Pakistan State Oil is in dire straits, one in which it has found itself for quite some time. The first quarter results for FY11 have just reconfirmed where PSO stands. It is remarkable that PSO is still managing to hold its ground, by the way, as the company has gone well beyond the default benchmark of Rs100 billion in the receivables account.
That the countrys largest oil marketing firms quarterly profits more-than-halved surprised nobody - but the manner in which it happened is indeed alarming. A huge slide in the bottom line was expected as the issue of turnover tax remains unresolved - which meant an effective tax rate of 68 percent - which is disastrous for a firm like PSO that plays on high volumes.
Although, the top line grew, never mind merely, it was based on product price increases during the period. The floods were devastating for PSO as they wiped away 18 percent of the total volume, with identical decline in both black oil and diesel sales. That may just be short-lived though, as volumes are expected to tick-off again as time goes by.
Other than the turnover tax, it was the financial cost that did the damage as it almost doubled from the previous years level. As a consequence of the familiar circular debt menace, the company was compelled to arrange for short-term borrowing to stay afloat and meet its obligations.
The balance sheet numbers are yet to be revealed, but, looking at the receivables of Rs140 billion as on August 2010, the quarter ending figure must be there and there about. What is astonishing is that the company is still continuing its operations despite the latest receivables having mounted to Rs148 billion. It was last year when PSOs MD hinted that crossing the Rs100 billion level would mean a default for PSO.
Perhaps the governments little injections when the company is just about to sink every other time is keeping the firm afloat. But how long can it go on is the next question as the per-day financial charges have already swelled to Rs33 million, up from Rs20~22 million last year.
The key surprise in the income statement is the other income of merely Rs418 million, which was expected to be well over the billion-rupee mark given the recent trend. PSO had been able to post reasonable profits despite incurring high financial costs in the recent quarters, by virtue of earning penal interest on its receivables. The sudden dip, despite high receivables, will need some explanation as it seems odd.
All that PSO seems to be doing on purpose, realising the gravity of the situation, is holding back its dividends and cutting on its operating expenditures. The firm will be back with stronger volumes in the near future as gas shortage will mean the IPPs reverting to higher usage of furnace oil, but the key remains the power sector reforms without which the circular debt is here to stay and haunt PSO.
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PSO P&L
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Rs (mn) 1QFY11 1QFY10 chg
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Sales 170,362 169,268 1%
Cost of sales 163,649 162,875 0%
Gross profit 6,713 6,394 5%
Gross margins 3.9% 3.8% 4%
Other income 419 69 510%
Finance cost 2,975 1,573 89%
Operating expenses 1,952 2,487 -22%
PAT 810 1,906 -58%
EPS (Rs) 4.72 11.11
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Source: KSE notice