PSO – Inventory gains driving profits

The oil marketing sector had a tough FY20 where not only the volumetric sales suffered due to restrictions imposed to contain COVID-19 virus spread, but also the entire sector paid for the volatility in ex-refinery prices in shape of significant inventory losses and hence weak profitability. FY21 however, has witnessed quick recovery as the lockdown restrictions eased; economic recovery as seen from demand rebound due to resumption of industrial and economic activity as well as growth in car sales – two key drivers of volumetric sales in the OMC sector – have brought the sector back to normalcy.

Pakistan State Oil (PSX: PSO) – the largest OMC in the country has seen its volumes grow by around 11 percent year-on-year in the first six months of FY21 on an overall basis. Key retail fuels like petrol and diesel sales by PSO grew by percent, 13 and 19 percent year-on-year, respectively, while furnace oil too has been witnessing a revival in the country’s power mix with PSO’s volumes increasing by 26 percent year-on-year in 1HFY21. Volumes for 2QFY21 were even better with overall growth of around 13 percent year-on-year.

Despite the growth in volumetric sales by the OMC giant, the revenue growth for PSO in 1HFY21 stood weaker by 12 and 8 percent year-on-year in 1HFY21, and 2QFY21. This was primarily due to decreased average selling prices of petroleum products.

However, PSO’s gross margins were seen improving, which was due to inventory gains during 1HFY21 versus staggering inventory losses in 1HFY20. Also, a decline in finance cost due to lower short-term borrowings further lifted the net margins. PSO’s net profits for 1HFY21 grew by 48 percent year-on-year, while 2QFY21 growth in earnings was around 51 percent.

The stability in oil prices is key in topline growth. Compared to FY20 where the volatility was very high, oil prices in FY21 are expected yield better prices for PSO, which along with rising petroleum consumption will bring growth to the topline. Though PSO’s overall market share in 1HFY21 remained stagnant at around 46 percent due to decline in furnace oil share, its share in retail fuels was seen growing from 42 percent in 1HFY21 to 45 percent in 1HFY20. At the same time, the change in price mechanism for petroleum products to fortnightly will also reduce the size of inventory losses in case of oil price fluctuation. On the other hand, the liquidity position is likely to bet better in FY21 due to the likely clearance circular debt.