PSO finds efficient ways to deal with circular debt

The countrys largest oil marketing and distribution company Pakistan State Oil (PSO) surprised the market yet again with its nine months financial performance.
Not many expected the oil marketing giant to post earnings in excess of Rs40/share, but the fact that it surpassed the consensus by a good 10 percent, pushed the stock price up by more than 2 percent on Thursday.
The prevailing energy crisis and the resulting dependence on furnace oil based power plants is one thing PSO should not mind one bit as it boosts the firms revenues. Acute gas shortage during the period coupled with the introduction of new IPPs and RPPs has brought glory to the firms topline as the demand for Black Oil has jacked up.
However, PSOs bottomline took a massive hit as the circular debt trapped firm found itself wanting for cash to manage the working capital. What is astonishing is the massive surge in financial charges which were previously believed to be around Rs20-22 million a day doubled to almost Rs42 million/day in the quarter ending March.
To combat the pressure of mounting interest charges, PSO came up with an internally devised strategy of charging penal markup on its outstanding receivables, which kept hovering around Rs100 billion during the quarter. The company received Rs2.1 billion on this account in the last quarter and by the look of it, a similar interest receipt is the most likely reason behind PSOs humungous rise in other income.
Whether it is a case of rightsizing, reduction in marketing and advertising spending or just efficient resource management, is yet to be known, but PSO has done a commendable job of marginalizing the operating expenses significantly to counter the menace of circular debt.
The company seems all set to reap the gains of the rental power plants and the IPPs, which is planned to be added to the grid on a fast track basis. The fast depleting gas reserves and at least 3000 MW power plants in the offing together makes a perfect case of success for the firm in the times to come.

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PSO P&L

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Rs (mn)               9MFY10       9MFY09     % chg

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Sales                531,157      461,239       15%

Cost of sales        511,354      464,714       10%

Gross profit          19,803       (3,474)       NM

Gross margins              4%          -1%       NM

Other income           4,630          692      569%

Finance cost           7,618        4,680       63%

Operating expenses     5,952        8,816      -32%

PAT                    7,534       (9,269)       NM

EPS (Rs)               43.93       (54.04)       NM

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