Petroleum-Chemical and Energy: BOSICOR PAKISTAN LIMITED - Analysis of Financial Statements
Bosicor Pakistan Limited was incorporated on 9th January 1995 as a public limited company. At the time of inception, the company aimed to operate in the chemical, petroleum/petro-chemical and energy sectors. The Bosicor Corporation Limited holds 55% shares of Bosicor Pakistan, making Bosicor Pakistan a majority owned company of the former.
The company is in the business of refining and marketing a large range of petroleum products. It operates a refinery the Mouza Kund Plant (MKP1), at Mouza Kund in Balochistan. The range of products include: light straight run naphtha, liquefied petroleum gas (LPG), heavy naphtha, kerosene, motor spirits, high octane blending component, aviation fuels 1&4, high speed diesel and furnace oil. The company has a long-term sale and purchase agreement with Pakistan State Oil for marketing of its products.
The refinery has a designed capacity of 1.5 million tons per annum. The plant produces about 10,000 bbl/d of fuel oil, 6,000 bbl/d of diesel, and 5,500 bbl/d of naphtha, among other products. Its production capacity with respect to the other players in the industry is illustrated.
The company started commercial operations in 2004. It completed its first turnaround on 15th August 2005 after starting trial operation in November 2003. The trial operations started with a capacity of 8000 barrels per day. The capacity was subsequently increased to 18000 barrels per day.
The company is currently engaged for enhancing its refinery capacity from 18000 barrels to 30,000 barrels per stream day. It also pursuing projects for the installation of a Liquefied Petroleum Gas (LPG) treating unit to maximize the production of LPG. The projects are likely to complete in the current financial year.
The medium-term objectives of the company to develop its infrastructure, which would bring the company to self-reliance in the supply chain. For this, Bosicor Pakistan is pursuing additional storage capacity of 126,000 metric tons, besides investment in a Single Point Mooring to improve freight economy.
In the longer term, ie 2009-2010, the company will add an Isomerisation plant for converting and upgrading light naphtha into environmentally friendly motor gasoline. In the marketing and sales department, the company is progressing to establish retail outlets. It was expected that company would have 15 such outlets with company's brand identity by the end of June 2007.
The global refining industry has witnessed a downturn in profit margins since FY06. During FY06, the industry had to cope with rising crude oil prices against steady demand of refined products. As a result, refinery margins came under strain and the average gross and net profit margins in the industry fell steeply. The figure compares the international crude oil prices with refined product prices over the last five years. The squeeze in margins is evident from the shrink in the difference between crude oil prices and product prices during FY06.
Further, the refinery product prices in Pakistan are linked to the prices in the Gulf region which remained depressed during the 2nd and 3rd quarters of FY06. The domestic market also suffered its share of the lower margins. However in last quarter, the profit margins were redeemed in the backdrop of strong oil demand from China and other emerging market economies.
The profit margins of Bosicor have remained below the industry average but FY06 brought a positive change and the company managed to outdo the average industry, in terms of the gross profit margin, in the face of changing industry dynamics. The improvement in the trend notwithstanding, the pricing dynamics in the global market took its toll on the company in FY06 and HY07, manifesting itself most glaringly in the HY07. In HY07, the company was failed to overcome the pricing pressures, thus incurred the losses, hence the gross and net profit margins cascaded for the period, turning negative and dropping well below the average industry level. This decline in the profit margins for FY06 and HY07 occurred despite higher sales revenue than the corresponding periods in prior years. In HY07, the cost of sales as a percentage of sales underwent a drastic increase as cost of sales exceeded the sales revenue, resulting in losses even at the gross profit level.
Financial charges increased by 66% during the FY06, further pulling down the profits. Likewise, an 80.7% increase in financial and other charges was registered for the first half of FY07. This rise in finance cost may be attributed to the higher level of long-term loans and other debt instruments.
The other income jumped up by 35.2 times in FY06, and this somewhat eased the pressure on profits exerted by the higher costs of sales. However the settlement of the insurance claim, on account of loss of profit arising from breakdown in production in the year 2003-2004, formed a large portion of this income. Hence this growth is not sustainable in the long run. The profits from bank deposits also increased by 3.6 times in FY06, further augmenting the other income. The HY07, on the other hand, saw the other income figures decline by 3.4 times, further straining profitability for the period.
The ROE and ROA have also remained below average for the entire period. ROE suffered most in HY07 as an increase in equity, resulting from the revaluation of assets, compounded with the loss for the period, leading to high negative figures.
Bosicor Pakistan lags behind its competitors in terms of inventory management. Throughout its four years of commercial production, the inventory turnover (days) of the company has soared above the industry average. The ratio increased in FY06 but the first half of FY07 saw an improvement in the trend as the ratio declined for the company but increased for the average industry. The increase in FY06 was seen despite a 79% increase in sales for the year, since the inventory levels shot up, offsetting the effect of the increase in sales. The lower inventory levels and higher sales eased the trend in HY07.
The company performed better than the average industry in terms of collection of receivables in FY06, but under-performed in the other periods. The outcome in FY06 was a result of higher sales and a lower level of trade debtors at the year-end. The high DSO and inventory turnover gave rise to prolonged operating cycles of the company as compared to the industry. Hence Bosicor Pakistan trails behind the industry in generating cash from its raw materials.
The asset management capacity of the company, as measured by the total asset turnover and sales to equity also remained below average during all periods. The sales to equity and total asset turnover have been showing a positive trend up to FY06. However, increase in equity in HY07 may pull down the sales to equity figure in FY07 despite the higher sales during the period.
The debt ratios escalated during the FY06 as a result of an increase in both, current and non-current liabilities. During the year, the company was able to acquire more loans and assets on finance lease, causing the jump in the debt to equity and long term debt to equity ratios. The inflated current liabilities, arising from creditors and higher accrued mark up, further boosted the debt to equity and debt to assets figures of FY06.
In the first half of FY07, Bosicor obtained syndicated loan from ABL and UBL to finance the company's growth plan and a financial close of Rs 2.6 billion was realized. Consequently, the long-term debt to equity increased, however the effect was subdued because of the substantial increase in equity during the same period. Due to same reason, the debt to equity ratio declined for HY07. Despite this, the figures remained on the higher side, reflecting a high level of financial leverage for the company.
At the close of the first half of FY07, the company was in the process of issuing Right Shares to meet the equity portion of the cost of the company's expansion and up-gradation projects. This may bring about a positive change in the debt ratios.
The Times Interest Earned (TIE) dropped slightly in FY06, as compared to FY05, largely as a result of the mark up on the mounting loans. In the first half of FY07, the company incurred losses even at the gross profit level, hence the finance charges led to further deteriorate the situation. This does not bode well for the company and raises doubts about the company's debt financing abilities.
The current ratio has lingered slightly above 1 for the whole period, the greatest change being the temporary increase to 1.07 in FY06. The ratio has hovered slightly below the industry for the period, indicating the company's weaker standing in this respect.
The EPS has always been lower than that of the average industry and the trend persisted in the FY06 and HY07. The EPS turned negative in HY07 as profits dropped and losses were incurred. Although the trend was experienced by the entire sector, but, the average industry figures remained positive as compared to negative EPS for Bosicor Pakistan. The book value of the company's shares has been increasing throughout the period of commercial operations starting from 2004. As compared to the industry, Bosicor Pakistan has not done well in this field.
The profitability situation is expected to stabilize in the future and margins are likely to improve in light of the supply constraints and demand surge anticipated by the IEA.
Furthermore, as mentioned above, the company has undertaken various capacity expansion projects. When the additional capacity from these facilities comes online, it would enhance the sales of the company. Moreover, the incremental demand growth of various POL products worldwide is expected to be 23 million barrels per day over a 15-year period. Hence the company will be able to benefit from the capacity expansion even in the unlikely event of stunted growth in the country by exploring their export prospects.
Secondly, the refining sector operates under the Import Pricing Formula, whereby the prices of products are determined by the landing cost of imports. In the Budget 2007-08, the surcharge on White Oil Products has been abolished and 5% duty on the import of LDO has also been removed. These developments will have a significant impact on the refining sector's profitability as the price of imported products decreases, thereby reducing the local refinery revenue.
The budget also slashed the surcharge on furnace oil in the industry. This change, however, will not have a significant impact on the profits of refinery sector as the FO is a widely imported and deregulated product, hence companies are forced to keep their prices at a discount even though their built up price is higher than the imported price. As a result, this part of the policy introduced in the budget will not have a noticeable impact on the industry.
The government has been contemplating the revision of the existing Caltex-Bahrain formula applicable on Motor Gasoline. Originally, the Caltex-Bahrain formula was equated to the FOB price of naphtha plus a flat $60 per ton premium on gasoline which, on the 14th of June stood at $82 per bbl. The new formula is based on the price of MoGas 95 RON published by Platts, which on the same date was $80 per bbl. New pricing formula for motor gasoline was expected to become effective from July 2007 and the impact will, obviously, not be in favor of the industry.
In addition, the government also plans to raise Rs 30 billion by raising taxes on POL products, to increase the strategic oil reserves in the country. This will be detrimental for the sector, as it will result in a slowdown in demand growth and a reduction in OMC's product off-take with a subsequent decline in the production of some products by the refineries.
These developments and changes in the Government's policies and the international scenario will have a significant impact on the Bosicor Pakistan as well as the other companies in the industry. Bosicor Pakistan is still in its fourth year of commercial operations and it is hoped that as the company continues operations, it will grow and its profitability will improve.
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BOSICOR PAKISTAN LIMITED
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BALANCE SHEET FY'04 FY'05 FY'06 HY'07
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Non-Current Assets 3,162,216 3,369,867 3,741,835 5,884,590
Current Assets 2,001,207 3,506,272 7,375,766 6,107,730
Total Assets 5,163,423 6,876,139 11,117,601 11,992,320
Current Liabilities 1,995,467 3,472,308 6,869,637 6,069,553
Long Term Liabilities 1,417,490 842,270 1,489,373 2,573,091
Total Liabilities 3,412,957 4,314,578 8,359,010 8,642,644
Total Equity 1,750,466 2,561,561 2,758,591 3,349,676
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INCOME STATEMENT FY'04 FY'05 FY'06 HY'07
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Net Sales 2,112,506 9,998,865 17,929,007 9,558,478
Cost Of Sales 2,182,300 9,607,392 17,304,378 10,197,293
Gross Profit -69,794 391,473 624,629 -638,815
Admin Expenses 29,386 67,179 99,410 84,314
Selling And Dist Expenses 28,836 23,236 12,602
Operating Profit -99,180 295,458 501,983 -735,731
Other Income 2,786 100,876 21,524
Financial Charges 20,936 106,253 285,566 185,701
Profit Before Taxation -120,116 182,391 301,361 -899,908
Taxation 10,787 71,482 104,331 46,451
Profit After Taxation -130,903 110,909 197,030 -946,359
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LIDUIDITY FY'04 FY'05 FY'06 HY'07
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Current Ratio 1.00 1.01 1.07 1.01
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ASSET MANAGEMENT FY'04 FY'05 FY'06 HY'07
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Inventory Turnover(Days) 179.22 68.30 80.39 66.67
Day Sales Outstanding (Days) 130.05 45.37 22.23 34.48
Operating Cycle (Days) 309.27 113.67 102.61 101.15
Total Asset Turnover 0.41 1.45 1.61 0.80
Sales/Equity 1.21 3.90 6.50 2.85
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DEBT MANAGEMENT FY'04 FY'05 FY'06 HY'07
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Debt To Asset(%) 66.10% 62.75% 75.19% 72.07%
Long Term Debt To Equity(%) 80.98% 32.88% 53.99% 76.82%
Times Interest Earned (Times -4.74 2.81 2.11 -3.85
Debt/Equity (Times) 1.95 1.68 3.03 2.58
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PROFITABILITY FY'04 FY'05 FY'06 HY'07
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Gross Profit Margin -3.30% 3.92% 3.48% -6.68%
Net Profit Margin -6.20% 1.11% 1.10% -9.90%
Return On Asset -2.54% 1.61% 1.77% -7.89%
Return On Common Equity -7.48% 4.33% 7.14% -28.25%
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MARKET VALUE FY'04 FY'05 FY'06 HY'07
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Book Value 10.00 10.45 11.26 13.67
Price Earning Ratio -30.69 28.61 26.74 -3.99
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Earning Per Share -0.75 0.45 0.80 -3.86
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HY'06 HY'07
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Net Sales 8,028,197 9,558,478
Cost Of Sales 7,764,103 10,197,293
Gross Profit 264,094 -638,815
Admin Expenses 52,266 84,314
Selling And Dist Expenses 13,196 12,602
Operating Profit 198,632 -735,731
Other Income 93,917 21,524
Financial Charges 102,761 185,701
Profit Before Taxation 189,788 -899,908
Taxation 67,358 46,451
Profit After Taxation 122,430 -946,359
Gross Profit Margin 3.29% -6.68%
Net Profit Margin 1.52% -9.90%
EPS 0.5 -3.86
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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