The countrys largest OMC, Pakistan State Oil (PSO) surprised the market with its 1QFY12 financial results surpassing market expectations by more than 20 percent. A massive year-on-year improvement in profits was widely expected as 1QFY11 carried the low-base effect of a 1 percent turnover tax, which was later reversed retrospectively. The impressive top-line growth came on the back of a 35 percent year-on-year increase in product prices, as crude oil prices rose substantially in the global market. But volumetric sales failed to pick up considerably and the only reasonable increase was witnessed in the white oil category which grew by 8 percent year on year. Sales of furnace oil remained strong but flat at 1.8 million tons. The OMCs are undergoing margin deregulation in a phased manner, which resulted in slight improvement in primary product margins. Moreover, the furnace oil segment contributed heavily towards the gross profit as FO margins considerably improved during the quarter. Yet, gross profit margins decreased comparatively because of the inventory losses that the company faced during the quarter as against a sizeable inventory gain that was recorded during 1QFY11. Given PSOs recent history of being engulfed in the inter-corporate circular debt, consensus estimates pointed at high financial charges for the period. But PSO managed to throw a positive surprise, as the financial charges remained considerably lower than expected and on sequential basis; it appears that the one-time money injection from the finance ministry to the ailing power sector had had a big role to play in controlling the financial charges. The bottom line, however, faced the brunt of a massive hike in operating expenses, nearly negating the positive impact of reduced financial charges. What caused the operating expenses to swell as much as they did is yet to be known, but it appears that the company has exhausted its options to curb operating expenses in order to manage the working capital in the times of circular debt. Going forward, PSO will likely improve its gross margins as the phased deregulation of OMC margins is taking shape and the products margins have considerably improved form FY11. That said a lot will still depend on how the government plans to tackle circular debt, as PSOs receivables still stand over Rs.150 billion. The money injection worked for this quarter, but this can be a long-term solution and higher financial charges will soon be on the cards as circular debt mounts again.
==================================================== PAKISTAN STATE OIL ==================================================== (Rs mn) 1QFY12 1QFY11 chg ==================================================== Sales 238,736 170,362 40% Cost of sales 231,057 163,649 41% Gross profit 7,678 6,713 14% Gross margins 3.2% 3.9% -18% Other income 896 419 114% Finance cost 1,873 2,975 -37% Operating expenses 3,289 1,952 68% PAT 2,487 810 207% EPS (Rs) 14.50 4.72 ====================================================
Source: KSE notice
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