Pakistan State Oil

Pakistan State Oil (PSO) is the largest oil marketing company (OMC) in Pakistan that is involved in storage, distribution and marketing of various petroleum products. Its portfolio consists of motor gasoline, furnace oil, high-speed diesel oil, kerosene oil, LPG, jet fuel, CNG, petrochemicals and lubricants.
PSO has the country's largest storage capacity of one million ton - around 74 percent of the nation's total storage capacity. It has the largest network of retail outlets that serves the automotive sector, and supplies fuel to the railways, aviation industry, armed forces, power projects and the agriculture sector.
The firm has a market share of 62 percent in the OMC sector. In FY14, the OMC crossed Rs 1.3 trillion in sales revenue and retained leadership in oil market with 73 percent share in black oil and 54 percent share in white oil. For Individual petroleum products, the OMC's share in motor gasoline stood at 49 percent, while the market shares of furnace oil and HSD stood around 73 percent and 55 percent, respectively.
OPERATIONS AND PROFITABILITY IN FY14 Pakistan State Oil registered the highest-ever turnover of Rs 1.4 trillion in FY14 versus Rs 1.3 trillion in FY13. The revenue growth of 8 percent year-on-year came on the back of better volumetric sales and better product margins. FY14 outperformed inmost of the profitability indicators if compared with last four years' performance of the company.
Thanks to the increasing demand by the power sector and the ongoing CNG curtailment in the country, furnace oil sales and motor gasoline (petrol) volumes increased by eight to ten percent. Coupled with inventory gains during the 1HFY14, it supported the bottom line. However, high-speed diesel sale volumes remained unattractive for the firm and the industry in FY14 due to strong competition and inexpensive Iranian diesel available in the market.
The gross margins continued to show a stable trend, while net margins and EBITDA ratios increased by 59 percent and 43 percent respectively, mainly due to significant increase in 'other income' by 208 percent, which includes amount received in respect of interest income from IPPs.
The firm's earnings also benefitted from a more than three times increase in other income which mainly consists of a rise in penal income on delayed payments and a decline in exchange losses. The inhibition on PSO's earnings was the finance cost, which crept up by 26 percent, year-on-year due to the re-emergence of the circular debt, and hence excessive bank borrowings. Borrowings from banks stood at Rs 92 billion as of Jun 30, 2014 versus Rs 17 billion as of Jun 30, 2013.
PSO's earning however, continued to amaze. Along with a 72 percent, year-on-year increase in profit after tax, the company also announced cash dividend of Rs 4 per share, which is in addition to Rs 4 interim dividend already paid. Also, a 10 percent interim bonus dividend had already been paid in the fiscal year 2014.
LIQUIDITY PSO's power sector receivables continue to put pressure on its liquidity. Receivables stood at Rs 139 billion as of June 30, 2014 versus Rs 43 billion as of Jun 30, 2013, showing an increase of more than three times. The deficit is being financed through bank borrowings of Rs 106 billion as of September 07, 2014, which includes a loan, financing against PIBs and supplier credit.
PSO 1QFY15 1QFY15 was tainted by falling volumetric sales. After a long time, PSO has witnessed a decrease in its revenues as sales dropped by five percent year-on-year. On the encouraging side, PSO's gross margins improved from 3.87 percent in 1QFY14 to four percent in 1QFY15, which was primarily due to lower than expected inventory losses.
Similarly, 'other operating expenses' also dropped by 40 percent year-on-year on account of lower exchange losses, while finance cost declined by 15 percent year-on-year. With a 67 percent decline in penal income from the independent power producers, earnings for 1QFY15 declined 33 percent year-on-year.
OUTLOOK PSO's market share dropped slightly in FY14, but this drop has little impact on the market leader. Also, the OMC's drop in market share came from changes in PSO's business strategy. In FY14, the firm devised and implemented the strategy rationalising its product portfolio and maximising profitability by adopting smart selling approach.
Circular debt remains the key challenge for PSO and the sector. While the OMC emerged as the biggest beneficiary from the temporary resolution of circular debt in July 2013, PSO's receivables have once again swelled over Rs 200 billion recently. The long-term solution for this problem rests with control of T&D losses, reduction and elimination of power sector subsidies and a check on government borrowings.

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Pakistan State Oil (PSO)

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                                 FY12      FY13     FY14

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Profitability

GP margin                 %      2.86      2.64     2.61

NP margin                 %      0.75      0.98     1.55

EBITDA margin             %      2.21      2.16     3.09

ROE                       %     18.74     20.84    27.75

ROCE                      %     47.52     41.29    50.73

Turnover

Inventory turnover      (x)     13.55      12.2    16.33

Debtor turnover         (x)       5.5      16.9     8.04

Creditor turnover       (x)      5.08      7.77     8.65

Total asset turnover    (x)      3.93      4.11     4.31

Fixed asset turnover    (x)    200.39    226.77   246.04

Investment

EPS (Diluted)           Rs      33.34     46.52    80.31

Price earning           (x)      4.47       6.3     4.84

Dividend yield            %      3.18      2.18     2.31

Liquidity and leverage

Interest Cover ratio    (x)      2.17      3.53     4.45

Current                 (x)      1.15      1.03     1.09

Quick Ratio             (x)      0.85      0.54     0.79

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