National Refinery Limited (NRL) announced its first quarter FY10 results on Monday posting a massive increase in earnings owing to inventory gains and lower financial charges that outweighed the impact of depressed sales volume. However, there wasn much for the shareholders to cheer about as the companys management refrained from declaring any dividends for the quarter.
NRLs top-line was more than halved as both the sales volume and ex-refinery prices fell sharply during the period. Average price of the firms product mix excluding the lube segment went down by 55 percent on year-on-year basis, whereas the refinery production fell due to lower operational efficiency resulting from an extended maintenance shutdown during the period. The companys plant produced only 42 percent of the total capacity.
Yet, gross margins jumped on account of soaring inventory gains during the quarter (as against losses in the year ago period) as rising international oil prices drove ex-refinery prices higher. Although, the fuel refinery margins are expected to have been recorded at $2 per barrel as against $9 per barrel during 1QFY09 - the gross margins improved substantially as rising oil prices and significant contribution from the high margin lube segment made up for the lower ex-refinery prices during 1QFY10.
However, the biggest support to the bottom-line came from a less likely source ie a reduction in financial charges. The fast depreciating rupee, which lost 15 percent against dollar during 1QFY09, was the chief reason behind staggering financial charges of Rs 1.8 billion. But with the local currency showing much resistance - down just 2.5 percent in 1QFY10 -- the firms financial costs declined by more 90 percent to its normal levels.
Going forward, there are positive signs for the company as oil price in the international market is expected to stabilise in the range of $70-75/bbl. Therefore, on a conservative note if NRL manages to keep its fuel business margins at zero percent, the lube segment would be good enough to yield healthier profits as it enjoys premium pricing. Moreover, the company is expected to operate at optimal efficiency level to reap the lucrative fuel margins - on offer that may come along with inventory gains.
Even if things do not turn around drastically, the firm seems well hedged against falling oil prices as its lube business provides a much needed cushion against any sharp decline in oil price and offsets the impact of inventory losses. This is because any decline in oil price reduces the production cost of lube - furnace oil being its base material.
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