Shell Pakistan is one of the oldest multinational companies in Pakistan and the history of the company in Indo-Pak subcontinent dates back to 1903 when Shell Transport and Trading Company and Royal Dutch Petroleum Company decided to merge and supply petroleum to Asia.
The company came to be known as Burmah Shell Oil Storage and Distribution Company in 1928 in India with the merger of Royal Dutch Shell Plc and Burmah Oil Company. Later in 1947, the company was named Burmah Shell Oil Distribution Company of Pakistan which became Pakistan Burmah Shell (PBS) Limited in 1970 when Pakistani investors gained 51 percent of the shareholding.
In 1993, the Burmah Group divested from PBS and Shell Petroleum jumped in to raise its stake to 51 percent. Today, Shell Petroleum is a 76 percent majority stakeholder in Shell Pakistan Limited. The company is amongst the three oil marketing companies included in KSE100, the other two being PSO and Attock Petroleum Limited.
BUSINESS ACTIVITIES & HIGHLIGHT - 9MCY12 Shell Pakistan Limited operates in retail, aviation, lubricants and commercial fuels. Within the retail business, the company is the largest player in the foreign retail segment and provides fuel to over one million customers daily. With over 800 retail outlets, Shell Pakistan limited is the only petrol retailer in the country to offer premier fuel.
The company is a global leader in lubricants. The company has three major lubricant brands: Shell Helix, Shell Rimula and Shell Advance, which have gained prominence not only globally but also within the country. These lubricants are market leaders across passenger cars, bikes and heavy duty vehicles.
The company also provides world-class domestic heating oils, commercial road transport, industrial and wholesale products to business customers. Shell Pakistan Limited is also one of the key suppliers of fuel to IPPs in Pakistan. The company has a significant representation in the aviation industry as well.
Besides the common challenges like poor economic conditions in the country, outstanding receivables from the government are the most significant ones for Shell Pakistan Limited. The first nine months of CY12 were no different as the company's performance subsided owing mostly to the abovementioned factors.
As far as the industry dynamics are concerned, the company blames the regulated and fixed petrol and diesel margins such that they are unable to absorb the rising operating cost and the cost to finance investments and government receivables.
FINANCIAL PERFORMANCE Shell Pakistan Limited gets 99 percent of its revenues from the fuel sales and exports and gets the remaining from the non-fuel retail. Net sales, which include revenue from both fuel and non-fuel segments, showcased a slowdown in the growth in 9MCY12 with net sales declining by eight percent YoY.
Though Shell Pakistan asserts to have made significant investments in marketing activities in both the retail and lubricants businesses leading to significant growth in motor gasoline and consumer lubricants sales, the same growth cannot be seen in the overall revenues of the company.
The top line could have benefited from higher motor spirit demand but the crunch in revenues during 9MCY12 can be attributed to the ban on the export of petroleum products to Afghanistan along the Nato supply routes. Likewise, the bottom line during 9MCY12 turned into a loss due to a multitude of reasons such as increasing government receivables, high inflation, corporate tax payments in a period of a net loss, and low fuel margins.
The gross profit of Shell Pakistan Limited contracted by 24 percent YoY during the period under review and gross margins moved down by almost 100 basis points to 4.9 percent YoY in 9MCY11. Shell Pakistan Limited's overall expenses plunged by two percent in 9MCY12 versus similar period last year.
But this might not be a good signal especially amid dwindling sales. Lower marketing, sales and distribution expenses at the expense of weaker sales revenue is surely not a reason to celebrate. Adding to the agony, the net earnings were marred by not the rising cost to finance the government receivables where a large part of them remained overdue. The profitability during 9MCY12 dropped to a massive loss of Rs 1.55 billion as against a profit of Rs 1.12 billion in the same period last year, and the already wafer-thin net margins turned negative. Another concern put forward by the company that is eating away the bottom line is the minimum tax on turnover.
LIQUIDITY & EFFICIENCY At a time when the oil prices are very unpredictable and the cost of doing business is galloping at a fast pace, regulated margins on diesel and petrol in Pakistan remain the lowest in the region. This is a threatening situation for the operational efficiency of the company and hence the oil marketing segment.
Although Shell Pakistan Limited does not have any long-term loans on its balance sheet as of 1HCY12, the financial soundness and short term solvency of the company attracts attention as the company has been trying to sort out its working capital issue through short-term loans and financing. Its current liabilities have been exceeding its current assets leaving a question mark on its immediate liquidity.
On the brighter side, through the collection of old debts, the company was able to improve its operational cash flows. Also the company's borrowings shrunk by almost 15 percent YoY during 9MCY12 to Rs 13.428 billion. However, the challenge of delayed receivables remains the most significant problem for the company as the OMC is on one extreme of the value chain. As at June 30, 2012, receivables of Shell Pakistan stood at Rs 7.927 billion and Rs 2.601 billion in terms of tax refunds and fuel price subsidies respectively.
OUTLOOK Shell Pakistan Limited has been facing weaker volumes underscored by lower fuel oil sales, especially locally. The margins on the regulated petroleum products like diesel and motor spirit stand around two percent of the selling price.
One challenge that the company and the OMC sector deters to is the impact of minimum tax on turnover. The minimum tax regime charges incomes tax to the company on selling price basis. In a rising price scenario, this practice increases the tax liability, and amid no foreseeable lift to the margins, the industry has been asking for some equality with other industries. Moving forward, the situation is clamouring for a recovery in the circular debt crisis, and attention towards the corporate taxation, and a quick resolution of delayed government receivables more than any thing.
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SHELL PAKISTAN LIMITED
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9MCY10 9MCY11 9MCY12
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Net Sales (mn Rs) 139,355 167,264 153,074
Gross Profit (mn Rs) 8,269 9,869 7,521
Operating Profit (mn Rs) 1,961 3,731 1,438
Net Profit (mn Rs) (12) 1,122 (1,547)
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Profitability
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Gross margin 5.9% 5.9% 4.9%
Operating margin 1.4% 2.2% 0.9%
Net margin 0.0% 0.7% -1.0%
ROA 0.0% 2.3% -4.2%
ROE -0.2% 13.2% -24.7%
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Liquidity and Efficiency
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Current ratio 0.89 0.90 0.77
short term debt to equity 2.00 1.92 1.45
Total asset turnover 3.06 3.41 4.15
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Market
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EPS -0.17 13.11 -18.07
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