PSO reports strong quarter

Pakistan State Oil (PSO) announced its 9MFY18 financial results on Monday, showing a 7 percent year-on-year decline in after tax profits. This could be termed a strong performance in unfavourable circumstances, where PSO is undergoing a massive shuffle of its sales mix and volumes that will ultimately impact the top-line.

In the 3QFY18, the profits were handsomely up by 14 percent year-on-year, despite (or because) higher impact of loss in FO market share. The gross profit margins during the quarter were up by 27 bps over last year, and 62 bps higher than the 9MfY18 numbers. This could be attributed to sales mix now dominated by white oil, having much reduced share of low margin FO products. Moreover, PSO has also been focusing on its LPG volumes, lubricants, and store sales – all of which are higher margin businesses – and the improved margins could just be the beginning of how PSO would want to position itself going forward, without or with little furnace oil.

That said, there is a lot that needs to be done on account of circular debt settlement, as PSO’s receivables had crossed Rs300 billion by the end of December 2017. The lower volume of FO handling may have resulted in slowdown of receivables accumulation, but the drag is too heavy to be removed in one go. PSO faced the price in the form of high finance cost due to short term borrowings, which in the third quarter alone equaled the finance cost in the first half. That said, the reprieve in the form of penal income was there to somewhat mitigate the impact of high finance cost.

PSO seems fully aware of increased competition in the white oil segment, and has been seen gearing itself quite well. In quarters to come, PSO will have to worry less about receivables and payables, since most of it stems from the furnace oil dealings.

That should ideally result in greater focus on further improving the sales mix, and resultantly the margins and profits. Furthermore, it also has plans to convert its FO storage to HSD and MS storage to save itself from inventory losses going forward. The interim dividend of Rs10/share is a healthy signal – and could well be an indication of better things in offing in the future.