Inventory mismanagement lops ATRL's gross margins

Poor inventory management and lower production has hurt Attock Refinery yet again. Although, the firm's bottom line improved significantly in the quarter ended September, but was still painted in red despite a favourable pricing scenario.
The topline slid by 38 percent mainly due to a significant drop - ranging from 13 to 31 percent - in ex-refinery prices of various products. But luckily for ATRL - the fall in ex-refinery prices wasn't in the same proportion as the one in international crude oil price, which is normally a good omen for refinery businesses.
Fear of thin margins also led to under utilisation of refining capacity; albeit the firm will likely blame the circular debt for under par production, as it has done in the recent past. ATRL operated at 77 percent efficiency level, compared with an average utilisation of 90-92 percent seen in the last three quarters.
What is more disturbing, though, is the fall in gross margins which resulted in gross loss for the period. The decline comes rather unexpectedly as the volatility in international oil prices was not substantial during the quarter - except for August when the prices went up by $7/bbl on month-on-month basis. This ideally should be good enough to mitigate the impact of likely inventory losses incurred in July and September, when oil prices had decreased by $3/bbl.
The net refinery margins are expected to have remained low at $3/bbl as against $8/bbl last year - but that should lead to lower gross profits in rupee terms - not the margins. There clearly seems to be a case of poor inventory management as rupee remained relatively stable against dollar during the period - leaving no other reason to believe in for the gross loss.
The bottom line, which still looks respectable compared to 1QFY09, owes many thanks to a sharp decline in financial charges - which slid 10 times because of exchange rate stability. Moreover, non-refinery income also aided the bottom line through dividends received from associated companies.
Going forward, the company's performance largely depends on the international oil price movement which is currently in favour of the refinery. ATRL is believed to have made substantial inventory gains during the current month as prices have risen sharply amid increased demand.
Going by consensus estimates, oil price should relatively remain stable in the band of $70-75/bbl which might pose a downside risk of inventory losses in the remaining months of the quarter. Therefore, it all finally comes at effective inventory management if the company has to reap the full fruit.

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ATRL P&L

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Rs (mn)                                 1QFY10    1QFY09    % chg

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Sales                                   19,256    30,964     -38%

Cost of sales                           19,779    30,790     -36%

Gross profit                           (523.06)   173.99    -401%

Gross margin %                           -2.72%    0.56%    -583%

Finance cost                            128.46   1246.72     -90%

Profit from refinery operations           -553      -870       NA

Income from non-refinery operations        157      0.00       NA

PAT                                    (396.25)  (870.18)      NA

EPS (Rs)                                 (4.65)   (10.20)      NA

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