The refining sector has had difficult times in the last couple of years and profitability is seen recuperating in 1HFY21. However, the sector continues to battle the infrastructural and liquidity challenges that inhibit sustainable productivity and profitability. Pakistan Refinery Limited (PSX: PRL), which is one of the four listed refineries, announced a profit after tax in 1HFY21 versus a loss in the corresponding period.
Demand contraction during the ongoing fiscal year (FY21) due to COVID-19 as well as decline in oil prices continue to eat away the revenue growth, PRL’s topline in 1HFY21 dropped by 3 percent year-on-year, while that in 2QFY21 was down by 11.6 percent year-on-year. From gross loss, the company reported gross profits in both 1HFY21 and 2QFY21. Significant improvement in gross margins was primarily due to contained inventory losses.
Moderate growth in expenses and increase in other income further supported operating margins, while decline in finance cost lifted net margins in 1HFY21. Though the company posted a loss after tax in 2QFY21, there was a decline of 90 percent year-on-year in losses for the period.
Improvement in earnings has partially been due to production of IMO-2020 grade low sulphur Marine Residual Fuel and Euro II compliant High Speed Diesel. During the period, PRL’s right issue was completed, which increased paid-up capital and will help PRL meet funding requirements for certain short to medium term CAPEX projects along with the working capital requirements.
Despite earnings turning green in 1HFY21 for PRL – a reminder that the refinery segment is not out of the woods yet. Long term factors the inability of the refining sector to upgrade the refining process. PRL in its Annual Report 2020 highlighted that it has envisaged an elaborate upgrade project, which will not only meet but will exceed the current regulatory environmental requirements and produce EURO V compliant MS and HSD. The project at the same time aims to convert the refinery from a simple configuration to a complex one, significantly reducing fuel oil production, by converting it into MS and HSD.
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