Circular debt continues to haunt PSO

Rarely does a company find itself reporting a 40 percent increase in profits but remains in dire straits. Welcome to PSO. The OMC giant announced its half yearly results yesterday, in line with the consensus estimates, but nearly half of it constitutes of a one-time gain from the tax reversal as the government reverted its decision on turnover tax.
Take the one-time tax benefit out and PSO actually has a 25 percent thinner bottom line compared to the year ago period.
The floods wiped away PSOs volumetric sales as it remained 10 percent lower on a year-on-year basis, only to be supported by a relatively higher oil price scenario, which explains the minimal increase in the top line.
The sales mix was dominated by the low-margin furnace oil product, which is why the gross margins remained largely flat. Had it not been for the timely inventory gains by virtue of higher realised prices, gross margins could have been worse.
What really hampered the bottom line was, again, the usual suspect - the circular debt. The company is paying huge financial charges in the form of interest payments on payables and interest on short-term borrowings, which have escalated to manage the working capital flow.
The seriousness of the problem can be gauged by the fact that PSO had to pay as much as Rs34 million on a daily basis on account of financial charges.
The financial charges during the period are just half a million rupees less than what PSO paid in the entire year back in FY09. Such is the crunch that the payables on the books as on September 2010 were more than the receivables, adding insult to injury.Furthermore, what used to mitigate the high financial cost to some degree, that is the other income, also went down dramatically. With such high receivables, touching Rs140 billion as on September 30 2010, such a sharp decline in other income is indeed odd as one would expect PSO to earn a sizeable amount on account of the penal interest income.
The fact that PSO is still doing the business as usual is commendable as not long ago the companys MD hinted on a case of the company collapsing should the receivables cross Rs100 billion. They are now well over the mark and still growing, the government tries to keep it afloat by injecting a few billions on and off, but the problem remains there.
All that the company is doing in these tough times is reducing the payout and cutting on the operating expenses. But these measures are finite and such costs can only be curtailed to a certain level, beyond which, PSO has nothing else but to hope and pray that the circular debt wipes off, the sooner the better.

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PSO P&L

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Rs mn                1HFY11   1HFY10    chg   2QFY11   2QFY10    chg

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Sales               359,953  350,211     3%  189,591  180,943     5%

Cost of sales       346,009  336,692     3%  182,360  173,817     5%

Gross profit         13,944   13,519     3%    7,231    7,126     1%

Gross margins             4%       4%     0%       4%       4%   -3%

Other income          1,796    2,290   -22%    1,378    2,221   -38%

Finance cost          6,044    3,877    56%    3,068    2,304    33%

Operating expenses    4,178    4,472    -7%    2,226    1,985    12%

PAT                   7,131    5,084    40%    6,321    3,178    99%

EPS (Rs)              41.58    29.64           36.86    18.53

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Source: KSE notice

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