Pakistan State oil Company Earnings Revised by Topline Securities

Topline Securities has revised earning of Pakistan State Oil Company Limited (PSO), up by 13% for FY21. The earnings revision primarily stems from 1) decrease in short term borrowings and 2) increase in earning as economy comes out from shocks of COVID-19.

Payment proceeds from the issue of Pakistan Energy Sukuk-II have enabled the Company to significantly reduce its liabilities/improve liquidity. Its short-term borrowings over the past fiscal year have declined by Rs41 billion, which was also aided by lower Furnace Oil (FO) sales. Going forward, the brokerage house expects lower borrowings that will reduce finance cost significantly. Finance cost is expected to reduce by 64%YoY, which will be a result of both decline in borrowings and lower interest rates, of which the impact will be more visible in the coming year as re-pricing kicks in.

Reduction in other receivables has also helped improve the footing as the head showed a decline of Rs34 billion primarily driven by decline in FE-25. To recall, FE-25 borrowing (foreign currency borrowing) were allowed by GoP as payments for imports.

The mechanism addressed the issue of exchange losses (to be borne by GoP) and exchange gains (to be paid to GoP). There was a breakthrough on exchange loss on the FE-25 borrowing with the GoP retiring Rs28.6 billion of the total amount with a balance of Rs1.7 billion remaining.

The government and IPPs are in discussions to revise future returns of the IPPs. The key demand for the IPPs has been resolution of the accumulated stock of circular debt. PSO’s highest proportion of Jun-2020 trade debts (past due) of Rs196 billion emanates from GENCO Holding Company (Rs75 billion in FY20 vs Rs82.3 billion in FY19), SNGP (Rs68.2 billion in FY20 vs Rs53.4 billion in FY19) and HUBC (Rs23.3 billion in FY20 vs Rs25.6 billion in FY19). The release of outstanding circular debt by the government will help IPPs/Gencos to retire their payables against PSO, which will further improve the liquidity position of the company.

FY21 has started on a promising note with industry volumes depicting an increase of 11%YoY in the first two months. The volumes have been primarily driven by a 19%YoY increase in HSD volumes and a 14%YoY increase in Furnace Oil sales, followed by a 9%YoY increase in MS volumes.

PSO volumes show a similar trend on a YoY basis during 2MFY21 with HSD, FO and MS improving by 29%YoY, 13%YoY and 14%YoY, respectively. Projected growth of car sales in the coming year is expected to be around 35%YoY, which is expected to bode well for MS demand, which in turn is projected to grow by 10%YoY for FY21.

For FY20 the margin revision came in at around Nov-Dec 2019 period. OMC margins are fixed in PKR terms and linked to the Consumer Price Index (CPI). The last revision was of Rs0.17/ltr to Rs2.81/ltr from Rs2.64/ltr for MS and Rs0.40/ltr to Rs2.81/ltr for HSD which was in line with CPI. The brokerage house expects the revision to come at a similar timeline this year and have incorporated this in its model on a pro-rated basis.

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