JS Securities Limited – JS Research (06-11-2019)

Karachi, November 06, 2019 (PPI-OT): OMCs 1QFY20 Review – Earnings declined by 12% YoY, despite increase in volumes

We review the OMC sector’s performance during 1QFY20 with PSO, APL and SHEL as a sample.

While the top-line has grown on the back of higher retail prices in 1QFY20, the bottom line shrunk by 12% YoY on the back of higher finance costs which grew by a staggering 56% YoY.

Moving forward, we believe the sector will find some breathing room if volumetric sales continue to increase and exchange rates and international crude prices remain favourable.

We review financial performance of the Oil Marketing Sector for 1QFY20. Our sample comprises of Pakistan State Oil (PSO), Attock Petroleum Limited (APL) and Shell Pakistan Limited (SHEL). We have excluded Hascol Petroleum Limited (HASCOL) as it remains, in our view, an outlier in the concerned quarters. On a YoY basis, we see a 13% increase in the top-line which can be traced back to a 5% increase in volumes coupled with higher retail fuel prices. Margins on retail products – High Speed Diesel and Motor Spirit – which constitute a major portion of the revenues have remained unchanged during the period.

After the passage of a full quarter of the fiscal year, as OMCs wait for annual increase in margins to be notified, our sample has already witnessed a decline in gross margins of 63bps YoY to 3.76% in 1QFY20. On the cost side, we find inflationary effects in the double digit growth of Selling and Distribution expenses over that same period. Resultantly, operating margins in the sector declined by 3% YoY in 1QFY20. The most substantial increase however can be seen in Financial Charges and Other Income which have increased by 56% and 93% respectively. These increases are mostly attributable to the steep rise in interest rates over the period, inflating both finance costs and income from financial assets.

Since the start of FY19, the PKRUSD rates and international crude prices have shown varying levels of volatility, resulting in exchange and inventory gains (and losses). Moving forward, if retail sales continue to improve on a sequential MoM basis, we believe that the volume-dependent sector will find some breathing room in the coming quarters. Of course, that is assuming the exchange rate and international crude prices continue to exhibit stability.

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