PSO cannot ignore the circular debt

Though the company avows to be churning healthy cash flows of Rs1.8 to Rs2 billion daily, one cannot fail to notice how dangerously Pakistan State Oil (PSO) gets entangled in the circular debt that periodically disables it to pay for its letter of credits (L/Cs). And with this, the danger of international default becomes an impending threat.
With receivables worth Rs140 billion and payables hovering over Rs180 billion as on December 31, 2012, circular debt remains a hanging sword over PSOs efficiency. However, due to the companys TFC deal in September 2012, the drain on profitability from the generally high finance cost in shape of interest payments as well as exchange losses during the latest financial period (9MFY13) of PSO was reasonably lower.
But this did not translate into any exponential or modest growth in PSOs earnings. The bottom line growth was restricted to four percent year-on-year as other income in 9MFY13 came back to the 9MFY11 levels. Analysts have pointed towards the absence of penal mark-up from the power sector that resulted in a 69 percent year-on-year fall in other income.
Top line of PSO could also not provide a substantial support to the bottom line. There were substantially lower inventory gains on account of meager change in POL prices during the period under review. In tandem with the international crude prices, gross margins remained flat during 9MFY13 primarily due to the flattish margins on deregulated products like furnace oil.
Though, the OMCs debt position has improved relatively for the 9MFY13, the relief did not translate into any dividend announcement, highlighting the company restricted pay out position. The long-term solution to the circular debt menace lies in the elimination of power sector subsidies, a check on government financing and the energy sector reforms; all factors beyond the companys control.

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Pakistan State Oil (PSO)

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(Rs mn)              9MFY13    9MFY12    YoY    3QFY13    3QFY12     YoY

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Net sales           790,948   737,392     7%   256,110   244,516      5%

Gross profit         26,863    25,600     5%     8,762     9,183     -5%

Operating profit     17,212    14,484    19%     5,929     5,301     12%

Other income          2,264     7,402   -69%       126     6,141    -98%

Finance cost          6,039     8,839   -32%     1,559     4,838    -68%

Profit after tax      9,317     8,974     4%     3,043     4,391    -31%

EPS (Rs/share)        37.72     36.33     4%     12.32     17.78    -31%

Gross  margin          3.4%      3.5%             3.4%      3.8%

Operating  margin      2.2%      2.0%             2.3%      2.2%

Net margin             1.2%      1.2%             1.2%      1.8%

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