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OVERVIEW (October 26, 2010) : Shell Pakistan enjoys a 100-year history in this part of the world, dating back to 1899, when Asiatic Petroleum, the Far Eastern
marketing arm of two companies: Shell Transport Company and Royal Dutch Petroleum Company began to import kerosene oil from Azerbaijan into the
subcontinent.
After the partition, its name was changed to Burmah Shell Oil Distribution Company of Pakistan. In 1970, 51% shares of the company were transferred to Pakistani
investors and its name changed to Pakistan Burmah Shell (PBS) Limited. In February 1993, as the economic liberalisation began and the Burmah divested from
PBS, Shell Petroleum stepped into raise its stake to 51%. Since then, Shell Petroleum Company successively increased its shares, with the group now having a
76% stake in Shell Pakistan Ltd.
Shell Pakistan Limited (SPL) is a Pakistan-based company engaged in the marketing of petroleum and compressed natural gas. It also blends and markets
various kinds of lubricating oils. The company has investments in two non-trading subsidiaries, namely Shell Pakistan Provident Trust (Private) Limited and Shell
Pakistan Pensions Trust (Private) Limited. The company introduced Shell Helix Ultra, Shell Helix CNG Super and restored its quick oil change service as Shell
Helix Oil Change Plus.
Net sales have shown an increase of 24.3% to Rs 90 billion, while the cost of sales have shown an increase of 26.6%. Due to this there has been a slight decline
in the gross profit margins to 6.3% from previous 7.2%. Distribution, administrative and marketing expenses have increased marginally and were rather subdued
especially so in times of inflationary pressures. Financial costs have reduced by 37%, adding impetus towards better results.
Company has achieved significant growth in its pre-tax earnings, achieving Rs 1.762 billion in comparison to Rs 962 million earned in the same period last year.
This improvement in profitability is mainly on the back of continued volume growth in key business segments, better product mix towards high margin products as
well favorable movements in the international oil prices. However, after tax earnings declined to Rs 720 million as against a Rs 1.014 billion in the same period last
year due to an exceptional increase in Income Tax following the re-introduction of turnover tax, and increase in tax from 0.5% to 1%.
FINANCIAL ANALYSIS (FY08-09)
Shell Pakistan is currently the second largest Oil Marketing Company of Pakistan with an existing market share of 13.7 percent. During the period, the company
earned a profit after tax of Rs 2.56 billion. In the same period last year, the company had incurred a loss of Rs 1.73 billion.
Shell Pakistan has managed to bring down its liabilities considerably in previous year. However, despite this significant achievement, government receivables
continue to be a major challenge and the company still has a approximately Rs 4.5 billion bills, comprising of price differential claims and sales tax/petroleum
development levy (PDL) refunds. These are being followed up vigorously with concerned government authorities.
Sales surged in the financial year 2009 with total revenues increasing from Rs 84,900,771 by the end of December 2008 to Rs 156,000,098 by the end of
December 2009.
During FY09, the company posted a net profit of Rs 2.562 billion and this profitability is mainly driven by higher sales volume and mainly supported by the positive
impact of increasing international oil prices. The company's gross profit margin increased from -9% in Dec'08 to 3% in Dec'09. Net Profit Margin increased from
-6% in Dec'08 to 2% in Dec'09. Return on assets increased from -13% in Dec'08 to 12% in Dec'09. Return on equity increased from -83% in Dec'08 to 31% in
Dec'09.
All the four profitability ratios are indicative of the fact that Shell Pakistan has vastly improved its earnings and is also making efforts to cut back on its
expenditures.
Shell has always concentrated on shifting its portfolio towards high margin products. This strategy, therefore, has reaped enormous benefits in terms of better
sales, gross profit and net income for the company. Higher oil prices in the world market were the main contributory factor towards high profitability ratios that the
company has been posting since 2003.
Liquidity position of Shell is not commendable, as other players of the industry. However, with the introduction of higher margin products, Shell has been able to
enhance its performance since FY05 owing to inauguration of White Oil Pipeline enabling it to better supply/transportation of oil across the country. As a result, the
company's oil stock increased significantly.
FY07 however, disturbed the increasing trend of Shell's liquidity position and it was the most challenging period for the whole industry. Short-term loans and
accrued liabilities increased significantly, depressing the current liabilities and the current ratio of the company. On the other hand FY08 improved Shell's liquidity
position. This is mainly due to sharp decline witnessed in the short-term loans taken by the company.
During the FY09, the company's current assets decreased from Rs 12.725 billion in Dec'08 to Rs 12.290 billion in Dec'09. However, the company's current
liabilities decreased from Rs 30.333 billion to Rs 25.169 billion. Hence, the company has managed to keep its current ratio steady in the FY09.
Comparison with the industry reveals that Shell has been relatively efficient as far as managing its assets is concerned. In line with the industry trend, operating
cycle is extending which can be attributed to the unsold inventory (and low inventory turnover rate) owing to lower demand and higher prices of oil in the
international market.
In the FY09, Shell experienced marked improvements on overall cash flow with tighter cost control and better credit management. Shell's stockholdings
significantly reduced and business grew on more profitable segments. Shell is continuing to leverage their association with the wider Shell Group through the
Technical Service agreements to enhance their profitability and performance.
In the FY09, inventory turnover increased from 10 days in FY08 to 12 days by the end of FY09. Similarly, the operating cycle increased from 10 days in FY08 to 12
days by the end of FY09, following the trend of the inventory turnover.
Total asset turnover increased from 2 times in the FY08 to 7 times in FY09. Sales to Equity Ratio increased from 14 times in the FY08 to 19 times in the FY09. The
increase in both these asset management ratios can be attributed to the surge in sales in the FY09.
Up-till Jun 07, on account of large amount of short-term loans and consequently high interest expenses, debt-to-asset ratio had been rising steadily while interest
coverage strength had been diminishing. This trend changed in FY08 and the company's debt to equity ratio declined mainly due to a 78 percent decline in short-
term loans. In FY09, the debt-to-asset ratio increased from 84% in FY08 to 114% in FY09.
Interestingly, this was not due to an increase in liabilities, which actually fell from Rs 33.016 billion in the FY08 to Rs 25.283 billion in the FY09. The decrease in
the D/A Ratio was primarily due to a decrease in total assets, which fell from Rs 39.272 billion in the FY08 to Rs 22.262 billion in the FY09. Long-term loans and
advances, long-term deposits and prepayments, long-term debtors, stores and spares and cash and bank balances all decreased during the FY09.
As a result of long-term borrowing, Shell's long-term debt to equity ratio increased from 1.47 percent in FY06-07 to 20 percent in FY07-08. In the FY09, the debt to
equity ratio fell from 5 times in the FY08 to 3 times by the end of the FY09. TIE Ratio increased from -8 times in the FY08 to 3 times in the FY09, which shows that
the company showed a marked improvement in its debt management capabilities. Long-term debt to equity ratio shot up in the FY09, from 43% in the FY08 to
306% in FY09.
The company has been able to post high earnings per share than other industry players. However, it recorded a sharp decline of 81.8% in FY06-07 mainly
attributable to escalating oil prices and lower demand for POL products, arising from a shift towards cheap substitutes. However, FY07-08 was very positive for the
company. Higher sales volume combined with very high international oil prices resulted in very high growth in EPS. In FY09, EPS increased from -Rs 75 in FY08
to Rs 37 in FY09.
By the end of FY09, the dividend per share stood at Rs 33. This increase in DPS has been due to impressive growth witnessed in company's bottom line.
OURTESY: E conomics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.DIS
LAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information]
s general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above informati
n] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or
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