and utilization of fund for business purpose. Its sub areas are as follows

 Financial accounting: It relates to record keeping of various financial transactions,

their classification and preparation of financial statements to show the financial
position of the organization.
 Management accounting: It deals with analysis and interpretation of financial record
so that management can take certain decisions on investment plans, return to investors
and dividend policy

5
  Taxation: This area deals with various direct and indirect taxes which an organization
has to pay.
 Costing: Costing deals with recording of costs, their classification, analysis and cost
control.

Financial management refers to the efficient and effective management of money (funds) in
such a manner as to accomplish the objectives of the organization. It is the specialized
function directly associated with the top management. The significance of this function is not
seen in the 'Line' but also in the capacity of the 'Staff' in overall of a company. It has been
defined differently by different experts in the field.

The term typically applies to an organization or company's financial strategy, while personal
finance or financial life management refers to an individual's management strategy. It
includes how to raise the capital and how to allocate capital, i.e. capital budgeting. Not only
for long term budgeting, but also how to allocate the short term resources like current
liabilities. It also deals with the dividend policies of the share holders.

Definitions of Financial Management

 "Planning is an inextricable dimension of financial management. The term financial

management can notes that funds flows are directed according to some plan." By
James Van Horne
 "Financial management is that activity of management which is concerned with the
planning, procuring and controlling of the firm's financial resources. " By Deepika
&Maya Rani
 “Financial Management is the Operational Activity of a business that is responsible
for obtaining and effectively utilizing the funds necessary for efficient operation.” By
Joseph Massie
 “Business finance deals primarily with rising administering and disbursing funds by
privately owned business units operating in non-financial fields of industry.”– By
Kuldeep Roy

6
  “Financial Management is an area of financial decision making, harmonizing
individual motives and enterprise goals." -By Weston and Brigham
 “Financial management is the area of business management devoted to a judicious use
of capital and a careful selection of sources of capital in order to enable a business
firm to move in the direction of reaching its goals.” – by J.F.Bradlery
 “Financial management is the application of the planning and control function to the
finance function.” – by K.D. Willson
 “Financial management may be defined as that area or set of administrative function
in an organization which relate with arrangement of cash and credit so that
organization may have the means to carry out its objective as satisfactorily as
possible." - by Howard & Opton.1
 Business finance can be broadly defined as the activity concerned with planning,
raising, controlling and administering of funds and in the business. “ by H.G Gathman
& H.E Dougall
 Financial management is a body of business concerned with the efficient and effective
use of either equity capital, borrowed cash or any other business funds as well as
taking the right decision for profit maximization and value addition of an entity.-
Kepher Petra; Kisii University.
 "Financial management refers to the proper and efficient use of money and it plays a
significant role in analyzing to invest in profitable business enterprise. Return on
Investment must be greater than the invested amount."
 "Financial management refers to the effective and efficient management of money
and it is also process of planning, controlling, leading, directing of a firm's financial
resources."

 Wealth maximization means maximization of shareholders' wealth. It is an advanced

goal compared to profit maximization.2
 Maintaining proper cash flow is a short run objective of financial management. It is
necessary for operations to pay the day-to-day expenses e.g. raw material, electricity
bills, wages, rent etc. A good cash flow ensures the survival of company.

1
"Business Finance and Financial Management". UpFina.
2
"Wealth Maximization". eFinanceManagement.

7
  Minimization on capital cost in financial management can help operations gain more
profit.
 It is vague:- There are several types of profits before interest, depreciation and taxes,
profit before taxes, profit after taxes, cash profit etc.

Financial Management for Start Up

For new enterprises, it is important to make a good estimation on costs, sales.3 Consideration
on appropriate length sources of finances can help businesses avoid the cash flow problems
even the failure of setting up. There are fixed and current sides of assets balance sheet. Fixed
assets refers to assets that cannot be converted into cash easily, like plant, property,
equipment etc.4 A current asset is an item on an entity's balance sheet that is either cash, a
cash equivalent, or which can be converted into cash within one year.5 It is not easy for start
ups to forecast the current asset, because there are changes in receivables and payables. 6

AIMS AND OBJECTIVES-

 To study the Break Even Analysis with reference to Gas Authority of India Limited
(GAIL) for the years 2014-15, 2015-16 and 2016-17.
 To comment critically on the cost volume profit (CVP) analysis, profit volume ratio
and margin of safety through break even charts for the following financial years.

RESEARCH METHODOLOGY:

The researcher will be relying on Doctrinal method of research to complete the project.

3
Nobanee, Haitham; Abraham, Jaya (2015). "Current assets management of small enterprises". Journal of
Economic Studie
4
"What are fixed assets? | The e-conomic Accounting Glossary". www.e-conomic.co.uk
5
"Current Asset Definition - AccountingTools". www.accountingtools.com.
6
"The Top 4 Cash Flow Forecasting Mistakes".

8
.LIMITATIONS OF THE STUDY-

Time was a very big limitation while making of this project. The researcher had limited
period of time and computation of data was a bit hectic task.

SOURCES OF DATA:

The researcher has used both primary as well as secondary sources to complete the project.

1. Primary sources include books related to Financial Accounting.

2. Secondary sources include all the financial data of the company and websites related to
Financial Accounting.

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2. NATURE AND FUNCTIONS OF FINANCIAL MANAGEMENT:

Financial management is one of the important aspects in finance. Nobody can ever think to
start a business or a company without financial knowledge and management strategies.
Finance links itself directly to several functional departments like marketing, production and
personnel. Here we will list out some of the major scope of financial management notes
which will help you in your decision making process.
We find that corporate finance is based on two fields of study, Economics and Accounting.
Economics provides us much of the theory that underlines our techniques, whereas
Accounting provides the data which helps us in making decision. Financial Management is
the maintenance and creation of economic value or wealth.

Illustration :

Consider two firms, Merck and General Motors (G.M.) at the end of 2007, the total market
value of Merck, a large pharmaceutical Co. was $ 103 billons. Over the life of the business,
Merck investor had invested about $ 30 billions in the business. In other words management
created $ 73 billions in additional wealth for the Shareholders G M on the other hand, was
valued at $ 30 billions at the end of 2007; but over the year G M's investors had actually
invested $ 85 billions-- a loss in value of $ 55 billions. Therefore Merck created wealth for its
shareholder's, while G M lost shareholder's wealth.

Financial Management is that branch of study which deals with finance and its functions
which are-

 Raising of funds
 Allocations
 Controlling financial resources
The objective of all the above activities is to maximize shareholder's wealth.

"Financial Management is the operational activity of a business that is responsible for

obtaining and effectively utilising the funds necessary for efficient operations."

- Joseph & Massie

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There are 3 A's of Financial Management.

 Anticipating Financial Needs

 Acquiring Financial Resources and
 Allocating Funds in Business
Since FM is concerned with the efficient use of capital funds which is an important economic
resource.

Finance & Economics

Economics is concerned with the overall institutional environment in which the firm operates,
which includes the internal and external environment. It is effect with the factors like.

 Growth rate of the economy

 Domestic saving rate
 The tax environment
 External economic relationship
 Demand and Supply relationship
 The rate of inflation
 The fiscal policy
 The terms on which the firm can raise finance etc.
No financial manager can afford to ignore the key development in the economic sphere and
the impact of the same on the firm. Since the macro-economic environment defines the
setting within which a firm operates and micro-economic theory provides the conceptual
underpinning(support) for the tools of financial decision making.

Finance & Accounting

The finance and accounting functions are closely related and almost invariably fall within the
domain of the chief financial officer. We can understand the relation of finance with account
in the following three heads.

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  Score Keeping Vs Value Maximising
Accounting is concerned with score keeping, whereas finance is aimed at value maximizing.

“ The accountant role is to provide consistently developed and easily interpreted data about
the firm’s past, present and future operations. The financial manager uses these data, either in
raw form or after certain adjustment and analyses, as an important input to the decision-
making process.”

Gitman

 Accrual Method Vs. Cash Method

The accountant prepares the accounting reports based on the accrual method which
recognizes revenues when the sale occurs and matches expenses to sales. 7 The focus of the
manager, however, is on cash flows. He is concerned about the magnitude, timing and risk of
cash flows as these are the fundamental determinants of value.

 Certainty Vs. Uncertainty

Accounting deals primarily with the past. It records what has happened. Hence, it is relatively
more objective and certain. Finance is concerned mainly with the future. It involves decision
making under imperfect information and uncertainty.

NATURE OF FINANCIAL MANAGEMENT:

Nature of financial management could be spotlighted with reference to the following

aspects of this discipline:

(i) Financial management is a specialized branch of general management, in the present-day-

times. Long back, in traditional times, the finance function was coupled, either with
production or with marketing; without being assigned a separate status.

(ii) Financial management is growing as a profession. Young educated persons, aspiring for a
career in management, undergo specialized courses in Financial Management, offered by
universities, management institutes etc.; and take up the profession of financial management.

7
"Measuring the Deficit: Cash vs. Accrual". Government Accountability Office.

12
(iii) Despite a separate status financial management, is intermingled with other aspects of
management. To some extent, financial management is the responsibility of every functional
manager. For example, the production manager proposing the installation of a new plant to be
operated with modern technology; is also involved in a financial decision.

Likewise, the Advertising Manager thinking, in terms of launching an aggressive advertising

programme, is too, considering a financial decision; and so on for other functional managers.
This intermingling nature of financial management calls for efforts in producing a co-
ordinated financial system for the whole enterprise.

(iv) Financial management is multi-disciplinary in approach. It depends on other disciplines,

like Economics, Accounting etc., for a better procurement and utilisation of finances.

For example, macro-economic guides financial management as to banking and financial

institutions, capital market, monetary and fiscal policies to enable the finance manager decide
about the best sources of finances, under the economic conditions, the economy is passing
through.

Micro-economics points out to the finance manager techniques for profit maximisation, with
the limited finances at the disposal of the enterprise. Accounting, again, provides data to the
finance manager for better and improved financial decision making in future.

(v) The finance manager is often called the Controller; and the financial management
function is given name of controllership function; in as much as the basic guideline for the
formulation and implementation of plans-throughout the enterprise-come from this quarter.

The finance manager, very often, is a highly responsible member of the Top Management
Team. He performs a trinity of roles-that of a line officer over the Finance Department; a
functional expert commanding subordinates throughout the enterprise in matters requiring
financial discipline and a staff adviser, suggesting the best financial plans, policies and
procedures to the Top Management.

In any case, however, the scope of authority of the finance manager is defined by the Top
Management; in view of the role desired of him- depending on his financial expertise and the
system of organizational functioning.

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(vi) Despite a hue and cry about decentralisation of authority; finance is a matter to be found
still centralised, even in enterprises which are so called highly decentralised. The reason for
authority being centralised, in financial matters is simple; as every Tom, Dick and Harry
manager cannot be allowed to play with finances, the way he/she likes. Finance is both-a
crucial and limited asset-of any enterprise.

(vii) Financial management is not simply a basic business function along with production and
marketing; it is more significantly, the backbone of commerce and industry. It turns the sand
of dreams into the gold of reality.

No production, purchases or marketing are possible without being duly supported by requisite
finances. Hence, Financial Management commands a higher status vis-a-vis all other
functional areas of general management.

Brief about the nature of financial management:

Financial Management is an integral part of overall management. Financial considerations

are involved in all business decisions. So financial management is pervasive throughout the
organisation. The central focus of financial management is valuation of the firm. That is
financial decisions are directed at increasing/maximization/ optimizing the value of the firm.
Financial management essentially involves risk-return trade-off Decisions on investment
involve choosing of types of assets which generate returns accompanied by risks. Generally
higher the risk returns might be higher and vice versa. So, the financial manager has to decide
the level of risk the firm can assume and satisfy with the accompanying return. Financial
management affects the survival, growth and vitality of the firm. Finance is said to be the life
blood of business. It is to business, what blood is to us. The amount, type, sources, conditions
and cost of finance squarely influence the functioning of the unit. Finance functions, i.e.,
investment, rising of capital, distribution of profit, are performed in all firms - business or
non-business, big or small, proprietary or corporate undertakings. Yes, financial management
is a concern of every concern. Financial management is a sub-system of the business system
which has other subsystems like production, marketing, etc. In systems arrangement financial
sub-system is to be well-coordinated with others and other sub-systems well matched with
the financial subsystem.

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FUNCTIONS OF FINANCIAL MANAGEMENT:

It is very difficult to separate the function from production, marketing and other function of
the organization but the function such as raising of funds, investing them in assets and
distributing return earned from assets to shareholders can easily be identified.

The following are the main functions of financial management which have been explained
below:

 Investment Decision: Evaluating the risk involved, measuring the cost of fund and
estimating expected benefits from a project comes under investment decision. It is one
of the important scope of financial management. The two major components of
investment decision are – Capital budgeting and liquidity. Capital budgeting is
commonly known as the investment appraisal. It deals with the allocation of capital
and funds in such a manner that they will yield earnings in future. Capital budgeting
determines the long term investment which includes replacement and renovation of
old assets. It is all about maintaining an appropriate balance between fixed and current
assets in order to maximize profitability and to maintain desired liquidity in the firm
for its smooth functioning.

 Working Capital Decision: Decisions related to working capital is another crucial

scope of financial management. Decisions involving around working capital and short
term financing are known as working capital decision. It also manages the
relationship between short term assets and its liabilities.8 Short term assets include
cash in hand, receivables, inventory, short-term securities, etc. Creditors, bills
payable, outstanding expenses, bank overdraft, etc are a firm’s short term liabilities.
Short term assets can be exchanged with cash within one calendar year. Similarly, the
liabilities are to be settled within an accounting year.

 Dividend Decision: The Dividend Decision plays a crucial role in today’s corporate
era. It determines the amount of taxation that stockholders pay. A good dividend
policy helps to achieve the objective of wealth maximization. Distributing the entire
profit in the form of dividends or distributing only a certain percentage of it is decided

8
Gross Working Capital vs Net working Capital

15
 by dividend policy. It is known as deciding the optimum dividend payout ratio i.e.
proportion of net profits to be paid out to shareholders. Stability of cash dividends and
stock sets the parameter which determines the number of investment opportunities.
Expansion of an economic activity depends on effectiveness of dividend decisions
and scope of financial management.

 Financing Decision: Financing Decisions focuses on the accountabilities and

stockholders’ equity side of the firm’s balance sheet, for example decision to issue
bonds is a kind of financing decision. The main aim of financing decision is to cover
expenses and investments. The decision involves generating capitals by various
methods, from different sources, in relative proportion and considering opportunity
costs, with respect to time of flotation of securities, etc. Scope of financial
management is to meet the expenses of the firm, a suitable capital structure for the
enterprise should be developed by the finance manager. Only an optimum finance mix
can maximize the market price of the company’s shares in the long run. To decrease
the risk, a stable equilibrium is required between debt and equity. Return and risk to
the equity shareholders depends on how optimally the debts and financial leverages
are used. Only when the risk and return are in synchronization, the market value per
share is maximized. The apt timing for raising funds is to be decided by the financial
manager time to raise the funds.

The functions of financial management are guided by the ultimate aim of any business i.e.
profit and wealth maximization. If we broadly classify the functions of a finance head of the
business, it can be the procurement of funds and utilization of funds. The objective
underlying the function of procurement of funds is to minimize the cost of funds whereas the
objective behind the utilization of funds is to maximize the returns.

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The functions of finance can be pictorially explained as:

PROCUREMENT/SOURCING OF FUNDS

1) Assessing the Requirement of Funds

The function of procurement of funds starts from estimating the requirement of funds.
It involves a lot of forecasting exercises to identify each and every future requirement
of the project and find out the sum required for investment in fixed assets and
working capital. Not only the quantum of a requirement is enough, the finance
manager has also to decide the timing of that requirement. The timing of funds is very
important in financial management because it carries time value of money and we
know ‘a dollar today is the same as a dollar 1 year later’.

2) Financing Decisions/Capital Structure Decisions

Once a reasonable estimate of funds is charted out, the capital structure decisions
would finalize two things viz. a) the mix of long-term finance and short-term finance
2) the mix of own funds and debt funds. Longs term funds are normally used to

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 finance long-term requirements such as fixed assets, other long-term investments and
a part of the working capital that remains permanently invested at any point of time.

UTILIZATION/APPLICATION OF FUNDS

1) Working Capital Management Decisions

Working capital management is a very important day to day activity for a finance
manager. It spreads over both the broader functions i.e. procurement as well as
utilization of funds. It mainly involves management of current assets and current
liabilities and keeps the gap between two managed as per the available funds with the
organization. Cash management is a big task in working capital management. The
finance manager has to ensure that all the branches, units etc have the sufficient cash
to address the necessary expenses. The smoother the management of cash, the
smoother is the flow of operations of the business.

2) Dividend Decisions

Dividend decisions mainly involve taking decisions in relation to the payment of

dividend to the shareholders. The main concerns to handle is to decide the dividend
payout ratio which is dependent on a lot of things like requirement of funds to the
company in their projects, the comparison of returns expected in company’s projects
and the return available to the shareholder in the normal market, stability of the
dividend payment, market expectations, trend of earnings, tax considerations to the
shareholders etc.

3) Investment Decisions/Capital Budgeting

Investment decisions involve utilization/application of funds in the right mix of

projects and fixed assets to maximize the returns for the organization. There are
various techniques used like Net Present Value, Internal Rate of Return, and Payback
Period etc.

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 4) Financial Analysis/Performance Appraisal

The financial analysis is neither included in the functions of the finance but it is
necessary to evaluate all the functions of finance which are performed. This
evaluation results in the findings for improvements etc. Performance appraisal
assesses the effectiveness of procurement of funds and their respective utilization.

There are other functions like dealing with day to day transactions and negotiating
with the creditors, debtors, bankers etc.

Scope Of Financial Management

The firm secures whatever capital needs and employs its activities which generates returns on
invested capital. Finance is involved in all the activities of the firm such as buying a new
machine or replacing an old machine for the purpose of increasing production capacity
effects the flow of funds. Recruitment of employees in production is clearly a responsibility
of the production department but it requires payment of wages and salaries and other benefits
thus involves finance. Similarly sales promotion activities comes within the preview of
marketing department but advertisement and other marketing activities involves the cash
outflow hence finance is involved therefore, it is understood that the scope of financial
management is not restricted to finance department only but also effects production and
marketing department as well. For better understanding the scope of financial management
we can divide it into two approaches, Traditional and Modern Approach.

Traditional Approach: - In early stage the role of FM was restricted upto raising and
administrating of funds needed by the corporate enterprises to meet their financial needs such
as;

 Arrangement of funds from financial institutions.

 Arrangement of funds through financial instruments like share, bonds etc.
 Looking after the legal and accounting relationship between a corporation and its
sources of funds.

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Thus, the finance manager has a limited role to perform he was expected to keep accurate
financial records, prepare reports on the corporation's status and performance and manage
cash in a way that the corporation was in a position to pay its bills on time.

The term 'Corporate Finance' was used in place of the present term 'Financial
Management'. The traditional approach now has been discarded as it suffers from certain
limitation, the traditional approach implied a very narrow scope for financial management as
it has not provided analytical framework for financial decision making.

Modern Approach: - Provides both conceptual and analytical framework for financial
decision making. It means the financial function covers both, acquisition and allocating of
funds the new approach is an analytical way of viewing the financial problems of a firm. the
main contents of the modern approach are as:

 What is the total volume of funds, an enterprise should have?

 What specific assets should an enterprise acquire?
 How are the funds required to be finance?

Objectives of financial management:

The main objectives of financial management are:-

1. Profit maximization: The main objective of financial management is profit

maximization. The finance manager tries to earn maximum profits for the company in
the short-term and the long-term.9 He cannot guarantee profits in the long term
because of business uncertainties. However, a company can earn maximum profits
even in the long-term, if:-
i. The Finance manager takes proper financial decisions.
ii. He uses the finance of the company properly.

 Wealth maximization: Wealth maximization (shareholders' value maximization) is

also a main objective of financial management. Wealth maximization means to earn
maximum wealth for the shareholders. So, the finance manager tries to give a

9
Landsg, S (2002). Price Theory and Applications (fifth ed.). South-Western.

20
 maximum dividend to the shareholders. He also tries to increase the market value of
the shares. The market value of the shares is directly related to the performance of the
company. Better the performance, higher is the market value of shares and vice-versa.
So, the finance manager must try to maximise shareholder's value. Wealth
maximization means maximization of shareholders' wealth. It is an advanced goal
compared to profit maximization.10

2. Proper estimation of total financial requirements: Proper estimation of total

financial requirements is a very important objective of financial management. The
finance manager must estimate the total financial requirements of the company. He
must find out how much finance is required to start and run the company. He must
find out the fixed capital and working capital requirements of the company. His
estimation must be correct. If not, there will be shortage or surplus of finance.
Estimating the financial requirements is a very difficult job. The finance manager
must consider many factors, such as the type of technology used by company, number
of employees employed, scale of operations, legal requirements, etc.
3. Proper mobilisation: Mobilisation (collection) of finance is an important objective of
financial management. After estimating the financial requirements, the finance
manager must decide about the sources of finance. He can collect finance from many
sources such as shares, debentures, bank loans, etc. There must be a proper balance
between owned finance and borrowed finance. The company must borrow money at a
low rate of interest.
4. Proper utilisation of finance: Proper utilisation of finance is an important objective
of financial management. The finance manager must make optimum utilisation of
finance. He must use the finance profitable. He must not waste the finance of the
company. He must not invest the company's finance in unprofitable projects. He must
not block the company's finance in inventories. He must have a short credit period.
5. Maintaining proper cash flow: Maintaining proper cash flow is a short-term
objective of financial management. The company must have a proper cash flow to pay
the day-to-day expenses such as purchase of raw materials, payment of wages and
salaries, rent, electricity bills, etc. If the company has a good cash flow, it can take
advantage of many opportunities such as getting cash discounts on purchases, large-

10
"Wealth Maximization". eFinanceManagement..

21
 scale purchasing, giving credit to customers, etc. A healthy cash flow improves the
chances of survival and success of the company.
6. Survival of company: Survival is the most important objective of financial
management. The company must survive in this competitive business world. The
finance manager must be very careful while making financial decisions. One wrong
decision can make the company sick, and it will close down.
7. Creating reserves: One of the objectives of financial management is to create
reserves. The company must not distribute the full profit as a dividend to the
shareholders. It must keep a part of it profit as reserves. Reserves can be used for
future growth and expansion. It can also be used to face contingencies in the future.
8. Proper coordination: Financial management must try to have proper coordination
between the finance department and other departments of the company.
9. Create goodwill: Financial management must try to create goodwill for the company.
It must improve the image and reputation of the company.11 Goodwill helps the
company to survive in the short-term and succeed in the long-term. It also helps the
company during bad times.
10. Increase efficiency: Financial management also tries to increase the efficiency of all
the departments of the company. Proper distribution of finance to all the departments
will increase the efficiency of the entire company.
11. Financial discipline: Financial management also tries to create a financial discipline.
Financial discipline means:-
i. To invest finance only in productive areas. This will bring high returns
(profits) to the company.
ii. To avoid wastage and misuse of finance.
12. Reduce cost of capital: Financial management tries to reduce the cost of capital. That
is, it tries to borrow money at a low rate of interest. The finance manager must plan
the capital structure in such a way that the cost of capital it minimised.
13. Reduce operating risks: Financial management also tries to reduce the operating
risks. There are many risks and uncertainties in a business. The finance manager must
take steps to reduce these risks. He must avoid high-risk projects. He must also take
proper insurance.

11
A Primer on Calculating Goodwill Impairment: Valuation Issues Raised by Financial Accounting Statement
142.

22
 14. Prepare capital structure: Financial management also prepares the capital structure.
It decides the ratio between owned finance and borrowed finance. It brings a proper
balance between the different sources of capital. This balance is necessary for
liquidity, economy, flexibility and stability.

Role of Finance Manager: Who is a finance manager? What is his or her role? A financial
manager is a person who is responsible in a significant way to carry out the financial function
he occupies the key position in the enterprises now a days he is one of the member of the top
management. In today’s scenario, the job of financial manager in India has become
important, complex and demanding, due to certain changes such as.

 Industrial licensing framework has been substantially relaxed, leading to considerable

expansion in the scope of private sector investment.
 The Monopolies and Restrictive Trade Practices (MRTP) has been virtually abolished
and the Foreign Exchange Management Act (FEMA) has been substantially
liberalized.
 Freedom has been given to companies in designing and pricing the securities issued
by them.
 The system of cash credit has been replaced by a system of working capital loan.
 The pace of mergers, acquisitions and restructuring has intensified.
 The scope for direct investment has expanded considerably and foreign portfolio
investment has assumed great significance.
And also due to the wake of global competition, economic uncertainty, tax law changes,
etc.

The key challenges of financial manager may be as

 Investment planning
 Financial structure
 Mergers, acquisitions and restructuring
 Working capital management
 Performance Management
 Risk Management

23
 Investor relations
 Utilized the fund in the most efficient manner.
 Financial Negotiation.

24
3. BREAK EVEN ANALYSIS:

Learning Objectives

• To describe as to how the concepts of fixed and variable costs are used in C-V-P
analysis

• To segregate semi-variable expenses in C-V-P analysis

• To identify the limiting assumptions of C-V-P analysis

• To work out the breakeven analysis, contribution analysis and margin of safety

• To understand how to draw a breakeven chart

• To compute breakeven point.

Understanding break-even analysis

The Break Even Analysis (BEA) is a useful tool to study the relation between fixed costs and
variable costs and revenue.

It’s inextricably linked to the Break Even Point (BEP), which indicates at what moment an
investment will start generating a positive return.12

It can be graphically represented or calculated with a simple mathematical calculation. A

Break-Even Analysis calculates the size of the production at a certain (selling) price that is
necessary to cover all the costs that have been incurred.

12
Brealey, R., Myers, S., Marcus, A., Maynes, E., Mitra, D. 2009. Fundamentals of Corporate Finance.
McGraw-Hill Ryerson. USA. pp. 284. ISBN 978-0-07-098403-5

25
Break Even Analysis components

To understand how this analysis works, it’s wise to at least mention the following cost
concepts.

1) Fixed costs

Fixed costs are also called overhead. These costs are always occur after the decision
to start an economic activity and they relate directly to the level of production, but not
the quantity of production.

Fixed costs include (but are not limited to) depreciation of materials, interest costs,
taxes and general overhead costs (labour costs, energy costs, depreciation costs).

A carpentry business that mainly makes tables, chairs and closets, employs 50 people.
The business has a large number of fixed costs. It’s about costs that come back every
month and stay the same, and can only change after a year. Think for instance of
salaries, monthly energy bills and the depreciation costs of current assets (including
machines) and fixed assets (such as a building).

2) Variable costs

Variable costs are costs that change in direct relation to the volume of production.
This concerns for instance selling costs, production costs, fuel and other costs that are
directly related to the production of goods or an investment in capital.13

For a carpentry business, mainly the costs for raw materials, auxiliary materials, semi-
finished goods such as wood, nails and copper handles, are variable. If they are
producing 50 closets per month, they use less than when they produce 75 closets in
some other month. Therefore, these costs vary every month.

13
Garrison, Noreen, Brewer. Ch 2 - Managerial Accounting and Costs Concepts, pp 39.

26
Financial Tool

The Break Even Analysis is a handy tool to decide if a company should or should not start
producing and selling a product.

In addition, you can calculate the Break Even Point (BEP), also known as the critical point.
It is the turnover at which the total revenue would equal the total costs. In that case, the
organisation would break even and both the fixed and variable costs will be earned back. If
the turnover is lower than the total costs, it’s a loss. Everything over this critical point can be
booked as profit.

Break Even Analysis formula

In order to calculate the Break Even Point within the Break Even Analysis, you need certain
data, namely the fixed costs, the selling price of the product and the variable costs per
product.

27
The Break Even Point is determined by the moment when the fixed costs have been earned
back. That only happens because of the so-called contribution margin; the selling price minus
the variable costs.

When the fixed costs are divided by the contribution margin, you get the Break-Even Point.
See the picture below for the Break-Even Point formula:

Break Even Point = fixed costs / ( selling price – variable costs )

Break Even Analysis example

The previously mentioned carpentry business is planning to make a new closet.

It’s a Bohemian model of rough, white-washed woos with two doors and a drawer at the
bottom. The closet is almost two metres high, 1.50 metres wide and 0.5 metres deep. There
are shelves in the closet and there is an area to hang up clothes, making it suitable as a
wardrobe. It would be a good idea for the director to first consider certain data before he
decides to start production of the closet.

 The expected selling price is $1,000.

28
  The fixed costs average $210,000 per year (monthly labour costs, energy costs,
interest and depreciation costs).
 The purchasing price of the wood, auxiliary materials and semi-finished products is
$400 per closet and make up the variable costs.

With this data, the director will determine the Break-Even Point and he makes the
following calculation:

Break Even Point = $210.000 / ( $1000 – $400 ) = 350 items

That means that the carpentry business won’t break even until they sell 350 of these
closets, and won’t make a profit until the 351th one.

Cooperation

The above shows that good communication and pleasant cooperation between the Purchasing,
Sales and Production departments of a business is very important.

Together they will reach a joint conclusion. It might be impossible for the Sales department
to sell more than 350 of these closets. It might be feasible, but the $1,000 selling price might

29
be too high, leading to the salespeople recommending a more competitive selling price of
$750.

When that happens, something changes in the Break-Even Point and they will need to sell
more than 350 closets before making a profit.

The Purchasing department on the other hand can make sure that raw materials, auxiliary
materials and semi-finished products are purchased at more affordable rates, reducing the
variable costs.

Together with the Sales department, they can also opt to stick to the high selling price,
ensuring that they will turn a profit sooner when they sell 350 closets.

Lastly, it’s the Production department’s turn. For them it’s about efficiently handling raw
materials. Waste needs to be avoided in order to reduce the variable costs.

An efficient and effective approach will also help with the speed of production, allowing
more closets to be produced in less time.

Of course, other departments are also linked to this system. For instance, it’s the Marketing
department’s task to offer the closets in an attractive way using various channels, including
shops, online shops, design magazines and so on.

Break Even Analysis advantages

The main advantage of a Break-Even Point is that it explains the relationship between costs,
production volume and revenue.

This analysis can be expanded to show how the changes between fixed and changing cost
relations will affect profit levels and the Break-Even Point in for instance product prices or
turnovers.

The Break Even Analysis is particularly useful when it is combined with partial budgeting
techniques.

30
The most important advantage to using the method is that it shows the minimally required
amount of economic activity, necessary to prevent potential losses.

Furthermore, based on the Break-Even Point formula, it’s easy to make additional
calculations that provide insight into the profitability of the investment.

 It is frequently mistaken for the payback period, the time it takes to recover an
investment. There are variations on break even that make some people think we have
it wrong. The one we do use is the most common, the most universally accepted, but
not the only one possible.
 It depends on the concept of fixed costs, a hard idea to swallow. Technically, a break-
even analysis defines fixed costs as those costs that would continue even if you went
broke. Instead, you may want to use your regular running fixed costs, including
payroll and normal expenses. This will give you a better insight on financial realities.
We call that “burn rate” these post-Internet days.
 It depends on averaging your per-unit variable cost and per-unit revenue over the
whole business.

Over the past few years, the break-even analysis has fallen out of favor with financial
analysts. It is okay when done right, can be useful, but not for all businesses and not for all
situations. And, to add to the confusion, the term “break-even” is often used to refer to
“payback” or “payback period.” And there are several ways to do the analysis. But what is
shown here is the most common.

There is no net loss or gain, and one has "broken even," though opportunity costs have been
paid and capital has received the risk-adjusted, expected return. In short, all costs that must be
paid are paid, and there is neither profit nor loss.14

14
Levine, David; Michele Boldrin (2008-09-07). Against Intellectual Monopoly. Cambridge University Press.
p. 312.

31
4. COST VOLUME PROFIT ANALYSIS:

Cost-volume-profit (CVP) analysis is used to determine how changes in costs and volume
affect a company's operating income and net income. What is 'Cost-Volume Profit Analysis':

Cost-volume profit (CVP) analysis is based upon determining the breakeven point of cost and
volume of goods and can be useful for managers making short-term economic decisions.
Cost-volume profit analysis makes several assumptions in order to be relevant including that
the sales price, fixed costs and variable cost per unit are constant. Running this analysis
involves using several equations using price, cost and other variables and plotting them out
on an economic graph.

Breaking down 'Cost-Volume Profit Analysis'

CVP analysis is a method of Financial Accounting that is concerned with the impact varying
levels of sales and product costs will have on operating profit. CVP analysis is only reliable if
costs are fixed within a specified production level. All units produced are assumed to be sold
and all costs must be variable or fixed in a CVP analysis. Another assumption is all changes
in expenses occur because of changes in activity level. Semi-variable expenses must be split
between expense classifications using the high-low method, scatter plot or statistical
regression.

Cost-Volume-Profit (C-V-P) Relationship

We have observed that in marginal costing, marginal cost varies directly with the volume of
production or output. On the other hand, fixed cost remains unaltered regardless of the
volume of output within the scale of production already fixed by management. In case if cost
behaviour is related to sales income, it shows cost-volume- profit relationship. In net effect, if
volume is changed, variable cost varies as per the change in volume. In this case, selling price
remains fixed, fixed remains fixed and then there is a change in profit.

32
Being a manager, you constantly strive to relate these elements in order to achieve the
maximum profit. Apart from profit projection, the concept of Cost-Volume-Profit (CVP) is
relevant to virtually all decision-making areas, particularly in the short run.

The relationship among cost, revenue and profit at different levels may be expressed in
graphs such as breakeven charts, profit volume graphs, or in various statement forms.

Profit depends on a large number of factors, most important of which are the cost of
manufacturing and the volume of sales. Both these factors are interdependent. Volume of
sales depends upon the volume of production and market forces which in turn is related to
costs. Management has no control over market. In order to achieve certain level of
profitability, it has to exercise control and management of costs, mainly variable cost. This is
because fixed cost is a non-controllable cost. But then, cost is based on the following factors:

• Volume of production

• Product mix

• Internal efficiency and the productivity of the factors of production

• Methods of production and technology

• Size of batches

• Size of plant

Thus, one can say that cost-volume- profit analysis furnishes the complete picture of the
profit structure. This enables management to distinguish among the effect of sales,
fluctuations in volume and the results of changes in price of product/services.

33
In other words, CVP is a management accounting tool that expresses relationship among sale
volume, cost and profit.15 CVP can be used in the form of a graph or an equation. Cost-
volume-profit analysis can answer a number of analytical questions. Some of the questions
are as follows:

1) What is the breakeven revenue of an organization?

2) How much revenue does an organization need to achieve a budgeted profit?
3) What level of price change affects the achievement of budgeted profit?
4) What is the effect of cost changes on the profitability of an operation?

Cost-volume-profit analysis can also answer many other “what if” type of questions.

Cost-volume-profit analysis is one of the important techniques of cost and

management accounting. Although it is a simple yet a powerful tool for planning of
profits and therefore, of commercial operations. It provides an answer to “what if”
theme by telling the volume required to produce.

Objectives of Cost-Volume-Profit Analysis

1) In order to forecast profits accurately, it is essential to ascertain the relationship

between cost and profit on one hand and volume on the other.
2) Cost-volume-profit analysis is helpful in setting up flexible budget which indicates
cost at various levels of activities.
3) Cost-volume-profit analysis assists in evaluating performance for the purpose of
control.
4) Such analysis may assist management in formulating pricing policies by projecting
the effect of different price structures on cost and profit.
Assumptions and Terminology

Following are the assumptions on which the theory of CVP is based:

15
The Controversy over the contribution margin approach, in MAAW, Chapter 11.

34
1) The changes in the level of various revenue and costs arise only because of the
changes in the number of product (or service) units produced and sold, e.g., the
number of television sets produced and sold by Sigma Corporation. The number of
output (units) to be sold is the only revenue and cost driver. Just as a cost driver is any
factor that affects costs, a revenue driver is any factor that affects revenue.

2) Total costs can be divided into a fixed component and a component that is variable
with respect to the level of output. Variable costs include the following:

a. Direct materials

b. Direct labour

c. Direct chargeable expenses

Variable overheads include the following:

d. Variable part of factory overheads

e. Administration overheads

f. Selling and distribution overheads

3) There is linear relationship between revenue and cost.

4) When put in a graph, the behaviour of total revenue and cost is linear (straight line),
i.e. Y = mx + C holds good which is the equation of a straight line.
5) The unit selling price, unit variable costs and fixed costs are constant.
6) The theory of CVP is based upon the production of a single product. However, of late,
management accountants are functioning to give a theoretical and a practical approach
to multi-product CVP analysis.

35
 7) The analysis either covers a single product or assumes that the sales mix sold in case
of multiple products will remain constant as the level of total units sold changes.
8) All revenue and cost can be added and compared without taking into account the time
value of money.
9) The theory of CVP is based on the technology that remains constant.
10) The theory of price elasticity is not taken into consideration.

Marginal Cost Equations and Breakeven Analysis

From the marginal cost statements, one might have observed the following:

Sales – Marginal cost = Contribution ……(1)

Fixed cost + profit = Contribution ……(2)

By combining these two equations, we get the fundamental marginal cost equation as
follows:

Sales – Marginal cost = Fixed cost + Profit ……(3)

This fundamental marginal cost equation plays a vital role in profit projection and has a
wider application in managerial decision-making problems.

The sales and marginal costs vary directly with the number of units sold or produced. So, the
difference between sales and marginal cost, i.e. contribution, will bear a relation to sales and
the ratio of contribution to sales remains constant at all levels. This is profit volume or P/V
ratio. Thus,

P/V Ratio (or C/S Ratio) = Contribution (c) ..........(4)

Sales (s)

It is expressed in terms of percentage, i.e. P/V ratio is equal to (C/S) x 100.

36
 Or, Contribution = Sales x P/V ratio .....(5)

Or, Sales = Contribution .....(6)

P/V ratio

The above-mentioned marginal cost equations can be applied to the following heads:

1. Contribution
Contribution is the difference between sales and marginal or variable costs. It contributes
toward fixed cost and profit. The concept of contribution helps in deciding breakeven point,
profitability of products, departments etc. to perform the following activities:

 Selecting product mix or sales mix for profit maximization.

 Fixing selling prices under different circumstances such as trade depression, export
sales, price discrimination etc.

2. Profit Volume Ratio (P/V Ratio), its Improvement and Application

The ratio of contribution to sales is P/V ratio or C/S ratio. It is the contribution per rupee
of sales and since the fixed cost remains constant in short term period, P/V ratio will also
measure the rate of change of profit due to change in volume of sales. The P/V ratio may
be expressed as follows:

P/V ratio = Sales – Marginal cost of sales = Contribution

Sales Sales

= Changes in contribution = Change in profit

Changes in sales Change in sales

A fundamental property of marginal costing system is that P/V ratio remains constant at
different levels of activity.

37
 A change in fixed cost does not affect P/V ratio. The concept of P/V ratio helps in
determining the following:

• Breakeven point.
• Profit at any volume of sales.
• Sales volume required to earn a desired quantum of profit.
• Profitability of products.
• Processes or departments.

The contribution can be increased by increasing the sales price or by reduction of variable
costs. Thus, P/V ratio can be improved by the following:

• Increasing selling price.

• Reducing marginal costs by effectively utilizing men, machines, materials and
other services.
• Selling more profitable products, thereby increasing the overall P/V ratio.

3. Breakeven Point

Breakeven point is the volume of sales or production where there is neither profit nor
loss. Thus, we can say that:

Contribution = Fixed cost

Now, breakeven point can be easily calculated with the help of fundamental marginal cost
equation, P/V ratio or contribution per unit.

a. Using P/V Ratio

Sales S BEP = Contribution at BEP = Fixed cost

P/ V ratio P/ V ratio

Thus, if sales is Rs. 2,000, marginal cost Rs. 1,200 and fixed cost Rs. 400, then:
38
 Breakeven point = 400 x 2000 = Rs. 1000

2000 – 1200

Similarly Profit volume ratio can be calculated as 40%

So, breakeven sales = Rs. 400 / .4 = Rs. 1000

b. Using Contribution per unit

Breakeven point = Fixed cost = 100 units or Rs. 1000

Contribution per unit

4. Margin of Safety (MOS)

Every enterprise tries to know how much above they are from the breakeven point. This is
technically called margin of safety. It is calculated as the difference between sales or
production units at the selected activity and the breakeven sales or production.16

Margin of safety is the difference between the total sales (actual or projected) and the
breakeven sales. It may be expressed in monetary terms (value) or as a number of units
(volume). It can be expressed as profit / P/V ratio. A large margin of safety indicates the
soundness and financial strength of business.

Margin of safety can be improved by lowering fixed and variable costs, increasing
volume of sales or selling price and changing product mix, so as to improve contribution
and overall P/V ratio.

16
Graham, Benjamin. Dodd, David. Security Analysis: The Classic 1934 Edition. McGraw-Hill. 1996.

39
Margin of safety = Sales at selected activity – Sales at BEP

= Profit at selected activity

P/V ratio

The size of margin of safety is an extremely valuable guide to the strength of a business.
If it is large, there can be substantial falling of sales and yet a profit can be made. On the
other hand, if margin is small, any loss of sales may be a serious matter. If margin of
safety is unsatisfactory, possible steps to rectify the causes of mismanagement of
commercial activities as listed below can be undertaken.

a. Increasing the selling price-- It may be possible for a company to have higher
margin of safety in order to strengthen the financial health of the business. It
should be able to influence price, provided the demand is elastic. Otherwise, the
same quantity will not be sold.

b. Reducing fixed costs.

c. Reducing variable costs.
d. Substitution of existing product(s) by more profitable lines
e. Increase in the volume of output.

f. Modernization of production facilities and the introduction of the most cost

effective technology.

Illustration:

A company earned a profit of Rs. 30,000 during the year 2000- 01. Marginal cost and
selling price of a product are Rs. 8 and Rs. 10 per unit respectively. Find out the margin
of safety.

40
Solution:

Margin of safety = Profit

P/V ratio

P/V ratio = Contribution x 100

Sales

= Rs. 2 x 100 = 20%

Rs. 10

Margin of safety = Rs. 30000 = Rs. 1,50,000

20%

41
5. COMPANY PROFILE:

INTRODUCTION:

Gail (India) Limited (GAIL) (formerly known as Gas Authority of India Limited) is the
largest state-owned natural gas processing and distribution company in India. It is
headquartered in New Delhi. It has the following business segments: natural gas, liquid
hydrocarbon, liquefied petroleum gas transmission, petrochemical, city gas distribution,
exploration and production, GAILTEL and electricity generation. GAIL was conferred with
the Maharatna status on 1 Feb 2013, by the Government of India.17 Only six other Public
Sector Enterprises (PSEs) enjoy this coveted status amongst all central CPSEs.18 GAIL was
listed in the 131st position among India's most trusted brands according to the Brand Trust
Report 2014, a study conducted by the Trust Research Advisory.19

HISTORY:

GAIL (India) Limited was incorporated in August 1984 as a Central Public Sector
Undertaking (PSU) under the Ministry of Petroleum & Natural Gas (MoP&NG). The
company was formerly known as Gas Authority of India Limited. It is India's principal gas
transmission and marketing company. The company was initially given the responsibility of
construction, operation and maintenance of the Hazira – Vijaypur – Jagdishpur (HVJ)

17
"Govt grants Maharatna status to BHEL, GAIL". Business Standard.
18
"The Global 2000". Forbes.com. Forbes.com LLC.
19
"India's Most Trusted brands 2014". Archived from the original.

42
pipeline project. It was one of the largest cross-country natural gas pipeline projects in the
world. This 1750-kilometre-long pipeline was built at a cost of ₹17 billion (US$260 million)
and it laid the foundation for development of market for natural gas in India. GAIL
commissioned the 1,750 kilometres (1,090 mi) Hazira-Vijaipur-Jagdishpur (HVJ) pipeline in
1991. Between 1991 and 1993, three liquefied petroleum gas (LPG) plants were constructed
and some regional pipelines acquired, enabling GAIL to begin its gas transportation in
various parts of India.

GAIL began its city gas distribution in New Delhi in 1997 by setting up nine compressed
natural gas (CNG) stations.

In order to secure gas for its mainstream business, the Exploration and Production department
was created. Today GAIL is a partner in the Daewoo-OVL led consortium in two offshore
blocks in Myanmar which have made a gas discovery. The bulk of its blocks are located in
India in the prolific basins of Cambay, Assam-Arakan, Mahanadi, Krishna Godavary deep
water and on land, Cauvery on land and deep water and western offshore. It is actively
scouting for foreign blocks both exploratory or discovery.

GAIL today has reached new milestones with its strategic diversification into petrochemicals,
telecom and liquid hydrocarbons besides gas infrastructure. The company has also extended
its presence in power, liquefied natural gas re-gasification, city gas distribution and
exploration & production through participation in equity and joint ventures. Incorporating the
new-found energy into its corporate identity, Gas Authority of India was renamed GAIL
(India) Limited on 22 November 2002.

GAIL (India) Limited has shown organic growth in gas transmission through the years by
building large network of trunk pipelines covering length of around 10,700 kilometres
(6,600 mi). Leveraging on the core competencies, GAIL played a key role as gas market
developer in India for decades catering to major industrial sectors like power, fertilizers, and
city gas distribution. GAIL transmits more than 160 mmscmd of gas through its dedicated
pipelines and have more than 70% market share in both gas transmission and marketing.

43
INFRASTRUCTURE:

GAIL owns the country's largest pipeline network, the cross-country 2300 km Hazira-
Vijaipur-Jagdishpur pipeline with a capacity to handle 33.4 MMSCMD gas. Today the
company owns and operates more than 11000 km long cross country natural Gas Pipeline in
India having presence in 22 states in the country. It also owns and operates more than
2000 km long LPG pipelines in the country and has the pride to operate one of the world's
longest exclusive LPG pipeline in the country from Jamnagar in Gujarat to Loni in Uttar
Pradesh. The company also owns and operates seven mega LPG recovery plants in the
country today and has to its credit almost 20% of domestic LPG produced and supplied for
the domestic usage through its sisters PSUs like IOCL, BPCL and HPCL. GAIL is one of the
major petrochemical conglomerates in the country today with India's largest gas based
petrochemicals in operation since 1999. In petrochemicals it has its own gas based integrated
petrochemical plant and also the ownership of 70% in dual fuel petrochemicals in Assam,
Brahamaputra Cracker and Polymer Limited and one of the major equity partners in OPal.

The company supplies gas to power plants for generation of over 4,000 MW of power to the
Fertilizer plants for production of 10 million tonnes of urea and to several other industries.
The regional pipelines are in Mumbai, Gujarat, Rajasthan, Andhra Pradesh, Tamil Nadu,
Pondicherry, Assam, Tripura, Madhya Pradesh, Haryana, Uttar Pradesh and Delhi. The
Company has established six gas processing (LPG) plants, four along the HVJ pipeline two at
Vijaipur, MP, one at Vaghodia, Gujarat and Auraiya, UP and one each in Lakwa, Assam and
Usar, Maharashtra. These plants have the capacity to produce nearly 1 million tpa of LPG.
GAIL has also set up several compressor stations for boosting the gas pressure to desired
levels for its customers and internal users.

GAIL also possesses a vast telecommunication network that contributes significantly to the
high level of system reliability of operations, on-line real-time communication and
monitoring higher productivity. GAIL became the first Infrastructure Provider Category II
Licensee and signed the country's first Service Level Agreement for leasing bandwidth in the
Delhi-Vijaipur sector in 2001, through its telecom business GAILTEL.

In 2001, GAIL commissioned the world's longest and India's first cross country LPG
transmission pipeline running from Jamnagar in Gujarat to Loni in Uttar Pradesh. The total
length of this LPG pipeline is 1415 km.

44
GAIL has started working on the Jagdishpur-Haldia/Bokaro-Dhamra Pipeline. This was
earlier planned to constructed between Jagdishpur in Uttar Pradesh to Haldia in Bengal for a
total length of 2050 km. But now it has been reconfigured. The pipeline will connect Prime
Minister Narendra Modi's political constituency Varanasi to the gas grid, to link the Dhamra
terminal. The over 2,500-kilometer line will be constructed in three phases and will also now
connect Adani Group's Dhamra LNG import terminal in Odisha. In the first phase, a trunk
pipeline from Phulpur (Allahabad) will be laid to Dobhi (Gaya) in Bihar with spur lines to
Barauni and Patna. The 755-km Phase-1 project will cost Rs 3,200 crore and will be
completed by December 2018. GAIL already as a line up to Phulpur. It is raising capacity of
this pipeline by laying a 672-km parallel line from Vijaipur in Madhya Pradesh to Phulpur
via Auriaya in Uttar Pradesh at the cost of Rs 4,300 crore. In the Phase-II, a 1200-km line
would be laid from Dobhi to Bokaro/Ranchi in Jharkhand and Angul and Dharma in Odisha
at the cost of Rs 5,565 crore. Phase-III will involve laying 583-km line to Haldia at the cost
of Rs 3,425 crore.20

OPERATIONS:

Natural gas

Natural gas transmission

GAIL has built a network of trunk pipelines covering the length of around 11,000 km.
Leveraging on the core competencies, GAIL played a key role as gas market developer in
India for decades catering to major industrial sectors like power, fertilizers, and city gas
distribution. GAIL transmits more than 160 MMSCMD of gas through its dedicated pipelines
and have more than a 70% market share in both gas transmission and marketing.

However, there are regional imbalances in the gas supply across the country. To bridge this
gap in infrastructure, the Ministry of Petroleum and Natural Gas, in 2007, authorised five
new pipelines to GAIL covering a length of over 5,500 km.

20
"GAIL reconfigures Rs 12,000 crore Jagdishpur-Haldia gas pipeline". The Economic Times.

45
 S. Length km/ capacity in
Pipeline Commissioning
no. MMSCMD

1. Dadri Bawana Nangal* 610 km/31 MMSCMD 2011–12

2 Chainsa Jhajjar Hissar** 300 km/35 MMSCMD 2011–12

3. Dabhol Bangalore[7] 1386 km/ 16 MMSCMD 2013–14

4. Kochi Kanjirikkod Bangalore 860 km / 16 MMSCMD 2012–13

Jagdishpur-Haldia Bokaro-
5. 2500 / Unknown 2019-20
Dhamra

• Phase-I completed till Bawana

• Phase-I completed till Sultanpur In addition to these, GAIL is augmenting the capacities of
its two existing pipelines, viz. Dahej– Vijaipur pipeline and Vijaipur – Dadri pipeline. All
these projects are progressing well and are expected to be completed in phases by 2013 -14 or
so. When these pipelines are commissioned, the capacity of GAIL pipeline system is
expected to increase from 157 MMSCMD at present to over 300 MMSCMD and cover over
14,000 km.

Gas marketing

Since inception in 1984, GAIL has been the undisputed leader in the marketing, transmission
and distribution of natural gas in India. As India's leading natural gas major, it has been
instrumental in the development of the natural gas market in the country.21

GAIL sells around 51% (excluding internal usage) of the natural gas sold in the country. Of
this, 37% is sold to the power sector and 26% to the fertiliser sector. GAIL is supplying
around 60 MMSCMD of natural gas from domestic sources to customers across India. These
customers range from the smallest of companies to mega power and fertiliser plants. GAIL
has adopted a gas management system to handle multiple sources of supply and delivery of
gas in a co-mingled form and provide a seamless interface between shippers, customers,
transporters and suppliers. GAIL is present in 11 states: Gujarat, Rajasthan, Madhya Pradesh,

21
GAIL (India) Limited | LPG Transmission:--". www.gailonline.com.

46
Delhi, Haryana, Uttar Pradesh, Maharashtra, Tamil Nadu, Andhra Pradesh, Assam, and
Tripura. They are further extending their coverage to states of Kerala, Karnataka, Punjab,
Uttarakhand, West Bengal and Bihar through their upcoming pipelines.

LNG

By the end of 2009–10, the gas consumption in India stood at 165 MMSCMD with LNG
occupying 15% (25 MMSCMD) of the entire gas market. The proportion of imported LNG is
expected to increase to anywhere between 20% and 30% by 2015. GAIL has been playing a
principal role on its part in ensuring that the government's objective of achieving energy
security is achieved through a judicious mix of energy portfolio.

As a dominant player in the gas markets, GAIL plays a major role in sourcing of LNG and
creation of the pipeline infrastructure to form an efficient national grid that will ensure
connectivity to all demand centres. To achieve these objectives, GAIL is actively pursuing
LNG sourcing from major LNG producers/sellers all across the globe and has been adopting
a strategy to have a mixed portfolio of spot, short/mid-term, and long-term deals. To ensure
long-term supplies in the past, GAIL has promoted Petronet LNG Ltd (PLL), along with oil
majors Oil and Natural Gas Corporation (ONGC), Indian Oil Corporation (IOC) and Bharat
Petroleum Corporation Limited (BPCL) for the import of LNG into India. PLL is importing
7.5 MMTPA of LNG from Qatar for its Dahej Terminal on long-term contract basis. PLL
will also be importing 1.44 MMTPA from Gorgon LNG project, Australia for its Kochi
Terminal. GAIL is also the sole transporter of the entire RLNG and a major off-taker from
both these contracts.

Further, from time to time GAIL had imported LNG on a spot basis to cater to additional gas
demand in India. GAIL imported its first spot cargo from Algeria in May 2006 and within a
shorter span has gone on to become a major importer of LNG in Asia. GAIL had imported
five spot cargoes in the first half of 2011. In addition, GAIL has imported 1 LNG cargo from
the international market through PLL.

GAIL had also inked a short-term deal with Marubeni Corporation to purchase up to 0.50
MMTPA of LNG on a medium term basis and has already received three LNG cargoes under
the contract. The government of India has entrusted GAIL with the responsibility of reviving
the LNG terminal at Dabhol in Maharashtra, as well as sourcing LNG for the terminal. GAIL

47
is exploring all the possible options for sourcing around five MMTPA of LNG for the Dabhol
Terminal. GAIL has stepped up efforts to source LNG on a long-term basis from various
projects across the globe including Qatar, Australia, Russia and US.

Until now GAIL has signed 23 master sales and purchase agreements (MSPA) with various
LNG suppliers in its endeavor to source spot and medium term from time to time. GAIL is
also in talks to add six to eight additional suppliers under the umbrella.

Liquid hydrocarbons

GAIL is marketing gas processing units (GPUs) products, namely liquefied petroleum gas,
propane, pentane, naphtha and by-products of polymer plant, namely MFO, propylene and
hydrogenated C4 mix. LPG is being sold exclusively to PSU oil marketing companies
(OMCs) while other products are sold directly to customers in the retail segment.

GAIL is India's major producer of propane, popularly known as GAIL Propane. It is an eco-
friendly fuel and provides an effective way of reducing pollution and increasing productivity.

GAIL produces and markets pentane. It is primarily being used for reprocessing into iso,
normal and commercial pentane used in EPS, PU, LAB industry.

Acetone and phenol are being produced from propylene by blending with benzene which are
mainly used in the pharmaceutical industry.

MFO is mainly used as fuel for heating, paint spraying, and furniture polishing. Naphtha is
primarily used by power, Fertilizer, steel and Petrochemical units. In power, steel units it is
used as a fuel, whereas in petrochemical, chemical, fertilizer units it is used as a feedstock.

GAIL is operating seven gas processing units (GPU) located at Vijaipur (two units), Auraiya,
Vaghodia, Usar, Lakwa and Gandhar plants for production of LPG and GCU at Pata plant for
production of polymer. In the process of production of main products, such as LPG and
polymer through GPU/GCU except the Usar, the following by-products- liquid hydrocarbons
(LHC) are produced:

48
LPG production and transmission

Liquefied petroleum gas (LPG) is the most widely used domestic and commercial fuel in
India. Over the past four years, GAIL has emerged as one of the major LPG producers in the
country. Around 90 per cent of the LPG is consumed in India as fuel by the household sector,
while the balance is sold to industrial and commercial customers. GAIL has seven LPG
Plants, two at Vijaipur and one at Vaghodia, and one each in Lakwa (Assam), Auraiya (UP),
Gandhar (Gujarat) and Usar (Maharashtra), producing over 1 million TPA LPG and other
liquid hydrocarbons.

GAIL is the first company in India to own and operate pipelines for LPG transmission. It has
2038 km LPG pipeline network 1,415 km of which connects the western and northern parts
of India and 623 km of networks is in the southern part of the country connecting Eastern
Coast. The LPG transmission system has a capacity to transport 3.8 MMTPA of LPG. LPG
transmission through pipelines was 3145 TMT in the year 2013-14.

The above figure is of one of the working LPG plants of GAIL.

GAIL has a share of about 10% of the Indian LPG market in LPG production and 7% in LPG
sales.

GAIL produces LPG through fractionation in Gas Processing Units, known as Straight Run
LPG. GAIL’s LPG is an eco-friendly fuel and provides a cheaper and effective means of
reducing pollution and increasing productivity.

49
GAIL LPG is being supplied to PSU Oil Marketing Companies namely IOCL, BPCL and
HPCL ex-GPUs at Import Parity Price.22

Petrochemicals

GAIL diversified from gas marketing and transmission into the polymer business by setting
up North India's first gas based Petrochemicals complex. Even without having any prior
experience in petrochemicals, GAIL commissioned the plant successfully in the year 1999,
by rigorous teamwork and project management capabilities. The petrochemical business is
one of the core focus area of GAIL.

GAIL owns and operates a gas based Petrochemical Complex at PATA, District Auraiya,
near Kanpur in UP (around 380 km from Delhi). GAIL has world class “Sclairtech” solution
polymerization process licensed from M/s Nova Chemicals, Canada to produce LLDPE and
HDPE, with a nameplate capacity of 2,10,000 MT/annum and has two slurry based
polymerization processes licensed from M/s Mitsui Chemicals, Japan to produce HDPE, each
with a nameplate capacity of 1,00,000 MT/annum. A new world class gas phase Unipol PE
Process of M/s Univation Technology, USA, with a nameplate capacity of 400,000 MT/
annum, has been commissioned at PATA to produce HDPE/LLDPE.

GAIL Pata is the only HDPE/LLDPE plant operating in Northern India and has a dominant
market share in North India. The primary thrust markets for the polymers had been Western
India, but, with the entry of GAIL in the HDPE & LLDPE market Verticals, today North
India has also witnessed a rapid and significant growth in the polymer downstream
processing Verticals. In a successful span of about a decades of establishing and marketing its
grades under the brand names G-Lex and G-Lene, GAIL has alongside augmented its name
plate capacity of HDPE and LLDPE to 410,000 MTPA by adding another dedicated HDPE
downstream polymerisation unit of 100,000 MTPA.

GAIL has 70% equity in joint venture company Brahmaputra Cracker & Polymer Limited
(BCPL) in Dibrugarh, Assam with a nameplate capacity of 220 KTA of HDPE & LLDPE and
60 KTA of PP. GAIL has acquired equity in OPaL’s Greenfield petrochemical project at
Dahej to produce 1060 KTA of HDPE & LLDPE and 340 KTA of PP. GAIL is a co-
promoter with 17% equity stake in ONGC Petro-additions Limited (OPaL) which is
22
GAIL (India) Limited | LPG Transmission:--". www.gailonline.com.

50
implementing a green field petrochemical complex of 1.1 MMTPA ethylene capacity at
Dahej in the state of Gujarat.23

The current per capita consumption of plastics in India is about 1.8 kg compared with the
world average of 17 kg. Demand and supply projections indicate a progressively increasing
domestic offtake. Being the only plant outside western India, it offers easy access to polymer
consumers in Northern India and parts of Central India.

City gas distribution

GAIL is the pioneer of city gas distribution in India. GAIL took many initiatives to introduce
PNG for households and CNG for the transport sector to address the rising pollution levels.
Pilot projects were launched in the early 1990s in two metros Delhi and Mumbai through
joint venture companies Indraprastha Gas Limited (IGL) and Mahanagar Gas Limited (MGL)
leading to the start of commercial operation of city gas projects. The results of these ventures
are quite visible through the improvement in air quality in these cities.

Based on the success of IGL and MGL, GAIL has further set up six more JVCs viz
Bhagyanagar Gas Limited, Andhra Pradesh; Avantika Gas Limited in Madhya Pradesh;
Central U P Gas Limited & Green Gas Limited in Uttar Pradesh; Maharashtra Natural Gas
Limited in Pune Maharashtra and Tripura Natural Gas Company Limited in Tripura for CGD
projects in various cities.

However, Ministry of Petroleum & Natural Gas established the Petroleum and Natural Gas
Regulatory Board (PNGRB) with effect from 01.10.2007, under the Petroleum and Natural
Gas Regulatory Board Act 2006, to regulate the refining, processing, storage, transportation,
distribution, marketing and sale of petroleum, petroleum products and natural gas excluding
production of crude oil and natural gas. The Petroleum & Natural Gas Regulatory Board Act-
2006 provides the legal framework for the development of the natural gas pipelines and city
or local gas distribution networks. With the arrival of the PNGRB the implementation of
PNG in various cities is being taken up in a phased manner as and when the bids are called
for by the regulator.

23
GAIL (India) Limited | Petrochemicals :--". www.gailonline.com.

51
Exploration and production

GAIL is participating in 10 exploration blocks, in Basins such as Mahanadi, Mumbai,

Cambay, Assam-Arakan, Tripura Fold Belt, Gujarat Kutch, Krishna Godavari, Cauvery and
Cauvery Palar. GAIL has partnership in these blocks with various companies such as ONGC,
OIL, GSPC, Hardy Exploration & Production, Petrogas, JOGPL, Eni and Daewoo as
Operators. Out of these 10 E&P blocks, 2 blocks are overseas (A-1 and A-3 blocks in
Myanmar).

The blocks are in various stages of exploration, appraisal and development. Hydrocarbon
discoveries are in place in 7 E&P blocks in blocks where GAIL is participating. The blocks
with hydrocarbon discoveries are: MN-OSN-2000/2, CB-ONN-2000/1, Block A-1 and A-3
Myanmar, CY-OS/2, AA-ONN-2002/1, CB-ONN-2003/2.

Production of crude oil is in progress from Cambay Onland block (CB-ONN-2000/1) @ 1250
barrels per day. Development activities are in progress in 2 blocks in Burma (A-1 and A-3)
and production of gas is expected from May 2013. Declaration of Commerciality has been
approved by the Government in Mahanadi Offshore (MN-OSN-2000/2) block. In other
blocks where hydrocarbon discoveries have been made, the appraisal is in progress.

GAIL is an active member of multi-organisation team (MOT) set-up for assessment of shale
gas potential in Indian basins. The other representative in MOT are from DGH (Directorate
General of Hydrocarbons), ONGC and Oil India Limited (OIL).24

GAIL is also a member of National Gas Hydrate Programme being coordinated by DGH and
is actively involved in activities related to gas hydrate exploration.

GAS SUPPLY PROJECTIONS:

Sources 2008-09 2009-10 2010-11 2011-12

ONGC + OIL 59 56 55 51

24
"GAIL Management". GAIL (India) Limited. Archived from the original.

52
Pvt./JVs 61 60 58 57

Sub-Total 120 116 113 108

LNG 34 53 70 83

Total 154 169 183 191

Gas Supply Projections

ONGC+OIL Pvt./JVs LNG
90 83
Projections(MMSCMD)

80 70
70 59 61 60
60
56 53 55 58 57
51
50
40 34
30
20
10
0
2008-09 2009-10 2010-11 2011-12
Year

SUBSIDIARIES:

GAIL Gas Limited

GAIL Gas is a wholly owned subsidiary of GAIL. GAIL Gas has been selected for
implementation of City Gas Distribution (CGD) projects in four cities, namely, Kota, Dewas,
Sonepat and Meerut in the first round of bidding by the Petroleum & Natural Gas Regulatory
Board (PNGRB). GAIL Gas supply CNG & PNG (industrial, commercial and household
customers) in the city of Dewas, Meerut, Sonepat & Kota and Taj Trapezium Zone. GAIL
GAS is providing natural gas to approximately 350 industrial consumers in TTZ area (Agra
and Firozabad) in Uttar Pradesh India. GAIL GAS has also started the CGD work in
Bengaluru Karnataka recently. ...

53
Brahmaputra Cracker and Polymer Limited (BCPL)

GAIL has 70% equity share in BCPL, a subsidiary, with Oil India Limited (OIL),
Numaligarh Refinery Limited (NRL), Govt. of Assam, each having 10% equity share.
Feedstock Supply Agreements have been signed between BCPL and all the three suppliers,
viz., Oil and Natural Gas Corporation Limited, Oil India Limited and Numaligarh Refinery
Limited. Technology licence agreements have been signed for cracker, polyethylene and
polypropylene units.

BCPL is setting up a 280,000 TPA polymer plant at an investment of ₹54.6 billion

(US$840 million). The financial commitment to the extent of ₹30 billion (US$460 million)
has been made and project execution is in progress.

GAIL Global (Singapore) Pte Limited

GAIL has a wholly owned subsidiary, namely, GAIL Global (Singapore) Pte Ltd., to manage
investments abroad. GAIL is looking for further business opportunities through this
subsidiary company.

JOINT VENTURES:

Aavantika Gas Limited (AGL)

AGL is in operation in Indore and Ujjain and is supplying CNG to the transport sector in
these cities. AGL is supplying CNG to almost 9,000 vehicles in both the cities. AGL has
plans to set up five and two CNG stations in Gwalior and Ujjain respectively, and domestic
supplies to households. Six daughter stations are mechanically ready for CNG dispensing,
awaiting for CCOE final approval. MoPNG has authorised AGL for CGD in Indore, Gwalior
and Ujjain. GAIL has 22.5% stake in the Company along with HPCL as an equal partner.

Bhagyanagar Gas Limited (BGL)

BGL is operating six CNG stations in Vijayawada and 4 CNG stations in Hyderabad and one
CNG station in the Rajahmundry. BGL is supplying CNG in these three cities to almost 6,000
vehicles. BGL is also operating two Auto LPG stations in Hyderabad and one Auto LPG
station in Tirupati. BGL has received authorisation from MoPNG for City Gas Distribution

54
(CGD) in Hyderabad and Vijayawada. GAIL has a 22.5% stake in the company along with
HPCL as an equal partner.

Central U.P. Gas Limited (CUGL)

CUGL is operating 15 CNG stations in Kanpur, Unnao and two CNG stations in the Bareily.
CUGL is supplying CNG to almost 45,000 vehicles in the two cities. CUGL commenced its
domestic supply of PNG with connexions to 15000 households in Kanpur and Bareilly.
CUGL has received authorisation from MoPNG for CGD in Kanpur, Unnao, Bareilly &
Jhansi. GAIL has 25% stake in the Company along with BPCL as an equal partner. CUGL
has connected 200 commercial and industrial units in both the cities.

Green Gas Limited (GGL)

GGL is operating six CNG stations in Lucknow and three CNG stations in Agra. GGL is
supplying CNG in the two cities. GGL has tied up for the commencement of domestic supply
of PNG with connexions to households, commercial and industrial establishments. MoPNG
has authorised GGL for CGD in Lucknow and Agra. GAIL has a 22.5% stake in the company
along with IOCL as an equal partner.

Indraprastha Gas Limited (IGL)

IGL is the largest CGD entity in terms of CNG sales and the number of vehicles supplied by
CNG in India. IGL has received authorisation from MoPNG for CGD in Delhi and its
suburbs viz. NOIDA (Gautam Budh Nagar), Greater NOIDA, Faridabad and Ghaziabad and
part of Gurugram from State Govt. of Haryana. IGL is supplying piped gas to around 900,000
domestic, 3500 Commercial, 1600 small industrial consumers and CNG to over 10,00,000
vehicles through around 425 CNG stations in NCR. GAIL has a 22.5% stake in the company
along with BPCL as an equal partner.

Mahanagar Gas Limited (MGL)

MGL is a joint venture of GAIL and British Gas. MGL has set up 140 CNG stations catering
to over 200,000 vehicles spread over Mumbai, Thane, Mira-Bhayandar and Navi-Mumbai
areas besides supplying PNG to over 450,000 domestic customers, more than 1,000 small
industrial and commercial consumers. It has received authorisation from MoPNG for CGD in
Mumbai, District Thane including Navi Mumbai and Mira Bhayander. GAIL has a 49.75%
stake in the company along with British Gas as an equal partner.

55
Maharashtra Natural Gas Limited (MNGL)
MNGL is a joint venture of GAIL and Bharat Petroleum Corporation Limited (BPCL) for
implementation of City Gas Projects in and around Pune city. MNGL has received
authorisation from MoPNG for CGD in Pune including Pimpri, Chinchwad, Talegaon,
Hinjewadi and Chakan areas. It has started 10 stations supplying CNG to nearly 5,000
vehicles. GAIL has a 22.5% stake in the company along with BPCL as an equal partner.

ONGC Petro-additions Limited (OPaL)

GAIL is in the process of acquiring the equity stake in ONGC Petro- additions Limited
(OPaL), which is a joint venture of GAIL with Oil and Natural Gas Corporation Ltd. and
Gujarat State Petroleum Corporation Ltd., for setting up Petrochemical Project at Dahej in
Gujarat. OPaL is setting up a green field petrochemical complex of 1.1 MMTPA ethylene
capacity (dual feed cracker) in Dahej, Gujarat.

Four main players dominate the petrochemical sector, namely, Reliance Industries Ltd. (RIL),
Indian oil (IOCL), Gas Authority of India Ltd. (GAIL), and Haldia Petrochemicals Ltd. A
New Chapter to this Industry has been added by the evolution of ONGC Petro additions Ltd.
(OPaL) on 15 November 2006 which is a joint venture Company of Oil and Natural Gas
Corporation Limited (ONGC), Gujarat State Petroleum Corporation Ltd. (GSPCL) and GAIL
India Ltd. is a grass root Mega Petrochemical complex of Global scale based on dual feed
i.e., C2/C3/C4 & Naphtha at Dahej special Economic Zone (SEZ), Gujarat. The complex
consists of Dual Feed Ethylene cracker (with C2/ C3/ C4 and Naphtha feed ) of 1100KTPA
capacity to produce Ethylene and Propylene as Petrochemical Feedstock to downstream units
of Polyethylene (LLDPE, HDPE) and Polypropylene(PP) and associated unit i.e., PyGas
Hydrotreating, Benzene and Butadiene extraction plants to produce other products (Pygas,
1,3- Butadiene and Benzene). Utility and offsite facilities to cater to complex requirement is
built within the Complex which includes ECTS and CPP. The grass root complex is located
at a distance of about 10 km to the ONGC's C2+ Extraction Plant within Special Economic
zone (SEZ) at Dahej, Gulf of Khambhat.

Feed system: C2, C3 & C4 feed is sourced from existing C2+ recovery plant of ONGC in
Dahej (at a distance of 10 km) through the pipeline. Mixed Naphtha (LAN & ARN) in
definite proportionate from Hazira is sourced to Petrochemical complex through a separate
pipeline.

56
Saleable products: The products shall be dispatched through various modes, like bagging,
truck, rail, tanker loading and through pipelines.

Petronet LNG Limited (PLL)

PLL has been formed for setting up of LNG import and regasification facilities. PLL has a
long term LNG supply contract with RasGas, Qatar, for import of 7.5 MMTPA of LNG. PLL
Dahej terminal in Gujarat has been expanded to 10 MMTPA capacity. PLL has successfully
implemented a pilot project for supplying LNG through cryogenic road tankers. PLL is also
coming up with an LNG terminal at Kochi, Kerala, with an initial capacity of 2.5 MMTPA,
expandable up to 5 MMTPA and it was scheduled to be operational by end of 2011. GAIL
has a 12.5% equity stake in PLL, along with BPCL, ONGC and IOCL as equal partners.

Ratnagiri Gas and Power Pvt. Ltd. (RGPPL)

RGPPL is a joint venture company between GAIL, NTPC, Financial Institutions and MSEB.
The capacity of the Ratnagiri Gas & Power Station is 2,150 MW, which is the largest gas
based power generation facility in the country and is producing 1,850 MW of power. RGPPL
is in the process of commissioning an LNG import terminal of 5 MMTPA capacity. GAIL
has 32.88% stake in the company along with NTPC as an equal partner.

Tripura Natural Gas Company Limited (TNGCL)

TNGCL is supplying gas to around 7,500 domestic, 170 commercial and industrial
consumers and has set up one CNG station in Agartala, which is catering to more than 1,400
vehicles. TNGCL has received authorisation from MoPNG for CGD in Agartala. GAIL has
29% stake in the company.

GAIL China Gas Global Energy Holdings Limited

The joint venture company has been formed with an objective to pursue gas sector
opportunities, mainly in China. GAIL has 50% equity interest in the company along with
China Gas as the equal partner. The joint venture company is in the process of identifying
projects in gas and other related areas in China.

ANDHRA PRADESH GAS DISTRIBUTION CORPORATION

The joint venture company has been formed with an objective to reduce the gap between gas
demand and supply, mainly in Andhra Pradesh. GAIL Gas Limited has 50% equity interest in

57
the company along with APGIC (Andhra Pradesh Gas Infrastructure Corporation) as the
equal partner.

CORPORATE SOCIAL RESPONSIBLITY:

Corporate social responsibility means the obligation of a business or businessmen towards the
society.25 In terms of the guidelines issued by the Department of Public Enterprises, GAIL
has allocated an annual budget of 2% of the previous year's profit after tax for CSR activities,
which is effectively used for carefully chosen programmes. Socially useful programmes have
been undertaken in GAIL since its inception in and around the areas adjoining its major work
centres under the SCP/TSP Plan. But over the years, the scope of the CSR activities, the
nature of programmes undertaken and the systems adopted for the implementation of these
programmes have been streamlined and strengthened and the work under SCP/TSP came
under the wider scope of CSR. Today, CSR & sustainability development is accorded high
priority in the organisational ethos and attempted to be interwoven in all the business
activities and the projects that are being undertaken by the company. During the year 2010–
11, the company has taken up programmes of a value of approximately ₹575 million
(US$8.8 million) for implementation under the seven thrust areas, which include Community
Development, Infrastructure, Healthcare/Medical, Skill Development/Empowerment,
Educational Aids, Environment Protection, Drinking Water/Sanitation.

For the year 2010–11 under the thrust area Community Development, programmes worth
₹157 million (US$2.4 million) are endorsed and the implementation of these projects is in
progression.

GAIL (India) Ltd. extended its support for the reconstruction and renovation of numerous
public utilities/buildings which improved living standards not only for a person or family but
for the whole of the villages where this project was implemented. For the sustainable
development of the whole community GAIL is also supporting integrated livelihood
programmes in villages especially for small and marginal farmers. This would be considered
as a drop in the vast ocean but GAIL along with other Oil PSUs is contributing towards

25
Sheehy, Benedict (2015-10-01). "Defining CSR: Problems and Solutions". Journal of Business Ethics. 131
(3): 625–648.

58
provision of LPG connections to BPL families under Rajiv Gandhi Gramin LPG Vitrak
Yojana. This collaborative combined effort of the Oil PSUs would be able to generate a huge
wave in the ocean in UP region. GAIL believes that for providing better tomorrow for the
community where it has its working the focus should be on the future of the community i.e.
children and students. So in view of this belief GAIL is providing vehicles for distribution of
a mid-day meal for underprivileged children of government schools so as to encourage the
young girls and boys to educate themselves for their better and secured lives. GAIL in the
minuscule of its efforts have tried to touch every aspect of life by providing Night shelters
and blankets to villagers, adoption of destitute tribal children of the orphanage in the tribal
area, generating AIDS awareness and a behaviour change communication programme for
truckers of national highways and providing school bus for physically challenged students. In
just two years, more than 314,000 families have benefited from the programmes under
Community Development.26

26
GAIL (India) Limited | Petrochemicals :--". www.gailonline.com.

59
6. DATA ANALYSIS FOR THE FINANCIAL YEARS 2014-15, 2015-16
AND 2016-17:

MARGINAL INCOME STATEMENT

In this analysis the marginal income statement of ceramic tiles, vitrified tiles and granite slab
are studied. It contains information regarding capacity levels, sales, variable cost,
contribution, fixed costs and profit.

Table 1 shows marginal income statement of GAS AUTHORITY OF INDIA LIMITED

(GAIL)

Table 1

Marginal income statement

Particulars 2014-2015 2015-2016 2016-2017

Per unit sales price 25 25 30

Sales 200 400 300

Less: variable cost 160 288 150

Contribution 40 112 150

Less: Fixed cost 32 56 45

Profit 8 56 105

Source: published data of the company (The above stated amount is in crores.)

60
COST STRUCTURE OF GAS AUTHORITY OF INDIA LIMITED:

450

400
A
M 350
O
U
N 300
T
250
Sales
I
N Less: Variable cost
200
Less: Fixed cost
C
R 150 Profit
O
R
100
E
S
50

0
2014-15 2015-16 2016-17
FINANCIAL YEARS

The above table reveals that: the trend from 2014-15 to 2016-17 shows that there is highest
capacity utilization in 2014-15& in 2015-16 but sales are high in the 2015-16. but the
corresponding profit is high in the year 2016-17. but in the year 2015-16 there is high total
cost also, affecting to less sales & profit. So due to less sales & profit in 2014-15 the
organisation suffered from low profit.

61
 PROFIT VOLUME RATIO

P/V ratio is one of the important ratios for studying the profitability of operations of business
& establishes the relationship between contribution & sales. It denotes the percentage of each
sales rupee available to cover the fixed costs & to provide operating income to firm P/V ratio
revels the rate of contribution per product as per of turnover.

Comparison of P/V ratio can be made to find out which product is more profitable; higher
the P/V ratio more will be the profit & lower the P/V ratio lesser will be the profit.

PROFIT VOLUME RATIO OF GAS

AUTHORITY OF INDIA LIMITED
(GAIL)

GAIL LTD.

YEAR CONTRIBUTION SALES P.V.RATIO

2014-2015 40 200 20%

2015-2016 112 400 28%

2016-2017 150 300 50%

CALCULATIONS:

1. PROFIT VOLUME RATIO OF GAIL (INDIA) LIMITED FOR THE YEAR 2014-
2015:

P.V.R = CONTRIBUTION ÷ SALES × 100

62
 = 40 ÷ 200 × 100 = 20%

2. PROFIT VOLUME RATIO OF GAIL (INDIA) LIMITED FOR THE YEAR 2015-
2016:

P.V.R = CONTRIBUTION ÷ SALES × 100

= 112 ÷ 400 × 100

= 28%

3. PROFIT VOLUME RATIO OF GAIL (INDIA) LIMITED FOR THE YEAR 2016-
2017:

P.V.R = CONTRIBUTION ÷ SALES × 100

= 150 ÷ 300 × 100 = 50%

The above profit volume ratio reveals that:

There is a increasing profit volume ratio from the years 2014-2015 to 2016-2017. It is
considerably increased in the year 2016-2017 means the profitability of the organisation has
increased & considerably increase in P/V ratio due to slight increase in sales.

63
 BREAK EVEN CHART

A business is said to break even when its total sales are equal to its total cost. It is a point of
no profit no loss, at this point contribution is equal to fixed cost, a concern which attends
BEP at less number of units will definite be better from another concern where BEP is
achieved at more units of production.

Advantages of break-even charts:

 The management can understand information provided by the break-even chart more
easily than contained in the cost statements.

 The chart is useful for taking marginal decisions; it shows the effect on profits of
changes in FC, VC & selling price.

 The chart is very useful in forecasting costs & profits at various volumes of sales.

 A break-even chart is a tool for cost control because it shows the relative importance
of the fixed costs & the variable costs.

 Profitability of various products can be satisfied with the help of these charts & most
profitable product mix can be adopted.

64
 BREAK EVEN CHART OF GAS AUTHORITY OF INDIA LIMITED:

P.V.RATIO(IN BREAK EVEN SALES( IN

YEAR FIXED COST(IN CRORES) PERCENTAGE) CRORES)

2014-2015 32 20% 16

2015-2016 56 28% 200

2016-2017 45 50% 90

SOURCE: Published data of the company

65
 BREAK EVEN SALES
250
A
M
O 200
U
N
T
150

I
N
BEAK EVEN SALES
100
C
R
O 50
R
E
S
0
2014-2015 2015-2016 2016-2017

FINANCIAL YEARS

CALCULATIONS:

1. BREAK EVEN SALES OF GAIL (INDIA) LIMITED FOR THE YEAR 2014-2015:

BREAK EVEN SALES = FIXED COST ÷ P.V.RATIO × 100

= 32 ÷ (-) 77.5 × 100

= -38.7

2. BREAK EVEN SALES OF GAIL (INDIA) LIMITED FOR THE YEAR 2015-2016:

BREAK EVEN SALES = FIXED COST ÷ P.V.RATIO × 100

= 40 ÷ 25 × 100

= 160

66
3. BREAK EVEN SALES OF GAIL (INDIA) LIMITED FOR THE YEAR 2016-2017:

BREAK EVEN SALES = FIXED COST ÷ P.V.RATIO × 100

= 42 ÷ 50 × 100

= 84

67
MARGIN OF SAFETY
Margin of safety is the difference between the actual sales & the sales at break-even point.
One of the assumptions of marginal costing is that output will coincide sales, so margin of
safety is also the excess points output. If the margin of safety is large, it is an indicator of the
strength of business because with a substantial reduction in the sales or production profit shall
be made. If the margin is small reduction in the sales or production will be serious matter &
lead to loss.

MARGIN OF SAFETY OF GAS AUTHORITY OF INDIA LIMITED:

TOTAL SALES BREAK EVEN SALES MARGIN OF SAFETY

YEAR (in Crores) (in Crores) (in Crores)

2014-2015 200 16 184

2015-2016 400 200 200

2016-2017 300 90 210

CALCULATIONS:

1. MARGIN OF SAFETY OF GAIL (INDIA) LIMITED FOR THE YEAR 2014-2015:

MARGIN OF SAFETY = TOTAL SALES – BREAK EVEN SALES

= 200 – 16

= 184 Cr

68
2. MARGIN OF SAFETY OF GAIL (INDIA) LIMITED FOR THE YEAR 2015-2016:

MARGIN OF SAFETY = TOTAL SALES – BREAK EVEN SALES

= 400 – 200

= 200 Cr

3. MARGIN OF SAFETY OF GAIL (INDIA) LIMITED FOR THE YEAR 2016-2017:

MARGIN OF SAFETY = TOTAL SALES – BREAK EVEN SALES

= 300 - 90

= 210 Cr

GRAPHICAL REPRESENTATION OF MARGIN OF SAFETY OF GAIL

LIMITED:

215

210

205
A
M 200
C
O 195
R
U
O 190
N
R
T 185 MARGIN OF SAFETY
E
S 180
I
N 175

170

165
2014-2015 2015-2016 2016-2017
FINANCIAL YEARS

69
The above line graph reveals that: There is increasing trend in margin of safety of GAIL
LIMITED. It is because of increased sales & increased capacity utilization. It is important
that there should be a reasonable margin of safety usually indicates low fixed overhead so
that profits are made until there is a low level of activity to absorb fixed costs.

70
 BREAK EVEN ANALYSIS WITH REFERENCE TO GAIL LIMITED
FOR THE YEARS 2014-2015, 2015-2016 AND 2016-2017 THROUGH
GRAPHICAL REPRESENTATION:

 MEANING OF BREAK EVEN CHART:

A break-even chart is a graphical representation of marginal costing. It is considered to be

one of the most useful graphic presentations of accounting data. It is a readable reporting
device that would otherwise require voluminous reports and tables to make the accounting
data meaningful to the management.

 COMPONENTS OF BREAK EVEN ANALYSIS:

1. ANGLE OF INCIDENCE AT BREAK EVEN POINT:

This is the angle formed at the break-even point at which the sales line cuts the total cost line.
This angle indicates rate at which profits are being made. Large angle of incidence is an
indication that profits are being made at a high rate.

On the other hand, a small angle indicates a low rate of profit and suggests that variable costs
from the major part of cost of production. A large angle of incidence with a high margin of
safety indicates the most favourable position of a business and even the existence of
monopoly conditions.

2. RELATIONSHIP BETWEEN ANGLE OF INCIDENCE, BREAK EVEN SALES

AND MARGIN OF SAFETY:

When the break even sales are very low, with large angle of incidence, it indicates that the
firm is enjoying business stability and in that case margin of safety sales will also be high.

When the break even sales are low, but not very low with moderate angle of incidence, in that
case, though the business is stable, the profit earning rate is not very high as in earlier case.

Contrary to above, when the break even sales are high, the angle of incidence will be narrow
with much low margin of safety sales.

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  ASSUMPTIONS UNDERLYING BREAK EVEN ANALYSIS:

a. All costs can be separated into fixed and variable costs.

b. Fixed costs will remain constant and will not change with the change in level of output.

c. Variable costs will fluctuate in the same proportion in which the volume of output varies.
In other words, prices of variable cost factors i.e., wage rates; price of material etc. will
remain unchanged.

d. Selling price will remain constant even though there may be competition or change in
volume of production.

e. The number of units produced and sold will be the same so that there is no opening or
closing stock.

f. There will be no change in operating efficiency.

g. There is only one product or in the case of many products, product mix will remain
unchanged.

h. Product specifications and methods of manufacturing and selling will not change.

 ADVANTAGES OF BREAK EVEN ANALYSIS:

a. Information provided by the break even analysis can be understood by the management
more easily than contained in the Profit and Loss Account and the Cost Statements because a
break even chart is the simple presentation of cost, volume and profit structure of the
company. It summarizes a great mass of detailed information in a graph in such a way that its
significance may be grasped even with a cursory glance.

b. A break even chart is useful for studying the relationship of cost, volume and profit. The
chart is very useful for taking managerial decisions because it shows the effect on profits of
changes in fixed costs, variable costs, selling price and volume of sales.

c. The chart is very useful for forecasting costs and profits at various volumes of sales.

72
d. A break even chart is a tool for cost control because it shows the relative importance of the
fixed costs and the variable costs.

e. Profitability of various products can be studied with the help of these charts and a most
profitable product mix can be adopted. Profits at different levels of activity can also be
ascertained.

f. The profit potentialities can be best judged from a study of the position of the break-even
point and the angle of incidence in the break even chart. Low break-even point and large
angle of incidence in the break even chart indicate that fixed costs are low and margin of
safety is high. It is a sign of financial stability.

In such a case, some monopolistic conditions prevail and high profits are earned over a large
range of production activity. Low break-even point and small angle of incidence show that
fixed costs are low and margin of safety is high, but rate of profit is not high because of
absence of monopolistic conditions. High break-even point and large angle of incidence show
that fixed costs are high and margin of safety is low.

A small fall in volume may put the business into losses and a small increase in volume may
give a high profit because of large angle of incidence. Last, high break-even point and small
angle of incidence is the worst position because it indicates a low margin of safety and a low
rate of profit.

g. It is helpful in the determination of sale price which would give desired profits or a B.E.P.

h. It is helpful in knowing the effect of increase or reduction in selling price.

73
 1. BREAK EVEN ANALYSIS FOR THE FINANCIAL YEAR 2014-15:

UNITS FIXED COST VARIABLE COST TOTAL COST SALES/REVENUE

0 32 0 32 0

2 32 40 72 50

4 32 80 112 100

6 32 120 152 150

8 32 160 192 200

GRAPHICAL REPRESENTATION OF BREAK EVEN

ANALYSIS FOR THE YEAR 2014-15

250

A
M
200 200
O 192
U
N
T 150 152
150

I FIXED COST
N
112 TOTAL COST
100 100
C SALES/REVENUE
R
72
O
R 50 50
E
S 32 32 32 32 32

0 0
0 2 4 6 8
NUMBER OF UNITS

74
 2. BREAK EVEN ANALYSIS FOR THE FINANCIAL YEAR 2015-16:

UNITS FIXED COST VARIABLE COST TOTAL COST SALES/REVENUE

0 56 0 56 0

4 56 72 128 100

8 56 144 200 200

12 56 216 272 300

16 56 288 344 400

GRAPHICAL REPRESENTATION OF BREAK EVEN

ANALYSIS FOR THE YEAR 2015-16
450
A
M 400 400
O
U 350 344
N 300
300
T 272
250
I FIXED COST
N 200 200 TOTAL COST
SALES/REVENUE
C 150
128
R 100
100
O
R 50 56 56 56 56 56
E
S 0 0
0 4 8 12 16
NUMBER OF UNITS

75
 3. BREAK EVEN ANALYSIS FOR THE FINANCIAL YEAR 2016-17:

UNITS FIXED COST VARIABLE COST TOTAL COST SALES/REVENUE

0 45 0 45 0

2 45 30 75 60

4 45 60 105 120

6 45 90 135 180

8 45 120 165 240

10 45 150 195 300

GRAPHICAL REPRESENTATION 0F BREAK EVEN

ANALYSIS FOR THE YEAR 2016-17
350

A 300
300
M
O
U 250
240
N
T
200 195
I 180 FIXED COST
165
N 150 TOTAL COST
135
L 120 SALES/REVENUE
105
A 100
K 75
H 60
50 45 45 45 45 45 45
S

0 0
O 2 4 6 8 10
NUMBER OF UNITS

76
7. LIMITATIONS OF BREAK EVEN ANALYSIS:

Break even analysis is based on a number of assumptions (discussed earlier) which may not
hold good. Fixed costs vary beyond a certain level of output. Variable costs do not vary
proportionately if the law of diminishing or increasing returns is applicable in the business.

Sales revenues do not vary proportionately with changes in volume of sales due to reduction
in selling price as a result of competition or increased production.

In the break even analysis, we have seen that the total cost line and the sales line look straight
lines. This is possible only with a number of assumptions. But, in practice, the total cost line
and the sales line are not straight lines because the assumptions do not hold good. Thus, there
might be several break even points at different levels of activity.

b. A limited amount of information can be shown, in a break even chart. A number of charts
will have to be drawn up to study the effects of changes in fixed costs, variable costs and
selling prices.

c. The effect of various Product mixes on profits cannot be studied from a single break even
chart.

d. Break even analysis does not take into consideration capital employed which is a very
important factor in taking managerial decisions. Therefore, managerial decisions on the basis
of break even chart may not be reliable.

In spite of the above limitations, the break even analysis is a useful management device for
analysing the problems, if it is constructed and used by those who fully understand its
limitations.

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8. CONCLUSION:

The CVP analysis is very much useful to management as it provides an insight into the
effects and inter-relationship of factors, which influence the profits of the firm. The
relationship between cost, volume and profit makes up the profit structure of an enterprise.
Hence, the CVP relationship becomes essential for budgeting and profit planning.

As a starting point in profit planning, it helps to determine the maximum sales volume to
avoid losses, and the sales volume at which the profit goal of the firm will be achieved. As an
ultimate objective it helps management to find the most profitable combination of costs and
volume.

A dynamic management, therefore, uses CVP analysis to predict and evaluate the
implications of its short run decisions about fixed costs, marginal costs, sales volume and
selling price for its profit plans on a continuous basis. Break even analysis is important
because it's the simplest way for a business to determine if what it charges for its products
and services will cover what it costs to make the products or provide those services. The
higher the fixed costs for the business, the higher the breakeven point will be, meaning the
more offerings it needs to sell.

the trend from 2014-15 to 2016-17 shows that there is highest capacity utilization in 2014-
15& in 2015-16 but sales are high in the 2015-16 i.e. 400 Cr. but the corresponding profit is
high in the year 2016-17 i.e. 105 Cr. but in the year 2015-16 there is high total cost also,
affecting to less sales & profit. There is a increasing profit volume ratio from the years 2014-
2015 to 2016-2017, it has increased from the year 20% to 28% and finally 50% in the
financial year 2016-17. It is considerably increased in the year 2016-2017 means the
profitability of the organisation has increased. There has been increase in the breaking sales
from the financial year 2014-15 to 2015-16 which means that the organisation (GAIL) is
producing more so as to meet the additional customer demand which is a positive sign for a
business. Break even sales has increased from 16 Cr to 200 Cr but has fallen to 90 Cr in the
financial year 2016-17. The soundness of a business may be gauged by the size of the margin
of safety. A high margin of safety indicates the soundness of business. The margin of safety
of GAIL ltd. Has continuously increased from 184 Cr (2014-15) to 200 Cr(2015-16) to
210(2016-17) which speaks volume about its vast size and soundness.

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9. BIBLIOGRAPHY:

The researcher consulted following things while making the project.

PRIMARY SOURCES:-

1) BOOKS

(a) FINANCIAL MANAGEMENT 11TH EDITION BY I.M. PANDEY

(b) THE BASICS OF PUBLIC BUDGETING AND FINANCIAL MAMAGEMENT
BY CHARLES E. MENIFIELD
(c) FINANCIAL MANAGEMENT: THEORY AND PRACTICE 15TH EDITION
BY EUGENE F. BRIGHAM AND MICHAEL C. EHRHARDT.
(d) FINANCIAL MANAGEMENT: THEORY AND PRACTICE BY CHANDRA
PRASSANA.

SECONDARY SOURCES:-

2) WEBSITES

(a) http://www.foster.washington.edu
(b) https://www.financialtalks.com
(c) http://cms.sinhgad.edu
(d) http://financialtools.edu

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