INSTITUTE OF BUSINESS MANAGEMENT

REPORT ON FINANCING STRATEGY OF PSO

SUBJECT Advanced Financial Management

SUBMITTED TO: Sir Muhammad Ali Sheikh

SUBMITTED BY: Muhammad Danish Mujtaba (2009-1-03-10115)

BRIEF INTRODUCTION TO PSO

PSO came into being in the mid-1970s when the Government of Pakistan amalgamated three Oil Marketing Companies: Esso Eastern, Pakistan National Oil (PNO) and Dawood Petroleum as part of its Nationalization Plan.

From 1999 to 2004, PSO had undergone radical changes, both internal and external and has emerged with a new look and as a market leader with a long term vision. The company is the only public sector entity in Pakistan that has been competing effectively with three foreign multinationals, Shell, Caltex and Total. PSO is currently enjoying over 73% share of Black Oil market and 59% share of White Oil market. It is engaged in import, storage, distribution and marketing of various POL products including mages, high speed diesel (HSD), fuel oil, jet fuel, kerosene, liquefied petroleum gas (LPG), compressed natural gas (CNG) and petrochemicals. PSO also enjoys around 35% market participation in lubricants and is blending/marketing Castrol brands, in addition to a wide array of its own. It is considered as one of the most successful mergers in the history of Pakistan. The company has retail coverage of over 3,800 outlets, representing 80% participation in total industry network. The company has been the winner of Karachi Stock Exchange Top Companies Award for many years and is a member of World Economic Forum. PSO serves a wide range of customers throughout Pakistan including retail, industrial, aviation, and marine and government/defense sectors. PSO has been meeting the countrys fuel needs by merging sound business sense with national obligation. Pakistan state oil has come to this stage after 25 years of development and continuous improvement. The companys development started from 1974 when the federal government took over the management of PNO (Pakistan National Oil) and DPO (Dawood Petroleum Limited) and renamed into POCL (Pakistan Oil Company Limited) under the marketing of petroleum Products (Federal Control) Act 1974 The government then incorporated Petroleum Storage Development Corporation PSDC. Name of PSDC changed to State Oil Company Limited (1976). The government then merged PNO and POCL into SOCL and named it as Pakistan State Oil Company Limited.

FINANCIAL STATEMENTS OF PSO

PSO VERTICAL ANALYSIS

In 2007, 82.09% is cost of products sold of the sales and net sales are 85.07%of the sales which results in 2.98% gross profit. All the operating expenses accounts 1.46% of the sales and finance cost is 0.28% of sales with net profit of 1.14%. While in 2008 sales dropped along with cost of products sold with 79.77% and net profit increased because decrease in finance cost and decrease in cost of products sold. The decrease in finance cost shows that the company has paid its short term borrowings. Now in 2009 net profit is negative which shows loss by -0.93% it is probably because significant increase in cost of products sold also in increase in finance cost and operating cost because company has incurred short term borrowings. In 2010 cost of products sold and operating cost both decreased which resulted in an increase of net profit by 1.03%.

In 2007, 16.36 % are fixed assets with major portion of 10.89% of property and plant. While 83.60% are current assets which include 39.55%of inventory and 18.20% of trade debts. While shareholders equity consists of 28.02% and long term liability consists of 3.28% which shows that company has no long term debts and is mostly financed by shareholders and current liabilities are 84.75% which are more than current assets. In 2008 companys fixed assets are decreasing with increase in current assets due to more inventories in stock and increase in trade debts. This year sales are made on credit. Shareholders equity has decreased with increase in trade payables. In 2009, fixed assets increased and current assets decreased. The decrease in current assets is due to decrease in inventories in stock but the company has extended its credit policy instead of tightening it.

PSO HORIZONTAL ANALYSIS

While analyzing horizontally the company has decreased non current assets and as increase in current assets significantly because the company has loosed its credit policy and inventories stock has increased. While there is increase in current liabilities due to increase in short term borrowings and trade payables. And shareholders equity is decreasing and it shows that company is mostly financed with short term borrowings. If we move from 2007 to 2009 the sales are increasing with increase in cost of products sold. But in 2008 the companys net profit is high due to decrease in cost of products sold and decrease in operating costs.

FINANCIAL ANALYSIS (BALANCE SHEET)

2008% ASSETS Non-current assets Property, plant and equipment Intangibles Long-term Investment Long-term loans, advancement and receivables Long-term deposits and prepayments Deferred tax Current Assets Stores, Spare parts and loose tools Stock-in-trade Trade debts Loans and Advances Deposits and short-trm prepayments Other recievables Taxation-net Cash and Bank balances Net Assets in Bangladesh Total Assets EQUITY AND LIABILITIES Equity Share capital Reserves Non-current Liabilities Long-term deposits Retirement and other service benefits Current Liabilities Trade and other Payables Provisions Accured interest/ mark-up Short-term borrowing Total equity and Liabilties 2009% 2010%

100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

(93.65) (68.28) (79.73) (84.94) 5.76 1135 31.17 (96.83) (62.26) 137.46 5.50 37.46 (81.67) (95.51) 19.69 20.70

(85.45) (34.36) (74.76) (66.54) 59.23 (79.07) (98.32) (93.97) 246.56 3.47 (91.52) (92.83) (58.90) 66.88 59.11

100 100 100 100 100 100 100 100 100 100 100

0 (65.49) (67.40) 2.41 6.28 4.94 35.84 (94.82) 155.30 69.62 20.70

0 (94.43) (94.74) 13.64 19.92 17.75 92.48 (94.82) 51.52 18.40 59.11

PSO RATIO CALCULATION AND GRAPHS FOR THE YEAR 2008,2009,2010

1. PROFITABILITY RATIOS

ROA2008 = 15421663 = 0.1213 127110000 ROA2009= (466479) 153421643 ROA2010= 18931606 =0.0936 202247741 = -0.0030

Return On Asset
0.14 0.12 0.1 0.08 0.06 0.04 0.02

PSOs ROA was high due to high total assets but it decreased in 2009 due to negative income but increased slightly in 2010

0 2008 2009 2010

ROE2008= 14053795 = 0.4538 30965054 ROE2009= 6698535= -0.3209 20870785 ROE2010= 9049596 = 0.3084 29336058
0.5 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0

Return On Equity

PSO return on equity which measures the income available to shareholders increases but in 2009 due to negative net income it decreased significantly and kept on decreasing in 2010.

2008

2009

2010

ROC2008 =15421663 = 0.4849 31799652 ROC2009= (466479) = -0.0214 21725503 ROC2010 = 18931606 30284534 = 0.6251
0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

Return On Capital

PSOs ROC increased due to increase in shareholders equity and long term debts kept on increasing even in 2010.

2008

2009

2010

2. EFFICIENCY RATIOS

INVENTORY TURNOVER2008 = 465254907 = 15.73 29562055 INVENTORY TURNOVER2009 = 609685478 = 9.77 62360067 INVENTORY TURNOVER2010 = 713591707 = 17.53 40698209
18 16 14 12 10 8 6 4 2 0

Invetory Turnover

PSOs inventory turnover has decreased in 2009 it increased 17 times up again in 2010.

2008

2009

2010

10

RECEIVABLE TURNOVER2008=

495278533 = 36.41 13599966

40 35 30 25 20 15 10 5 0

Receivable Turnover

RECEIVABLE TURNOVER2009=

612695589 = 18.07 33904728

RECEIVABLE TURNOVER2010=

742757951 =9.22 80509830

PSOs receivable turnover was very high in 2008 but gradually it decreases due to poor credit policy.

2008

2009

2010

ASSETS TURNOVER2008=

495278533 =6.62 74737315

Assets Turnover
7 6 5 4 3 2

ASSETS TURNOVER2009 =

612695589 =4.82 127110020

ASSETS TURNOVER2010=

742757951 = 4.84 153421643

1 0 2008 2009 2010

PSOs assets turnover ratio was good in 2008 but it decreased and kept on decreasing in 2009 and 2010 due to increase in assets and decrease in sales.

11

3. LEVERAGE

LONG TERM DEBT RATIO2008=

834598 31799652

=0.0262

LONG TERM DEBT RATIO

0.045 0.04 0.035 0.03 0.025 0.02 0.015 0.01 0.005 0 2008 2009 2010

LONG TERM DEBT RATIO2009=

854718 =0.0393 21725503

LONG TERM DEBT RATIO2010=

948476 =0.0313 30284534

PSOs long term debt ratio is very low throughout because it is mainly financed by short term borrowings and shareholders.

LTDE* RATIO2008 = 834598 30965054 LTDE* RATIO2009 = 854718 20870785 LTDE* RATIO2010= 948476 29336058

= 0.0269
0.045 0.04 0.035 0.03 0.025 0.02 0.015 0.01 0.005 0

Long-term Debt Equity Ratio

= 0.0409

=0.0323

(*Long Term Debt Equity) It is also very low due to no long term debt.

2008

2009

2010

12

TIME INTEREST EARNED RATIO2008= 22450992=16.41 1367898 TIME INTEREST EARNED RATIO2009 = -5576658 = -0.894 6232056 TIME INTEREST EARNED RATIO2010=21233413 = 2.14 9882010
18 16 14 12 10 8 6 4 2 0

Times Interest Earned Ratio

PSO up to 2008 was able to cover its interest payments more than 15 times but in 2009 due to negative profit it was unable to cover it. In 2010 it was able to cover a small amount of interest obligation by earning.

2008

2009

2010

CASH COVERAGE RATIO2008= 23570129 =17.23 1367898 CASH COVERAGE RATIO2009 = (4434960) = -0.711 6232056 CASH COVERAGE RATIO2010= 22371050 =2.263 9882010
20 15 10 5 0

Cash Coverage Ratio

At fist in 2008 PSOs cash coverage ratio was high, however in 2009 and 2010 due to addition of depreciation the ratio decreased drastically.

2008

2009

2010

13

4. LIQUIDITY

NCTA* RATIO2008=

22142472 127110020

=0.1741%

NCTA*RATIO2009= 8666404 153421643 NCTA* RATIO2010= 23297692 202247741

=0.0564%

NET WORKING CAPITAL TO TOTAL ASSETS RATIO

0.2 0.15

=0.1151%
0.1 0.05

(*Net Working Capital To Total Assets) It shows that they arent sufficiently used.
0 2008 2009 2010

CURRENT RATIO2008 = 115878692 93736220 CURRENT RATIO2009= 138689524 130023120 CURRENT RATIO2010= 193373148 170075456

= 1.236
4 3.5

Current Ratio

= 1.066

3 2.5 2

= 1.136

1.5 1 0.5 0 2008 2009 2010

Current Ratio

The ratio is good and PSO can successfully pay its current liabilities against its current assets if liquidated

14

QUICK RATIO2008 =

36923368 =0.393 93736220

4 3.5

Quick Ratio

QUICK RATIO2009= 83392948 =0.641 130023120 QUICK RATIO2010 = 119279130 = 0.701 170075456

3 2.5 2 1.5 1 0.5 0 2008 2009 2010

The quick ratio is fluctuating and is low because it holds its stock in the form of petrol.

CASH RATIO2008 =

3018640 93736220

=0.03

Cash Ratio
4 3.5

CASH RATIO2009 =

2883118 130023120

=0.221

3 2.5 2 1.5 1 0.5

CASH RATIO2010 =

1778056 = 0.0104 170075456

PSOs cash ratio is high as borrowing on current and long term liability.

0 2008 2009 2010

15