Had it not been for a free falling market, Pakistan State Oils share price would have touched its upper circuit breaker yesterday, rather than the lower one which it actually did. PSO announced financial results for FY11, surpassing the consensus estimates by a whopping 25 percent - mainly on account of higher than expected gross profit. The bottom line increase need not be looked at much, as FY11 earnings are adjusted for a onetime tax reversal. But the top line growth in double digits is commendable, given that PSO lost its market share by 500 bps during FY11 against the corresponding period last year. PSOs volumetric sale shrunk by 9.4 percent year-on-year mainly on account of 10 percent and 13 percent dip in HSD and furnace oil sales. Motor gasoline demand although increased by 27 percent as gas shortages throughout the year resulted in increased dependence on petrol. Diesel and petrol margins remained under stress for most of the year after being fixed in absolute terms much to the dismay of the industry players. It was the improved realised margin on furnace oil that helped the gross profit stay above the previous years mark - as furnace oil contributes nearly 50-60 percent to gross profits. What continues to haunt PSO is the same old issue of circular debt - as the finance cost showed a sizeable increase eroding the bottom line significantly. What made matters worse in FY11 was a dip in other income which the company used to mitigate the high finance cost by way of receiving penal income on its receivables. It was indeed a double whammy for PSO that both the dip in other income and surge in finance cost came simultaneously, further widening the differential. What has caused such a sharp decline indeed requires explanation for which the detailed accounts may be worth the wait. It also appears that the company has exhausted the option of curtailing operating expenses to ease the circular debt blow. The finite nature of these expenses seemed to have stretched PSO to the limit after which there was not much room to cut on the operating expenses. The numbers may seem attractive, but the stock has continuously underperformed the index in the past six months as it is the circular debt that has the biggest say on the companys earnings compared to any other aspect. And there seems little hope out there, when it comes to circular debt resolution, hence the depressed share price.
================================================ Pakistan State Oil ================================================ Rs mn FY11 FY10 chg ================================================ Sales 820,530 742,758 10% Cost of sales 786,250 713,592 10% Gross profit 34,280 29,166 18% Gross margins 4.2% 3.9% 6% Other income 4,144 6,095 -32% Finance cost 11,903 9,882 20% Operating expenses 9,547 8,081 18% PAT 14,779 9,050 63% EPS (Rs) 86.17 52.76 ================================================
Source: KSE notice
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