Fundamental Analysis

October 25, 2012

Fundamental Analysis
Investors before investing has to evaluate a lot of information about the past performance and expected future performance of the companies, industries and the economy as a whole before taking the investment decision. This evaluation is known as fundamental These analysis include following 3 steps: Economy Analysis Industry Analysis Company Analysis

analysis.

Economy-Industry-Company

Analysis

Framework

Economy

Industry

Company
1.

Economy wide factors

such as growth rate of the economy, inflation rate, foreign exchange

rates etc. which affect all the companies. 2.

Industry wide factors such as demand supply gap in the industry, the emergence of substitute
products, changes in govt. policies relating to the industry etc. These factors affect only those companies which belong to a specific industry.

3.

Company specific factors

such as the age of its plant, the quality of management, brand

image of its products, its labor management relations etc. These factors are likely to make a companys performance quite different from that of its competitors in the same industry.

Economy Analysis
1

Fundamental Analysis

October 25, 2012

The performance of a company depends on the performance of the economy. Economic conditions like growth rate of national income, inflation, interest rates, exchange rates and political conditions have strong impact on determination of the value of a companys stock. Some important variables are as follows:

1- Growth Rate of National income

The rate of growth is an important variable for investment decision making. The important measure of National income is GDP (Gross domestic product), GNP (Gross national Product) and NNP (Net national product). All of these measures indicate the growth rate of an economy and the growth rate of Pakistan currently is 2.4% (2011).

2- Inflation

Year 2011 2010 2009 2008

GDP 2.4 4.8 4.3 2.7

GNP 4.2 1.21 1.07 -0.39

Inflation prevailing in the economy has a considerable impact on the companies. Higher rate of inflation upset business plans and lead to low profit margins. The inflation rate as measured by the changes in Consumer Price Index (CPI) after reaching peak at 25.3 percent in August 2008, showing easing since November 2008 with slight variations. The average CPI inflation for fiscal year 2012 is 11 percent.

3- Interest Rates:
Interest rates determine the cost and availability of credit for companies operating in an economy. A low interest rate stimulates investment by making credit available easy and cheaply. Moreover, it implies lower cost of finance for companies and thereby assures higher profitability. The State Bank of Pakistan (SBP) has slashed discount rate by 150 bps to 10.5 percent for a period of two months, a very surprising and welcome decision for industrialists and business community in the country. The decision was made in the light of controlled inflation that came down to 9.6% in July, while the incentive aimed at giving the private sector a chance to enhance investment for sustainable economic growth.

4- Exchange Rate
2

Fundamental Analysis

October 25, 2012

Exchange rate is the price of one currency in relation to another. In a slightly different perspective, it expresses the national currencys quotation in respect to foreign ones. Thus, exchange rate is a conversion factor, a multiplier or a ratio, depending on the direction of conversion. It is believed that if exchange rates can freely move, it may turn out to be the fastest moving price in the economy, bringing together all the foreign goods with it.

Exchange rates
Country
USA UK EURO Canada

Buying 95.35 153.10 124.61 96.75

Selling 95.15 152.78 124.35 96.55

5- Economic and Political stability

A stable political environment is necessary for steady, balanced growth. If a country is ruled by a stable government which takes decisions for the long-term development of the country, industry and companies will prosper.

Industry Analysis
A group of companies producing reasonably similar products which serves the needs of common set of buyers is termed as an Industry. Industry analysis is a tool used by investors to determine about the condition of a particular industry to for making investment decision to invest in that industry by ensuring about the risks and return from the investment in that industry.

Pakistan Oil and Gas Industry

Pakistan oil and gas industry is going through a process of transition as IT is experiencing a new wave of privatization. Government of Pakistan has announced its intention of privatizing 37% of its 75% stake in Qadirpur gas field and also transferring management responsibility to private companies. Aware of rich oil and gas reserves, oil and gas industry of Pakistan is putting in steady efforts to make best utilization of resources and build a strong production base. Reports of oil and gas industry of Pakistan reveals this countrys current average daily oil production is about 3,800 net barrels and natural gas of 73 net million cubic feet. Despite such huge potential, Petroleum Ministry of Pakistan reported high trade deficit due to major gap between import and export

Fundamental Analysis

October 25, 2012

value. Oil import of Pakistan is expected to reach $6.5 billion in 2009 and government aims at formulating policies to reduce import dependence and promote self-reliance by triggering exploitation.

Trading Statistics of the Sector

Crude oil (000) Barrels Import and export 23458 Natural gas MMCFT Import and export 992589

Year

2002-03

2003-04

22625

1202752

2004-05

24119

1344953

2005-06

23935

1400043

Number of Installed Factories

The total number of installed factories of oil in Pakistan = 83 The total number of installed factories of gas in Pakistan = 82

Marketing and Distribution

PAKISTAN STATE OIL CO.LTD.(PSO) SHELL PAKISTAN LTD.(SPL) CHEVRON PAKISTAN LTD.(CALTEX)(COPL) TOTAL PARCO PAKISTAN LTD.(TPPL) ATTOCK PETROLEUM LTD.(APL) PARC0-PEARL ADMORE GAS (PVT)LTD 64.2% 19.9% 7.3% 4.00% 2.6% 1.3% 0.7%

Company Analysis
4

Fundamental Analysis

October 25, 2012

Company analysis is the final stage of fundamental analysis. The economy analysis provides the investor a broad outline of the prospects of the growth in the economy. The industry analysis helps the investor to select the industry in which investment would be rewarding. Now the investor has to select the company in which he should invest is money. Company analysis provides the answers to following two questions: How has the company performed in respect to other similar companies and How has the company performed in comparison to earlier years?

It is imperative that one completes the politico economic analysis and the industry analysis before a company is analyzed because the company's performance at a period of time is to an extent a reflection of the economy, the political situation and the industry. What does one look at when analyzing a company? The different issues regarding a company that should be examined are:

Ratio Analysis
1. Liquidity Ratios
a. Current Ratio
Shows a companys ability to pay off its current liabilities from its current assets. Formula= SHELL
2007 2008 Current Assets Current Assets 20041859 30220209 Current Liabilities Current Liabilities 19612115 23307811

PSO
2007 2008 Current Assets Current Assets 6251327 115878692 Current Liabilities
Current Liabilities

51385727 93736220

Fundamental Analysis

October 25, 2012

Trend Analysis of Current Asset Ratio

1.60 Value 1.40 1.22 1.20 Ratio 1.30 1.24 1.02 2007 1.02 1.22 2008 1.30 1.24

1.00
0.80 Shell Pso

Internal Comparison
Shells Current ratio increased significantly as compared to previous year although the volume of current liabilities increased as a whole due to increase in trade payables but current assets grew at a rapid rate. The reason behind this was the significant change in the value of stock in trade. This is due to higher prices of petroleum products during that time and the company is using FIFO method for its inventory. Also, the working capital requirements from the GOP was increased for MNCs.

External Comparison
Shell current ratio increased more rapidly as compared to PSO because PSO current liabilities grew at the same level as their current assets. PSO benefited from not being an MNC.

b. Quick Ratio
Shows a firms ability to meet its current liabilities with its most liquid assets. Formula=
Shell Current Liabilities Current Liabilities

2007 2008

Current Assets Current Assets

20041859 30220209

19612115 23307811

Inventory Inventory

8244054 18095523

2007 2008

Current Assets Current Assets

62513273 115878692

PSO Current Liabilities Current Liabilities

6

51385727 93736220

Inventory Inventory

29562055 62360067

Fundamental Analysis

October 25, 2012

Trend Analysis of Quick Ratio

0.80 Value 0.70 0.60 Ratio 0.60 0.50 0.40 Shell Pso 2007 0.60 0.64 0.52 2008 0.52 0.57 0.64 0.57

Internal Comparison
Shells Quick ratio decreased due to higher prices of petroleum products, as the volume allocated for inventories was higher.

External Comparison
There is no significant difference between the decreases of the ratio of both the companies as compared to their previous benchmarks.

2. Leverage Ratio
a. Total debt ratio
Shows the percentage of the firms assets that are supported by debt financing. Formula= Shell 19751156 26053221

2007 2008

Total Debts Total Debts

Total Assets Total Assets

29211927 39664859

2007 2008

Total Debts Total Debts

PSO 53798098 96144966

Total Assets Total Assets

74737315 127110020

Fundamental Analysis

October 25, 2012

Trend Analysis of Total Debt Ratio

1.00 Value

0.90
0.80 0.70 0.60 0.50 Shell Pso 0.68 0.66 0.72 0.76

Ratio

2007 0.68 0.72

2008 0.66 0.76

Internal Comparison
Shells total debt increased in absolute amount but not at a pace of changing total assets thats why a minor fall in debt ratio is seen.

External Comparison
Psos total debt increased at a higher pace than its total assets mainly due to the change in current liabilities. Overall PSO has become more leveraged than shell. The main reason behind this was the higher amount of GOPs receivables were not paid to PSO and to tackle with cashflow problems the company had to finance more than previous.

b. Debt to equity ratio

Shows the extent to which the firm is financed by debt. Formula= Shell 19751156 26053221

2007 2008

Total Debts Total Debts

Total Equity Total Equity

9460771 13611638

2007 2008

Total Debts Total Debts

PSO 53798098 96144966

8

Total Equity Total Equity

20929217 30965054

Fundamental Analysis

October 25, 2012

Trend Analysis of Debt to Equity Ratio

3.50 Value 3.00 2.57 2.50 Ratio 2.00 1.50 Shell Pso 1.91 2008 1.91 3.10 3.10

2.09 2007 2.09 2.57

Internal Comparison
Shells debt to equity ratio decreased due to increase in its retained earnings.

External Comparison
Shell has maintained its debt to equity ratio better than PSO whose ratio has fluctuated apparently than the previous year. This effect can be seen in the previous total debts ratio. The main reason behind that was to finance the excessive receivables not yet paid by GOP.

3. Coverage Ratio

a. Times interest earned

Shows a firms ability to cover its interest charges. Formula= Shell 2007 2008 PSO 2007 2008

EBIT EBIT

1166405 8481359

Interest Expense Interest Expense

909919 970267

EBIT EBIT

7949786 22450992
9

Interest Expense Interest Expense

1158112 1367898

Fundamental Analysis

October 25, 2012

Trend Analysis of Times Interest Earned

20.00 16.41 Value 15.00 10.00 Ratio 5.00 0.00 Shell Pso 1.28 2007 1.28 6.86 2008 8.74 16.41 6.86 8.74

Internal Comparison
Shell has significantly improved its time interest earned ratio due to the massive increase in its operating income.

External Comparison
Although shell interest earned ratio increased significantly but it is still 50 percent as compared to Pso who is at good position.

4. Efficiency Ratios
a. Receivable Turnover
Indicates how successful the firm is in collection of receivable Formula= Shell 130129844 157626491

2007 2008

Credit Sales Credit Sales

Avg A/R Avg A/R

4905639.5 4578132.5

2007 2008

Credit Sales Credit Sales

PSO 411057592 583213959

Avg A/R Avg A/R

12657917 23752347

10

Fundamental Analysis

October 25, 2012

Trend Analysis of Receivable Turnover

40.00 Value 35.00 30.00 Ratio 25.00 20.00 Shell Pso 26.53 2007 26.53 32.47 24.55 2008 34.43 24.55 32.47 34.43

Internal Comparison
Shell has managed to control its receivable volume with the growing sales level. Thats why a increase in the ratio has been seen which shows its efficiency in collecting receivables while at the same time increasing its sales volume.

External Comparison
Pso s ratio has been deteriorated as compared to previous year which shows its relative inefficiency in collecting receivables as compared to Shell. The main amount of receivables which had affected the figures is from Government of Pakistan and IPPs.

b. Average collection period in days

Average number of days the receivables is outstanding. Formula=
Shell 365 365

2007 2008

Days Days

Receivable Turnover Receivable Turnover

26.53 34.43

PSO
2007 2008 Days Days 365 365 Receivable Turnover Receivable Turnover

32.47 24.55

11

Fundamental Analysis

October 25, 2012

Trend Analysis of Average Collection Period (Days)

16.00 Value 14.00 12.00 Ratio 10.00 8.00 Shell Pso 11.24 2007 13.76 11.24 10.60 2008 10.60 14.87 13.76 14.87

Internal Comparison
Shell has managed to control its receivable volume with the growing sales level. Thats why a increase in the ratio has been seen which shows its efficiency in collecting receivables while at the same time increasing its sales volume.

External Comparison
Pso s ratio has been deteriorated as compared to previous year which shows its relative inefficiency in collecting receivables as compared to Shell.

c.

Inventory Turnover ratio

Indicates the effectiveness of the inventory management practices of the firm. Formula=

2007 2008

COGS COGS

Shell 108664932 124694471

Avg. Inventory Avg. Inventory

9111970 13169788.5

2007 2008

COGS COGS

PSO 337446896 465254907

12

Avg. Inventory Avg. Inventory

28865344 45961061

Fundamental Analysis

October 25, 2012

Trend Analysis of Inventory Turnover (Days)

14.00 Value

12.50
11.00

11.93 11.69 10.12

Ratio

9.50 9.47 8.00 Shell Pso 2007 11.93 11.69 2008 9.47 10.12

Internal Comparison
Shells situation in that particular section has deteriorated significantly because of the large accumulation of inventory, may be not in physical quantities but in rupee amount due to higher oil prices. This can adversely affects the company earnings in the future.

External Comparison
In comparison with Shell Pso has maintained its inventory turnover ratio more efficiently although a decrease in ratio can be seen there also.

d.

Inventory Turnover Period in days

Average number of days before inventory is turned into accounts receivable through sales. Formula= Shell 365 365

2007 2008

Days Days

Inventory Turnover Inventory Turnover

11.93 9.47

2007 2008

Days Days

PSO 365 365

Inventory Turnover Inventory Turnover

13

11.69 10.12

Fundamental Analysis

October 25, 2012

Trend Analysis of Inventory Turnover (Days)

40.00 Value 38.00 36.00 34.00 Ratio 32.00 31.22 30.61 2007 30.61 31.22 2008 38.55 36.06

38.55
36.06

30.00
28.00 Shell Pso

Internal Comparison
Shells situation in that particular section has deteriorated significantly because of the large accumulation of inventory, may be not in physical quantities but in rupee amount due to higher oil prices. This can adversely affects the company earnings in the future.

External Comparison
In comparison with Shell Pso has maintained its inventory turnover ratio more efficiently although a decrease in ratio can be seen there also.

e.

Total Asset Turnover Ratio

Indicates the overall effectiveness of the firm in utilizing its assets to generate sales. Formula= Shell 130129844 157626491

2007 2008

Net Sales Net Sales

Avg Total Assets Avg Total Assets

28752163 34438393

2007 2008

Net Sales Net Sales

PSO 411057592 583213959

Avg Total Assets Avg Total Assets

72452919.5 100923667.5

14

Fundamental Analysis

October 25, 2012

Trend Analysis of Total Asset Turnover

7.00 Value 6.00 5.67 5.00 Ratio 4.53 4.00 3.00 Shell Pso 2007 4.53 5.67 2008 4.58 5.78 5.78

4.58

Internal Comparison
Shell Total asset turnover remained at the same level as the previous year.

External Comparison
Psos ratio also maintained at its previous level but Pso is more efficient in utilizing its assets overall.

5. Profitability ratios

a. Gross profit margin

Indicates the efficiency of the operations and the firms pricing policies. Formula= Shell 6380502 15150218

2007 2008

Gross Profit Gross Profit

Net Sales Net Sales

130129844 157626491

2007 2008

Gross Profit Gross Profit

PSO 12259430 30023626

Net Sales Net Sales

411057592 583213959

15

Fundamental Analysis

October 25, 2012

Trend Analysis of Gross Profit Margin

20.00% Value

10.00% Ratio 4.90% 2.98% 0.00% Shell Pso 2007 4.90% 2.98%

9.61% 5.15%

2008 9.61% 5.15%

Internal Comparison
GPM of Shell has doubled from the previous year which is a good sign for companys operations. That might because of increasing oil prices.

External Comparison
GPM of Pso also doubled because of the same effect but the overall level of Shell is far higher than Pso.

b. net profit margin

Indicates the firms profitability after taking account of all expenses and income taxes. Formula= Shell 706659 5137094

2007 2008

Net Profit Net Profit

Net Sales Net Sales

130129844 157626491

2007 2008

Net Profit Net Profit

PSO 4689798 14053795

Net Sales Net Sales

411057592 583213959

16

Fundamental Analysis

October 25, 2012

Trend Analysis of Net Profit Margin

3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Shell Pso 3.26%

Value

2.41%

Ratio

1.14% 0.54% 2007 0.54% 1.14% 2008 3.26% 2.41%

Internal Comparison
Shells NPM has improved a lot from the previous year level. This must be the same effect as seen in the companys GPM.

External Comparison
Psos NPM has also improved but not as significant as Shells. In fact the company was in better position as compared to shell previous year.

c.

Return on investment

Indicates the profitability on the assets of the firm (after all expenses and taxes). Formula= Shell 706659 5137094

2007 2008

Net Income Net Income

Avg Total Assets Avg Total Assets

28752163 34438393

2007 2008

Net Income Net Income

PSO 4689798 14053795

Net Sales Net Sales

72452919.5 100923667.5

17

Fundamental Analysis Trend Analysis of RETURN ON INVESTMENT

Value

October 25, 2012

24%
16% 8% 0% Shell Pso 6.47% 2.46% 2007 2.46% 6.47% 14.92% 13.93%

Ratio

2008 14.92% 13.93%

Internal Comparison
The companys ROI has also improved as seen in the previous ratios.

External Comparison
Shell ROI has increased more massively as compared to Pso.

d.

Return on equity

Indicates the profitability to the shareholders of the firm (after all expenses and taxes). Formula=

2007 2008

Net Income Net Income

Shell 706659 5137094

Avg Equity Avg Equity

9808758.5 11536204.5

2007 2008

Net Income Net Income

PSO 4689798 14053795

Avg Equity Avg Equity

20876138 25952135.5

18

Fundamental Analysis

October 25, 2012

Trend Analysis of Return on Equity

60% Value 50% 40% 30% Ratio 20% 22.46%

54.15%
44.53%

10%
0% Shell Pso

7.20% 2007 7.20% 22.46% 2008 44.53% 54.15%

Internal Comparison
A massive increase is seen on the Shells side with respect to ROE.

External Comparison
Despite Shells massive increase in ROE, Pso is still ahead in this respect.

6. Equity ratios
a. Earnings Per Share
The portion of a company's profit allocated to each outstanding share of common stock. Formula=

2007 2008

Profit Taxation Profit Taxation

Shell After 706659000 After 5137094000

No. of Common 54790313 shares Outstanding No. of Common 54790313 shares Outstanding

2007 2008

Profit Taxation Profit Taxation

PSO After 4689798000 After 14053795000

No. of Common 171518901 shares Outstanding No. of Common 171518901 shares Outstanding

19

Fundamental Analysis Trend Analysis of EARNINGS PER SHARE

100.00 Value 93.76 81.94

October 25, 2012

80.00
60.00 40.00 20.00 0.00 Shell Pso 27.34 12.90 2007 12.90 27.34

Ratio

2008 93.76 81.94

Internal Comparison
There is a huge improvement is EPS of Shell as compared to previous years performance.

External Comparison
EPS of both companies has almost no significant difference but improvement is seen in Shells performance which was far below from Psos level previous year.

b. Price Per Earning Ratio

A valuation ratio of a company's current share price compared to its per-share earnings. Formula= Shell Market Price Per 410.05 Share Market Price Per 417 Share

2007 2008

Earnings Share Earnings Share

Per 12.90 Per 93.76

2007 2008

PSO Market Price Per 391.45 Share Market Price Per 417.24 Share

Earnings Share Earnings Share

Per 27.34 Per 81.94

20

Fundamental Analysis

October 25, 2012

Trend Analysis of PRICE PER EARNING RATIO

40.00 Value 30.00 20.00 Ratio 14.32 10.00 0.00 Shell Pso 5.09 2007 31.79 14.32 2008 4.45 5.09 4.45 31.79

Internal Comparison
Price per earnings ratio has deteriorated but when compared to previous years EPS, it is evident that is not because of decrease in price share but because of significant increase in earnings of company. In summary shareholders did not lose confidence but enjoyed increased earnings.

External Comparison
Likewise Psos P/E ratio has also decreased almost to the same level as of Shells.

21

Fundamental Analysis Balance Sheet and Income Statement a. Shell Balance Sheet
ASSETS Non-current assets Fixed assets Long-term investments Long-term loans and advances Long-term deposits and prepayments Long-term debtors Deferred taxation - net Total Non-current assets Current assets Stores and spares Stock-in-trade Trade debts Loans and advances Trade deposits and short-term prepayments Other receivables Taxation Cash and bank balances Total Current assets Total Assets

October 25, 2012

2008

2007

6826848 2134783 146381 201718 134920 9444650

6579993 2015535 182579 110994 328727 280967 9498795

13328 18095523 4904940 47029 207864 6079111 872414 30220209 39664859

30286 8244054 4251325 42720 140239 5970763 219715 814530 19713632 29212427

22

Fundamental Analysis
EQUITY AND LIABILITIES Equity Share capital Reserves Unappropriated profit Total Equity LIABILITIES Non-current liabilities Deferred taxation - net Liabilities against assets subject to finance lease Long-term loan Asset retirement obligation Total Non-current liabilities

October 25, 2012

2008

2007

547904 2233026 10830708 13611638

547904 2233026 6679841 9460771

51574 2216 2500000 191620 2745410

547 138494 139041

Current liabilities Current maturity of liabilities against assets subject to finance lease Short-term running finances utilized under mark-up arrangements Short-term loans Trade and other payables Mark-up accrued Taxation Total Current liabilities Total Liabilities Total Equity and Liabilities

56742 4338339 1500000 16483008 157268 772454 23307811

32203 725836 6810000 11912496 131580 19612115

26053221 19751156 39664859 29211927

23

Fundamental Analysis b. Shell Income Statement

SHELL Income Statement Regular 2008

October 25, 2012

2007 130,129,844 141,615 17,909 447,517 130,736,885 15,691,451 115,045,434 108,664,932 6,380,502 3,366,555 1,716,707 1,297,240 215,322 1,512,562 377,978 1,134,584 878,098 256,486 122,250 378,736 327,923 706,659 Rupees 12.9

Sales Non-fuel retail sales others other revenue Net Sales Sales tax Net revenue Cost of products sold Gross Profit Distribution expenses Administrative and marketing expenses

157,626,491 119,915 20,205 341,349 158,107,960 18,263,271 139,844,689 124,694,471 15,150,218 2,950,422 2,109,289 10,090,507 306,453 10,396,960 1,915,601 8,481,359 970,267 7,511,092 212,248 7,723,340 2,586,246 5,137,094 Rupees 93.76
24

Other operating income Other operating expenses Operating profit Finance cost

Share of profit of associate - net of tax Profit before taxation Taxation Profit after taxation

Earnings per share

Fundamental Analysis c. PSO Balance Sheet

EQUITY AND LIABILITIES EQUITY Share Capital Reserves Total Equity Liabilities Non-Current Liabilities Long term deposits Retirement and other service benefits Total Non-Current Liabilities Current Liabilities Trade and other payables Provisions Accrued interest / mark-up Short term borrowings Taxes payable Total Current Liabilities Total Equity and Liabilities 2008

October 25, 2012

2007

1,715,190 29,249,864 30,965,054

1,715,190 19,224,027 20,939,217

834,598 1,574,148 2,408,746

768,308 1,644,063 2,412,371

81,067,565 726,116 217,928 10,997,908 726,703 93,736,220 127,110,020

41,431,075 688,512 131,961 9,064,781 69,398 51,385,727 74,737,315

d. PSO Income Statement

25

Fundamental Analysis

October 25, 2012

Sales Sales Tax Inland freight equalization margin Net sales Cost of products sold Gross profit Other operating income Operating costs Transportation costs Distribution and marketing expenses Administrative expenses Depreciation Amortization Other operating expenses Total Operating Cost Other income Profit from operations Finance costs

2008 583,213,959 74,249,472 13,685,954 495,278,533 465,254,907 30,023,626 1,396,527

2007 411,057,592 52,418,310 8,932,956 349,706,326 337,446,896 12,259,430 1,278,932

337,886 3,264,599 1,160,741 1,119,137 47,689 3,352,969 9,283,021 313,860 22,450,992 1,367,898 21,083,094 294,318 21,377,412 7,323,617 14,053,795 Rupees 81.94

369,328 2,745,289 1,002,712 1,098,157 41,908 755,420 6,012,814 424,238 7,949,786 1,158,112 6,791,674 330,306 7,121,980 2,432,182 4,689,798 Rupees 27.34

Share of profit of associates Profit before taxation Taxation Profit for the year

Earnings per share

26