What seems like a commendable earning performance from the National Refinery Limited (NRL) during the first half of FY10 might entice the investors towards the domestic refinery sector as other peer companies are due to announce their respective results soon.
But the massive turnaround in NRLs fortune from the red zone last year to an earnings in excess of Rs1 billion during 1HFY10 is not necessarily a reflection of improved refinery dynamics.
What tops the list of FAQs in the local refinery industry among the wonderers is: what does the NRL have that others don ? The answer to the question is a wide array of lubricating products in its portfolio. Had it not been for the high margin lubricant segments superior performance, the profit and loss statement would merely have been a loss statement - mirroring the year-ago period.
The bottom line grew despite a massive decline in net sales - which is a reflection of the 19 percent decline in crude oil prices and an under par performance at the production front. The firms refinery capacity utilization shrank to a paltry 44 percent against 61 percent that of the industry - mainly due to a prolonged plant maintenance shutdown in August 2009.
While a considerable reduction in oil prices is not usually a good omen for refineries, but the way it happened - it acted as a buffer to the gross refinery margins. Though still in red, the refining margins could have been much worse had the oil price been as volatile as it was during the 1HFY09.
The subdued spread on petroleum products under the current pricing mechanism resulted in negative refining margins of around $1/bbl - saved from declining any further by the relatively stable crude oil price during the period under review.
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NRL P&L
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Rs (mn) 1HFY10 1HFY09 % chg 2QFY10 2QFY09 % chg
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Sales 48,116 67,180 -28% 28,128 23,765 18%
Cost of Sales 45,861 65,761 -30% 27,113 24,288 12%
Gross profit 2,255 1,419 59% 1,015 -523 na
Gross margins (%) 5% 2% 122% 4% -2% na
Other income 562 659 -15% 276 322 -14%
Finance cost 222 2,176 -90% 78 279 -72%
PAT 1,154 -793 na 476 -702 na
EPS (Rs) 14.43 -9.92 na 5.95 -8.78 na
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Source: KSE notice
The relatively stable rupee against dollar provided a boost to the bottom line. Not that the rupee has gained any strength against the dollar in absolute terms, but the pace of its decline has slowed down a considerable bit to 4 percent during 1HFY10 from a massive 16 percent back in 1HFY09. That, plus the fact that the firm operated at much lower efficiency meant lesser foreign currency transactions relating to crude oil payments.
The firm, although, echoes the industrys voice of a revamp in the pricing mechanism to survive - is still better placed than its peers as it finds itself hedged against an unfavorable oil price scenario by virtue of its lube segment.
That said, if the government agrees on the price formula revision as per industrys demands - no company would welcome it more than the NRL given that it has made profits even in such distress times for the industry.
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