September 18, 2020 (MLN): Pakistan State Oil recently disclosed its financial accounts for the Financial Year 2020, which showed a heavy decline of Rs. 42 billion in the company’s short-term borrowings.

This amount accounts for almost 20% of the company’s balance sheet size as of March 30, 2020. Naturally, deleveraging of such a magnitude would lead to favorable change in the net finance cost of the company.

This factor is likely to have a strong positive impact on the earnings for the next quarter, a report by Foundation Securities suggested recently. Not only the borrowings, but the ongoing negotiation with the Power Sector to address the issue of mounting circular debt as well as the expected additional liquidity injection in the power sector by government to the tune of Rs. 200 billion would also uplift the cash position of the company.

Foundation Securities has estimated an annualized impact of Rs. 3 per share in the earnings for 1QFY21, after taking into account Rs. 28 billion on foreign exchange gains received from government, Rs. 26 billion reduction in trade debt mainly from Rs. 19 billion received from SNGP, improved working capital from Rs. 27/17 billion decrease/increase in Inventory/trade payable, and lower interest rates (KIBOR/LIBOR) which would reduce PSO’s finance cost.

PSO is also looking forward to gain from the future resumption of IMF program, which would result in higher electricity/gas prices and efficiency measures in power chain that would potentially address (partially if not fully) the issues on recurring basis in medium-long term.

The future outlook entails stability in international prices and inflationary revisions in marketing margins of regulated products are expected to improve gross earnings. Moreover, macroeconomic stability, stabilization of PKR-USD parity and aggressive business strategy of market penetration backed by plans of infrastructure development represent a promising future for the Company ahead.

To recall, PSO had reported had Loss after Tax (LAT) of Rs. 6.5 billion (Loss per share: 13.8) for the year ended June 30, 2020. The Board noted that the unprecedented losses of Rs. 16.4 billion incurred during Q4FY20 not only eroded the net profit of PKR 3 billion earned during the first three quarters, but also resulted in a net loss for the complete fiscal year 2020.

In wake of uncontrollable circumstances and despite massive inventory losses, the Company was able to contain the extent of losses through efficient inventory management, focus on high margin products and prudent expense controls. The Company was also successful in reducing the chronic receivables from the Power Sector, PIA and SNGPL by PKR 13.1 billion which stood at PKR 185.2 billion as of June 30, 2020.

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