APL- earnings hit by volumes and inventory losses

Attock Petroleum Limited (PSX: APL) has seen its earnings plummet in FY20 to levels not seen in at least a decade. At Rs1 billion, the earnings of the oil marketing company dropped 75 percent year-on-year in the fiscal year 2020.

Weakness in earnings due to inventory losses started appearing back in FY19 due to lower prices of petroleum product in the country versus international prices. Add the falling sales revenue to the equation, and you get FY20 financial performance.

APL’s revenues took a hit of over 8 percent year-on year in FY20, which stemmed from not only crashing oil prices during the year but also decreasing petroleum product sales. Volumes sold by the OMC sector have been falling during both pre-COVID and post-COVID times highlighted by power generation mix shifting away from furnace oil as well as slower and weak economic activity translating into weaker car sales, industrial activity, agriculture output, cross-border smuggling.

During FY20, APL’s overall market share remained the same around 10.5 percent. However, its volumes sold registered a decline of around 11 percent year-on-year where product-wise decline shows the highest in High Speed Diesel (17 percent YoY), followed by Motor Gasoline (7 percent YoY) and FO (5 percent (YoY) in FY20.

Apart from the weakness in the topline, higher cost of sales on account of inventory losses particularly in 2HFY20 squeezed APL’s gross margins. Inventory losses are expected to have come from furnace oil. A jump in finance cost amid high interest rates, relatively lower other income and decline in profits from associated also added to the bottomline decline –pulling APL’s net margins below one percent.