APL – down on inventory and exhange losses

With falling crude oil prices and domestic currency nosediving, the downstream oil marketing sector has been hit with a double whammy. Where the falling crude oil prices have been expected to result in significant inventory losses for the OMCs, the depreciating rupee was bound to bring in some substantial exchange losses. Attock Petroleum Limited’s (PSX: APL) financial performance for FY19 tells the same tale.

APL’s topline grew by around 26 percent year-on-year, which was entirely due to higher petroleum product prices; volumetric sales on the other hand have seen a decline led by 36 percent year-on-year decline in furnace oil volumes, and 9 percent year-on-year decline in high speed diesel sales. However, higher inventory losses squeezed APL’s gross margins.

APL’s net earnings for FY19 came down by 30 percent, year-on-year. And besides the higher inventory losses, the OMC’s earnigns were injured by 41 percent year-on-year higher operating expenses – a good chunk of which is likely to come from higher exchange losses incurred due to currency depreciation.

Despite the support from the other income, the earnings the company were adversely impacted by higher fianance cost amid high interest rate environment, and nearly 6.5 times increase in share of losses from associates, which is probably the high losses incurred by the Attock Refinery and Natiaonal Refinery in FY19.

While there has been a decline in profitability in FY19 along with a decrease in volumetric sales, APL has seen its market share increase from 9 percent in FY18 to 11 percent in FY19. The company commissioned Shikarpur Bulk Oil Terminal in the ongoing fiscal year, and plans to further invest in development of bulk terminals across the country. Construction of its bulk oil terminals at Sahiwal and Daulatpur are expected to complete soon, whereas it has acquired the land at Tarujabba and Gatti, Faisalabad to develop terminals.

Overall, the effects of monetary and fiscal tightening have been adversely affecting the OMC sector in FY19. And FY20 also looks heavy for the sector as not only the slowdown in volumes due to declining demand is expected to continue dampen sector sales, but the taxation changes in FY20 Budget like the increase in minimum tax rate for the OMCs from 0.5 percent to 0.75 percent will also negatively affect the profitability of the sector in the ensuing year.