KARACHI – The reversal of turnover tax decision has significantly benefited Pakistan State Oil with a positive impact of Rs 21 per share on its bottom line. The turnover tax was increased to one percent, as announced in the budget of FY11, adversely affecting companies with a high turnover and relatively lower margins.
According to details, PSO booked additional tax expense amounting to Rs 5.0 per share, thereby lowering the profit to Rs 4.54 for the first quarter of financial year 2011. Subsequent to the implementation of turnover tax at half the rate (0.50 percent), PSO will be liable to pay normal corporate tax at 35 percent, resulting in the reversal of incremental tax expense incurred.
Secondly, deferred tax asset amounting to Rs 2.87 billion, written off during the fourth quarter of FY10, is likely to be reversed. Consequently, FY11 earnings of the scrip are likely to boost by Rs 16 per share. International financial institutions forecast that average crude price would reach $100 and $105 per barrel in 2011 and 2012 respectively. In addition, efficient inventory management is likely to boost the bottom line further, supplementing the core profitability. PSO has booked inventory gains, amounting to Rs 394 million, during the first quarter of FY10.
PSO, in its last analyst briefing, revealed that charge penal markup income on overdue receivables from IPPs reached Rs 10 billion against the late payment charges on payable of Rs 6.5 billion. It’s worth mentioning that penal income is booked when recovered, while corresponding late payment charges on outstanding payables are booked when incurred. Subsequently, PSO booked penal markup income of Rs 311mn during 1QFY11 against corresponding expense of Rs 2.1 billion.
Realisation of penal markup income, outstripping corresponding expense in future may boost future earnings, said HMFS Investment Analyst Salman Vidhani. He added that the recent tinkering in pricing mechanism including fixation of margins on MS, HOBC, SKO and LDO are likely to have minimal impact (one percent), while further alteration in margins on HSD and FO can have significant impact on the company earnings.
Pressure of government finances and heavy reliance on FO for power generation and T and D losses continue to fuel circular debt despite frequent tariff rises. Delay in settlement of energy sector circular debt may further create opportunity cost for the company.
