1/12

Submitted to: Sir Wasim Ullah

Group Members:
 Muhammad Younus Baltistani  Muhammad Yasir Naran  Muhammad Zubair Jehlami  Sajjad Iqbal  RizwanBisharat
◦ MBA 19 b

INTERNATIONAL ISLAMIC UNIVERSITY ISLAMABAD

2/12

PAKISTAN STATE OIL
INTRODUCTION PSO is the market leader in Pakistan’s energy sector. The company has the largest network of retail outlets to serve the automotive sector and is the major fuel supplier to aviation, railways, power projects, armed forces and agriculture sector. Pakistan State Oil, the largest oil marketing company in the country, is currently engaged in storage, distribution and marketing of various POL products. The company’s current value of Rs. 75 billion, its 82.1% share in the black oil market and 61.2% share in the white oil market, alone speak volumes about its success. The company has significant growth in sales and turnover, tells the status of being the first Pakistani Public Sector Company to become a member of the World Economic Forum (WEF), and winning the “Karachi Stock Exchange Top Companies Award”. PSO has the widest oil distribution network. This network consist of 29 storage depots and 9 installations, 860,000 MTs of capacity i.e. almost 81% of total national storage, (1060000 MTs) Product movement system includes a fleet of 6000 tank Lorries, tank wagons and pipelines.. With its 3612 distribution outlets, PSO has the largest network in the country. Out of these, 1,610 outlets have been upgraded as per the New Vision Retail Program, with most modern facilities like electronic dispensing units, convenience stores, business centers, Easy Payment Centers and customer friendly staff to provide better and diverse services to its customers, these are according to international practices. PSO serves 2.8 million retail customers on daily basis, along with 2000 industrial units and business houses. The company has also been meeting the fuel needs of various government entities, armed forces, railways, agriculture sector, and industrial units. PSO also provides Jet Fuel to Refueling Facilities at 9 airports in Pakistan and ship fuel at 3 ports.

3/12

Michael porter five forces analysis:
Threat of New Entrance Threats of new entrance is very low, as PSO has a market share of about 71% in FY08 , 80% in black oil and 59% in white oil. Company has a huge capital. But the new company requires huge capital to enter in this sector. PSO supplies oil to large number of public sector firm. With its 3612 distribution outlets, PSO has the largest network in the country. Out of these, 1,610 outlets have been upgraded as per the New Vision Retail Program, with most modern facilities like electronic dispensing units, convenience stores, business centers. So threat of entry is low. Bargaining Power of Customer The company bargaining power of customer is moderately high. The reason behind it is switching cost problem. The product customer purchases from the company are undifferentiated. As The fact that PSO serves 2.8 million retail customers on daily basis, along with 2000 industrial units and business houses, is indicative of its vast customer base. The company has also been meeting the fuel needs of various government entities, armed forces, railways, agriculture sector, IPPs and industrial units. PSO also provides Jet Fuel to Refueling Facilities at 9 airports in Pakistan and ship fuel at 3 ports. Bargaining powers of supplies Bargaining powers of supplies is very high because. When there are many suppliers in an industry, they do not have much power. But there are few suppliers in industry. Here switching cost of supplier is very low. Threats of substitutes Threats of substitute are moderately high. The substitute is CNG, so automobile engine is switching to CNG engine. So there is buyer switching cost. Buyer switched to substitute because of High prices of oil at domestic as well as international market last year. Threat of rivalry Threats of rivalry are high. Because PSO peer competitors are Shell, APL. Caltex and they are also in profit. The industry is in profit due to growth in automobile industry, demand of generator increasing due to current load shading.

4/12

SWOT Analysis
Pakistan State Oil Company Limited Strengths • • • • • • Strong market Shares Strong Distribution Network Increased Financial Performance Karachi Stock Exchange Top Companies Award ranked 29th among the list of top 100 companies of the Muslim World PSO ranked 29th whose revenue as compared previous year was seen increased by 41 percent. Previous year PSO was ranked at 31st and Sui Northern Gas at 99th. Pakistan State Oil Company Limited Weaknesses • • • • • Dependent on Other Operator

Pakistan State Oil Company Limited Opportunities Increasing Oil and Gas Demand Expansion of Distribution Network

Pakistan State Oil Company Limited Threats Increase in Oil prices. Alternate Fuels.

FINANCIAL ANALYSIS (2006, 2007, 2008) Liquidity Ratios Current Ratio:
PSO has positive trend in current ratio. FY06 and FY08 current ratios are same as FY07 current ratio is comparatively low. As horizontal analysis shows that current assets of FY08 are 200% and FY07 108 % while keeping FY06 100% as base year. While current liabilities of FY08 199% and FY07 109%, FY06 100% as base year. This shows that both current assets and current liabilities for consecutive three years are increasing. Vertical

5/12
analysis shows that current asset is increasing FY06 83%, FY07 84% and FY08 94% as compare to total assets 100% for consecutive three years. While current liabilities for FY06, FY07, FY08 are 67%, 68%, 74% consecutively. This shows that company is encouraging the level of current assets as well as current liabilities.(See Graph 1 ,table 1) As compare to industry average current ratio of PSO is low. In 2008 PSO current ratio is 1.236 while industry average is 1.4. PSO has liquidity problem as compare to industry average. The company has less capacity to pay its short term finance / debt. In 2008 current ratio 1.236, as compare to 2006 and 2007 it is increased .current ratio is increased due to huge increase 110%, 100% in inventory level and cash and bank balance consecutively as compare to 2007. Trade and other payable and short term borrowing are increased by 100% and 12% comparatively. Now in 2008 company is improving its liquidity. As current financial cries in the world as well as in Pakistan almost every company has a liquidity problem. So that PSO is improving its liquidity position. Quick Ratio and cash ratio Quick ratio is .571, .641, and .636 respectively in 2008, 2007 and 2006. In 2008 quick ratio is comparatively low. It is decreased 10% in 2008 as compare to 2006, while 1% increased in 2007. In 2006 Quick ratio is 0.636, as compare to 2005 it was 0.615. As it is improved while current ratio is decreasing. As stock in trade is the major portion of current assets, when if is reduced as 40% of total assets. Cash ratio in 2006 is .040 as compare to 2005 which was .059. Cash ratio are .032, .030, .040 in 2008, 2007and 2006 respectively. While keeping 2006 as base year cash ratio is decreased 25% and 20% in 2007 and 2008 respectively. .(See Graph 1 ,table 1) With the comparison of current ratios in 2006, 2007 and 2007 PSO can pay off its short term liabilities. But when we examine the quick ratio that is less than current liabilities. Quick assets are not enough for the payment of current liabilities. Because the major inventory level of the company is 40%, 39% and 49% of total assets in 2006, 2007, and 2009 respectively. The company is improving its inventory level because it is a public company and it has a lot of branches and stations all over the county. PSO has a low cash and equality as compare to its industry average. Pso has cash ratio of .032 in 2008 as compare to industry average which is very low. .(See Graph 1 ,table 1)

6/12

Asset Management Analysis
Executive summery In contrast to the declining trend of FY07, FY08 witnessed a sharp rise in international oil prices contributing to PSO’s strong performance. . In FY08, PSO improved its market share to above 71% (FY07: 68%). This growth was mainly driven by higher demand for Furnace Oil (FO), High Speed Diesel (HSD) and Motor Gasoline (Mogas). FO sales were led by increased demand from the power generation sector, while higher demand for HSD and Mogas was mainly the result of control over smuggling of these products from Iran and extraordinary increase in the use of generators for electricity supply backup. These factors led to a positive impact on the company’s earnings through improved turnover and inventory gains. PSO achieved record YoY growth (42%) in its turnover during FY08. but the question arises that PSO utilizing its assets effectively and efficiently? And how? The answer is below in analysis.(See Graph 2 ,table 2) Inventory turnover ratio analysis Inventory turn over ratio is 11.53, 11.69, and 10.12 in FY06, FY07 and FY08 respectively. The ratio is decreasing. As compare to 2006 and 2008 inventory turnover ratio is not better. It takes 36 days to convert inventory into sale while 31 and 32 days in 2007 and 2006 respectively. The horizontal analysis shows that stock in trade increased 289% in 2008 as compare to 2006 100% as base year. But sale is increased only 165% as compare to the sale of 2006 100% as base year. This is the reason that our stock is turning late as compare to previous year. Due to shortage and fluctuation of oil price in 2007 and 2008 the company stock more and more but ultimate decrease oil price in world market. Its sale was not as much as it’s was stock. .(See Graph 2 ,table 2) As compare to industry average 20.56 inventory turnover in days in 2008, PSO has low turnover ratio. PSO has 71% market share so it has to maintain its high inventory. Its takes more time to convert its inventory into cash... PSO has to improve its inventory management. .(See Graph 2 ,table 2)

7/12
Account Receivable Turnover Account receivable is 20.56, 27.25 and 37.1 in FY06, FY07 and FY08 respectively. Its account receivable is increasing year to year. In 2008 it took 10 days for the receive cash against credit sales. In 2008 industry average of account receivable turnover was 18.10 times while its account receivable turnover is 37.1. PSO has a better position than its industry in respect of account receivable turn over. It takes 9.84 days to collect receivable while industry average is 23.10 days. .(See Graph 2 ,table 2) Account Payable turnover PSO account payable turnover ratio is decreasing year by year. It was 23, 8.6 and 7.60 times in 2006, 2007 and 2008. Company taking more time to pay its account payables. Horizontal analysis shows that it is increased 220% as it was 100% 2006 as base year. In comparison with industry average that is 10.61 times. In creditors Point Of View Company has to improve its account payable turnover. So that creditor may satisfy against their credit. .(See Graph 2 ,table 2) Fixed Asset turnover and total asset turnover Fixed asset turnover are improving year by year. The reason is that company sale is improving year to year but the fixed asset like property, plant and equipment is decreased 7% in 2008 as compare to 2007. Fixed asset is not increasing. Industry average is 34% in 2008 while company has 75%. Total asset turnover are also increasing year to year but it is better than its industry average. .(See Graph 2 ,table 2)

Profitability ratio:
Executive summary: The profitability overall measures the effectiveness of the firm’s management. It is a necessity over the longer run for a company. FY08 has seen a marginal increase in the profit margins for the company. The Net profit of the company showed a negative trend from 2006 to 2007 However in the year 2008 the

8/12
whole company went into the inclining trend The Net Profit was increased in 2008 by 13% as it compared to 2007 when it was decreased by 46%..(See Graph 3 ,table 3) Overall profitability ratio is comparatively high than the industry average. Analysis of profitability ratios: In 2006 the net Gross margin was increased by 5% whereas net profit margin was increased by 2%. ROA was 17% due to 31% percent increase in the EBIT and ROE was 36% 2006 was increase in the trend. The year 2007 was a year of decrease in profitability ratios in this GP was 3% and net profit margin was just 1.14% and ROA and ROE were less than from the previous yea The year 2008 was a good for the PSO there was an increase in the profitability as there was GP margin was 5.15% and net profit margin was 2.41% that was increased 112% from previous year and was ROA as were ROE were increased from year 2007. In 2008 the gross margin, net profit margin and return on asset of PSO is comparatively low than the industry average .Whereas the operating profit is comparatively high than the industry average. (See Graph 3, table 3) Long term debt paying ability: For the year 2006 the assets of the companies were increased by 34% and the debt ratio the liabilities were also increased by 41% to 70% from 60% and the time interest expense also decreased to 14.18 times from 25.79 where the owner equity increased from 1.98 to 2.37 .In the next year debt ratio increased while time interest decreased because this was a year of overall a slight decrease in the profitability. In 2008 debt ratio increases to 76% from 71% and time interest expense almost doubled and the owner 3.1 from 2.57 that was a good sign for the company. (See Graph 4, table 4) IN 2008 industry average is comparatively low than PSO this shows that PSO has more leverage .The PSO has more capacity to pay interest expenses from EBIT that is 150% more than industry average. The debt equity ratio of PSO is more than the industry average. (See Graph 4, table 4)

9/12

Due Pont Analysis:
ROE = Profit Margin * Asset Turnover * Equity Multiplier PSO ROE in decline in 2007 by 38% and increased 102% Y08. Company’s ROE goes up due to increase in operating efficiency that is a good sign. Decline in ROE in FY07 was due to decrease in profit margin by 67%. Comparison with industry average ROE FY08 is 54% more. (See Graph 6, table 6) Operating efficiency (profit Margin) Operating efficiency is almost same except in FY07. Operating profit decline inFY07 by 62% and increased 187% in FY08 as 2006 as base year 100%.the reason was that inFY07 financial cost increased 131% as compare to FY06. The factor is high price of oil in international market. But in FY08 profitability is increased due to sale is increased 41% due to increased in demand of furnace oil. (See Graph 6, table 6) Asset Use Efficiency (Total asset control) Compare to FY06, FY07 and FY08 asset turnover in increased from FY06 to FY07 BY 10% but it is decreased by 17% in FY08. The main reason is that the total assets increased by 70% (current asset increased 85%) I n FY08 where as sale is increased by only 42%. (See Graph 6, table 6) Financial Leverage (Equity multiplier) Total asset is increased 7% and 70% increased in FY07 and FY08 respectively. But total equity is increased by 1% and 47% in FY07 and FY08 respectively. This shows that is FY08 increase in equity is less than increase in total assets that resulted increase in financial leverage. (See Graph 6, table 6)

10/12

Z- SCORE
Z = .012x1 +.014x2 +.033x3 +.006x4 +.999 x5 z- Score is used for analysis of likelihood that a firm will fail or become bankrupt. Its combination of some ratios. It is also called multiple discriminant analysis. PSO has Z=4.6 in 2008 where as industry average is 4.24. Which means company has a very low chance of bankruptcy? Z value in increasing from FY06 to FT08.

Table and graphs
Table 1 (Liquidity Ratios)
liquidity ratios current ratio=current Assets/current liabilities quick ratio=C.A-Inventories-prepaid Expenses/current liabilities Cash ratio=cash +marketable securities/current liabilities 2008 1.236 0.571 0.032 2007 1.217 0.641 0.030 2006 1.235 0.636 0.040 2005 1.243 0.615 0.059 Industry 1.400 0.700 0.230

Graph 1 (Liquidity Ratios)
1.6

Liquidity Ratios

1.4
current ratio=current Assets/current liabilities

1.2

1 ratios

0.8

quick ratio=C.AInventories-prepaid Expenses/current liabilities

0.6

0.4
Cash ratio=cash +marketable securities/current liabilities

0.2

0 0 2008 2007 2006 years 2005 2008 Ind. ave

11/12

Table 2 (Asset Management)
Asset Management inventory turnover ratio=CGS/average inventory inventory turnover in days=365/inventory turnover A/R turnover ratio=credit sales/average A/R A/R turnover in days=365/average A/R A/P turnover ratio= CGS/Average A/P A/P turnover in days=365/A/P turnover ratio fixed Asset turnover=net sale / Average capital Asset total Asset turnover=net sale/ average total Asset 2008 10.12 36.06 37.11 9.84 7.60 48.05 75.39 5.78 2007 11.69 31.22 27.25 13.40 8.65 42.19 53.05 5.67 2006 11.53 31.66 28.45 12.83 9.01 40.50 45.21 5.76 2005 9.66 37.80 24.50 14.90 7.71 47.36 31.29 4.85 Ind. Ave 61.53 20.56 18.1 23.1 10.61 39.49 34.65 4.57

` Graph 2 (Asset Management)
80

Asset Management

70
inventory turnover in days=365/inventory turnover

60

50 days

A/R turnover in days=365/average A/R

40

A/P turnover in days=365/A/P turnover ratio

30

fixed Asset turnover=net sale / Average capital Asset

20
total Asset turnover=net sale/ average total Asset

10

0 0 2008 2007 2006 years 2005 2008 Ind. Ave

Table 3 (Profitability Ratios) Profitability Ratios
Gross margin=GP/net sales operating profit margin=operating income/sales 2008 5.15% 3.85% 2007 2.98% 1.93% 2006 4.88% 3.26% 2005 5.42% 3.68% Ind.Ave 5.99% 3.76%

12/12
net profit margin=net profit /net sales Return on Asset=EBIT/average total Assets ROE= net income/ total equity 2.41% 17.66% 45.39% 1.14% 10.64% 22.40% 2.13% 16.39% 36.15% 2.23% 17.86% 32.24% 2.47% 18.74% 29.09%

Graph 3 (Profitability Ratios)
0.5

Profitability
Gross margin=GP/n et sales

0.45

0.4

0.35

0.3 % age

operating profit margin=oprati ng income/sales net profit margin=net profit /net sales Return on Asset=EBIT/a verage total Assets ROE= net income/ total eguity

0.25

0.2

0.15

0.1

0.05

0 0 2008 2007 2006 years 2005 208 Ind.Ave

Table 4 (Long term Debt Paying Ability)
Long term Debt Paying Ability Debt Ratio=Total liabilities/ Total Assets Time interest earned=EBIT/interest expense Debt Equity ratio=total liabilities/total equity 2008 0.76 16.63 3.10 2007 0.72 7.15 2.57 2006 0.70 14.18 2.37 2005 0.66 25.79 1.98 Ind.Ave 0.59 6.26 2.61

Graph 4 (Long term Debt Paying Ability)
30

Long Term Debt Paying Ability

25

Debt Ratio=Total liabilities/ Total Assets

20 ratios

15

Time interest earned=EBIT/interest expense

10
Debt Equity ratio=tatal liabilities/total equity

5

0 0 2008 2007 years 2006 2005 2008 Ind. Ave

13/12

Table 5 DuPont Ratio (three Steps)
DuPont Ratio (three Step) Operating Efficiency (Profit Margin) Asset Use Efficiency (Total Asset Control) Financial Leverage (Equity Multiplier) DuPont Ratio (three Step) 2008 0.028 3.896 4.105 45.39% 2007 0.013 4.679 3.569 22.40% 2006 0.025 4.250 3.371 36.15% 2005 0.027 4.063 2.981 32.24% Ind.Ave

29.09%

Graph 5 DuPont Ratio (three Steps)
0.5 0.45 0.4 0.35 0.3 ROE 0.25 0.2 0.15 0.1 0.05 0 0 2008 2007 2006 years 2005 2008 Ind. Ave
DuPont Ratio (three Step)

14/12
Table 6 (Z-Score
Formula Z= 0.012x1 +0.014x2 +0.033x3 +0.006x4 +0.999x5

model)
2008 4.60 2007 4.69 2006 4.26 2005 4.08 Ind.Ave 4.24

Graph 6 (Z-Score
4.8 4.7 4.6 4.5 4.4 score 4.3 4.2 4.1 4 3.9 3.8 3.7 0 2008 2007

model)

Z- Score Model

2006 years

2005

2008 Ind. Ave

Sign up to vote on this title
UsefulNot useful