Shell Pakistan is one of the oldest multinational companies in Pakistan and the history of the company in Indo-Pak subcontinent dates back to 1903 when Shell Transport and Trading Company and Royal Dutch Petroleum Company decided to merge and supply petroleum to Asia. The company came to be known as Burmah Shell Oil Storage and Distribution Company in 1928 in India with the merger of Royal Dutch Shell Plc and Burmah Oil Company.
Later in 1947, the company was named Burmah Shell Oil Distribution Company of Pakistan which became Pakistan Burmah Shell (PBS) Limited in 1970 when Pakistani investors gained 51 percent of the shareholding. In 1993, the Burmah Group divested from PBS and Shell Petroleum jumped in to raise its stake to 51 percent. Today, Shell Petroleum is a 76 percent majority stakeholder in Shell Pakistan Limited. The company is amongst the three oil marketing companies included in KSE100, the other two being PSO and Attock Petroleum Limited.
Business Activity Year Round The company is divided into eight functional areas namely retail, aviation, operations, lubricants, commercial fuels, finance, HR and corporate. In the retail business, the company is the largest player in the foreign retail segment and provides fuel to over one million customers daily. With over 800 retail outlets, Shell Pakistan is the only petrol retailer in the country to offer premier fuel.
The company is a global leader in lubricants. The company has three major lubricant brands: Shell Helix, Shell Rimula and Shell Advance, which have gained prominence not only globally but also within the country. These lubricants are market leaders across passenger cars, bikes and heavy duty vehicles.
The company also provides world-class domestic heating oils, commercial road transport, industrial and wholesale products to business customers. Shell Pakistan is also one of the key suppliers of fuel to IPPs in Pakistan. The company also has a significant representation in the aviation industry.
Operating Highlights The poor economic conditions in the country, coupled with outstanding receivables from the government, were the most significant challenges for Shell Pakistan Limited during CY11.
In terms of growth in new avenues, the CY11 witnessed satisfactory performance for many of the company's brands. Shell Pakistan Limited continued to be amongst the top players in lubricants with a market share of 41 percent. Moreover, the oil marketing company expanded not only its retail but also its storage facilities during CY11.
During the year, the company invested in efforts to buttress its market leadership in the lubricant segment where it introduced the benefits of using the most expensive products for heavy duty machinery requirements to the agriculture sector.
Financial Highlights The company gets 99 percent of its revenues from the fuel sales and exports and gets the remaining from the non fuel retail. Gross sales, which include sales from both fuel and non fuel segments, witnessed a growth of 11 percent during CY11 over corresponding year.
The mere 11 percent growth in the top line during CY11 came from higher oil prices and the better performance of the export sales particularly during the first half of the year. However, the bottom line during CY11 remained tepid due to a multitude of reasons such as high inflation, increasing government receivables, spiking oil prices, security threats and growing cost of doing business.
Most significantly, the profitability during CY11 plunged versus that of last year due to a spiky increase in the finance cost. The government receivables on account of price differential claims, sales tax and petroleum development levy touched the sky during CY11 at RS13.9 billion versus Rs 9 billion in CY10, turning gains into losses. The company continued its endeavour in recovering the receivables but due to the hold-up in the process, the company suffered additional Rs 1.15 billion in the financing cost as working capital requirement.
Another massive challenge that the company and the OMC sector deter to is the impact of minimum tax on turnover. At 68 percent during CY11, the 68 percent rate increases the income tax liability of the company and a limited increase in the margins of diesel and motor gasoline as they are regulated. During the said period, the company was unable to payout cash dividends due to restraining cash flows primarily due to the circular debt. In exchange the company issued one bonus share for every four held during Y11.
Liquidity & Efficiency At a time when the oil prices as well as the cost of doing business are galloping at a fast pace, the regulated margins for diesel and petrol in Pakistan remain the lowest in the region. This poses a threatening situation for the operational efficiency of the company and hence the oil marketing segment.
With inflationary pressure boggling the economy down to a crucial precipice, the regulated margins allowed by the government are not adequate to absorb the cost of operations, government receivables and high cost of financing.
Although the company does not have any long term liability on its balance sheet CY11, the financial soundness and short term solvency of the company attracts attention as the company has availed short term loans and financing. These highlight loans taken for working capital requirement which show that the company is facing cash flow problems.
Outlook Shell Pakistan Limited has been facing declining volumes underscored by lower fuel oil sales, especially locally. The margins on the regulated petroleum products like diesel and motor spirit stand around two percent of the selling price.
However, the minimum tax regime that's charges incomes tax to the company on selling price basis. In a rising price scenario, this practice increases the tax liability with little lift to the margins. The industry has been asking for brining this rate in line with the other industries where income tax rates are as low as 35 percent.
Moving forward, with the resumption of Nato supply will bode well for the export side, especially for jet fuel and high speed diesel (HSD). At the moment the situation is clamouring for a recovery in the circular debt crisis, and attention towards the corporate taxation and delayed government receivables.
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Shell Pakistan Limited
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CY08 CY09 CY10 CY11
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Profitability
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Gross margin 4.0% 8.3% 6.1% 5.7%
Operating margin -1.0% 3.1% 1.9% 2.0%
Net margin -1.1% 1.6% 0.8% 0.4%
ROA -4.4% 7.6% 4.2% 1.8%
ROE -27.6% 31.0% 20.5% 11.0%
Liquidity and Solvency
Current ratio 0.88 0.85 0.84 0.90
Liabilities to assets 0.84 0.75 0.79 0.83
Debt to equity 0.40 - - -
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Efficiency
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Total asset turnover 4.15 4.64 5.13 4.46
No of days stock 22 26 23 25
No of days trade debts 6 3 3 4
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Market
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EPS (25.20) 37.42 23.59 13.23
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Source: Company accounts
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