Company Introduction: National Refinery Limited is involved in the business of refining crude oil since 1966. It is a petroleum refining and petrochemical company engaged in manufacturing and supplying a wide range of fuel products, lubes, BTX, asphalts and specialty products for domestic consumption and export. NRL added two refineries, one in 1977 and the other in 1985 and since then it has been involved in revamping and upgrading these facilities.
It operates two business segments: Fuel Segment and Lube Segment. Fuel segment is primarily a supplier of fuel products offering HSD, naphtha, mogas, LPG, jet fuels, and FO while it exports naphtha. Lube segment mainly provides different types of lube base oils, asphalts, and waxes, while it also exports lube base oils. NRL is the second largest refinery in the country in terms of crude oil processing and the only lube refinery in Pakistan.
Profitability National Refinery's net turnover for the first quarter FY12 increased by 12.63 percent compared to the same period last year. However, the gross profit ratio for the quarter fell by approximately 35 percent due to a rise in the cost of sales by 16.14 percent for the period. Net profit for National Refinery stood at Rs 828 million for 1Q FY12 as opposed to Rs 1,349 million posted in the same period last year, registering a decline of almost a 38 percent. This was due to the escalation of finance costs by more than 200 percent.
Although the quarterly performance deteriorated, the net profit after tax for the year ended FY11 exhibited an increase of almost 100 percent to Rs 6,569 million from Rs 3,285 million in FY10, with the major contributor being the high margin lube segment with a profit after tax of Rs 5,796 million in the same year.
The increase in profitability was mainly due to better refining margins, according to company accounts. The company's EPS has shown improvement year on year FY01 to FY11 whereas, the EPS for the first quarter of FY12 saw a slip to Rs 10.36 by 38.6 percent versus Rs 16.87 for the corresponding period last year.
Refinery Performance Fuel segment of National Refinery incurred a net loss of Rs 297 million for the first quarter FY12 compared to a profit after tax of Rs 237 million in the corresponding period last year. This was mainly due to shrinking gross refining margins as a result of volatility in product and crude oil prices. The situation is not new to National Refinery as the segment has been incurring losses consecutively for two previous years as the gross refining margins fail to absorb expenses.
Although the company annual results for the previous years show a lucrative lube segment, the quarter witnessed a hike in feed cost versus the selling price of lube base oils. Consequently, the lube segment experienced a loss, as the demand for lube base oil remained depressed due to scarcity development efforts.
Operations FY11 saw better inventory turnover periods as they reduced from 42 days FY10 to 41 days in FY11. However, during the past five years the inventory levels have increased significantly. Stalled demand could be one reason for the inventory pile up resulting in the fuel refinery operating at only 80 percent for the first quarter FY12 percent of designed capacity versus a 98 percent during the corresponding period last year.
Moreover, the inventories for the lube segment soared, decreasing the efficiency of the lube refinery from 118 percent to 100 percent first quarter FY12. The receivables and the payables situation have improved in terms of payment and receipt promptness due to the government's short-term attempts to deal with the inter corporate circular debt.
Liquidity The short-term liquidity position of the company is satisfactory as the current ratio is fairly above 1 for the last five consecutive years. However, if the piling up of inventories and the situation of the debtors' and creditors' turnover period - which are highly credited to the circular debt crisis - deteriorates, it can pose serious long-term liquidity threats. The company's escalating finance cost is highlighted by the markup on late payment to the suppliers.
Outlook The performance of refineries depends heavily on the GRM (Gross Refining Margin) which continues to follow an irregular pattern on a quarterly basis. The refining sector is reflecting its refinery capacity expansion plan, which is evident from Byco's move with a $430 million oil refinery project expected to come online in 2012 and Parco's Khalifa Coastal Refinery project. With such capacity enhancement, margins are likely to at least continue their jagged movement.
Crude oil prices persist to fluctuate amid the energy sector crisis and the prolonged circular debt. Refineries are expected to continue to meet the shortfall in demand with the imports of refined POL because of reduced capacities depicted by inefficiencies in the plants. This will directly affect the import bill where crude oil and petroleum products' share in the imports during the period July-October FY12 was 34 percent. Another major risk associated with the imports is the foreign exchange risk. With the rupee depreciating, the risk is high as most of the receivables and payables are primarily dollar-denominated.
Amid the dwindling refinery margins, most of the opportunity for National Refinery lies with the high margin deregulated lube segment. NRL achieved the highest annual LBO exports of 43,908 million tons in FY11 and enjoys the opportunity of expanding its geographical customer base. It now depends on the pricing mechanism revisions and deregulation of petroleum products to ensure smoothed refining margins- critical success factor for refining business.
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National Refinery Limited - Key Performance Ratios
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2011 2010 2009
Profitability
GP Ratio % 6.74 5.75 4.81
NP Ratio % 4.42 2.98 1.40
ROE % 26.69 16.73 8.83
Liquidity
Current Ratio times 1.68 1.5 1.58
Quick Ratio times 1.07 1.13 1.08
Operations
Inventory turnover days 40.46 41.68 44.08
Debtor turnover days 36.82 50.86 41.09
Creditor turnover days 67.63 88.67 83.61
Investment/Market
EPS Rs 82.14 41.08 19.17
P/E times 4.29 4.45 11.48
Dividend Yield times 7.1 10.94 5.68
Dividend Payout times 30.44 48.69 65.21
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Source: Company accounts
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