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After posting a staggering decline in earnings for FY19 (loss after tax: Rs5.8billion) Pakistan Refinery Limited's (PSX: PRL) performance for 1QFY20 was a much needed breather. As highlighted many times in this space, the refining segment had a tough time in FY19 due to many factors like the decline in furnace oil demand that led to the build-up of inventory that had to be sold at lower prices resulting in lower margins. Refining margins also came under pressure as petrol price came down. Also the steep devaluation of currency against the Dollar was another factor for the weak profitability of the refining segment.

PRL announced its 1QFY20 performance yesterday that showed a 40 percent year-on-year growth in the company's revenues, and hence a noticeable improvement in gross margins. Contained administrative and distribution expenses and increase in other income helped the refinery post operating profits in the period versus operating loss in 1QFY19. While PRL was able to post a PAT of Rs181 million in 1QFY20 versus a loss of Rs420 million in 1QFY19, its earnings were clipped by the rise in finance cost.

Finance cost for PRL primarily consists of interest expense on borrowings -  which increased for PRL due to increase in short term borrowings as well as increase in interest expense in a high interest rate environment - and exchange losses that had a huge share in FY19 due to the currency depreciation.

During FY19 however, Pakistan State Oil Company Limited (PSO) acquired 84 million shares from Shell Petroleum Company Limited, UK, which increased its shareholding in the Company to 52.68 percent, making PSO the parent company of PRL. The management is hopeful that this relationship will help it overcome the challenges it has been facing.

PRL's profitability has also been under constraint due to the delay incurred in the refinery upgradation process. Under the policy framework for up-gradation and expansion of refinery projects issued by the Ministry of Energy (MoE) in 2013, refineries were required to install Diesel Hydrodesulphurisation Unit (DHDS) by June 30, 2017 to produce EURO II compliant High Speed Diesel (HSD) and in case of non-compliance, the ex-refinery price of HSD based on Import Parity Pricing (IPP) formula would be brought down due to higher sulphur content. The Company did not meet the said deadline, which has been a reason for the losses incurred by the company. However, as per its FY19 Annual report, the Body has approved the upgrade project and work is underway.