ratio analysis of pakistani oil industries

INTRODUCTION TO BUSINESS FINANCEFINANCIAL RATIO ANALYSIS

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LETTER OF TRANSMITTAL

April 16, 2009

College of Business Management,

IoBM.

M/s. Aasiya Shirazi,

Course instructor, Introduction to Business Finance,

CBM.

Dear Madam,

Here is the report you asked us to prepare during the semester of the Introduction to Business

Finance course that is based on the "Refinery Sector".

The report attempts to provide a detailed an analysis of the sector. It gives an introduction to

sector and also compare ratio .

The report is ready for your perusal. For any query contact the following members.

Sincerely,

Arsalan Tahir-7946

M. Ovais Iqbal-8155

Hafiz Talha Hussain Tariq-7513

Ali Shayan-7807


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ACKNOWLEDGEMENT

First Of All, all the praise and thanks to ALMIGHTY ALLAH, the compassionate, the merciful, the only creator of this universe and the source of all knowledge who blessed us with health, thoughts, talented teachers and cooperative friends and provided us the opportunity to make some contribution to the already existing ocean of knowledge.

We are also thankful to my institute for giving me a wonderful opportunity to learn from this work.

We feel much pleasure to offer my sincere thanks and feelings of profound gratitude to Ms. Aasiya Shirazi whose guidance, advices, keen interest, philanthropic attitude and encouragement enabled us to complete this report.


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Table of Contents

INTRODUCTION TO REFINERIES

PAKISTAN REFINERY LTD.

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NATIONAL REFINERY LTD.

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ATTOCK REFINERY LTD. 7

BOSICOR LTD. 8

Financial Ratio Analysis

LIQUIDITY RATIOS 9

EFFICIENCY/ACTIVITY RATIOS 13

DEBT/LEVERAGE RATIOS 20

PROFITABILITY RATIOS 22

MKT/EQUITY RATIOS

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Conclusion 30

Recommendations 31

Appendix 32


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INTRODUCTION TO COMPANIES

PAKISTAN REFINERY LTD.On February 6, the foundation stone was laid by the then Minister for

Fuel, Power and Natural Resources. By July, the silhouette of the

Refinery could be seen as it appears today. In addition to this construction at Korangi, it

was necessary to build a Tank Farm at Keamari. There the crude oil to be discharged

from tankers in the Karachi harbour could be stored, before being transferred to the

Refinery tanks at Korangi.

On October 28, the plant came into operation two months ahead of schedule. It

incorporates some of the most modern refinery equipment and techniques. On

November 14, the opening of the Refinery was performed by Field Marshal Mohammad

Ayub Khan, President of Pakistan. The design capacity of the Refinery was to process 1

million tons of crude oil annually, but that very year it was decided to expand the

capacity of the Refinery to 2.1 million tons per annum, as soon as possible after

operations had commenced.

How far PRL have come….!!!

Today, Products derived from refining of crude oil meet an overwhelming part of the

world energy needs. PRL , since inception has been the principle manufacturer and

supplier of petroleum products to the domestic markets, Pakistan Defense Force and

Railways. It continues to server the energy needs of the country with professional

excellences and high degree of commithment. PRL takes pride in the competitive edge


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it enjoys of respect of efficiency, lower operating cost, high quality human resource,

reliability and introduction to newer geration technologies.

NATIONAL REFINERY LTD.Government of Pakistan took over the management of NRL under

the Economic Reforms Order, 1972 under the Ministry of Production,

which was exercising control through its shareholding in State Petroleum Refining and

Petrochemical Corporation (PERAC).

The Government of Pakistan had decided to place the National Refinery Limited under

the administrative control of Ministry of Petroleum & Natural Resources in November

1998.

In June 2003 the Government of Pakistan decided to include NRL in its privatisation

programme. The selling of 51% equity and transfer of management control to a strategic

investor had been proposed accordingly, the due diligence process for the privatisation

was initiated. After competitive bidding NRL was acquired by Attock Oil Group in July

2005.

The Company has been privatised and the management handed over to the new owner

(Attock Oil Group) on July 7, 2005.

The refinery complex of the Company comprises of three refineries, consisting of two

lube refineries and one fuel refinery. First Lube Refinery commissioned in 1966 with

designed capacity of 539,700 tons per annum of Crude Processing and 76,200 tones

per annum of Lube Base Oils. Second Lube Refinery commissioned in 1985 with

designed capacity of 100,000 tons per annum of Lube Base Oils.

NRL enjoys a competitive edge, as it is the only refinery producing LBO in Pakistan.


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ATTOCK REFINERY LTD.Attock Refinery Limited (ARL) was incorporated as a Private Limited

Company in November, 1978 to take over the business of the Attock Oil Company

Limited (AOC) relating to refining of crude oil and supplying of refined petroleum

products. It was subsequently converted into a Public Limited Company in June, 1979

and is listed on the three Stock Exchanges of the country. The Company is also

registered with Central Depository Company of Pakistan Limited (CDC).

Original paid-up capital of the Company was Rs 80 million which was subscribed by the

holding company i.e. AOC, Government of Pakistan, investment companies and general

public. The present paid-up capital of the Company is Rs 454.896 million.

Pioneer of Crude Oil Refining:

ARL is the pioneer of crude oil refining in the country with its operations dating back to

1922. Backed by a rich experience of more than 80 years of successful operations,

ARL’s plants have been gradually upgraded/replaced with state-of-the-art hardware to

remain competitive and meet new challenges and requirements.

It all began in February 1922, when two small stills of 2,500 barrel per day (bpd) came

on stream at Morgah following the first discovery of oil at Khaur where drilling started on

January 22, 1915 and at very shallow depth of 223 feet 5,000 barrels of oil flowed. After

discovery of oil in Dhulian in 1937, the Refinery was expanded in late thirties and early

fourties. A 5,500 bpd Lummus Two-Stage-Distillation Unit, a Dubbs Thermal Cracker,


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Lubricating Oil Refinery and Wax Purification facility and the Edeleanu Solvent

Extraction unit for smoke-point correction of Kerosene were added.

BOSICOR LTD.Abraaj Capital buys 40 percent stake in Bosicor, companies to become

Pakistan’s leading integrated refining and petrochemicals group.

Investment in Bosicor to support country’s demand for petroleum products and

byproducts. Largest private equity investment in Pakistan.

Bosicor Pakistan Limited was incorporated in 1995 and commenced commercial

operations in 2004.

The Group’s subsidiary, BPL, the fifth-largest oil refinery in Pakistan currently operates

with a rated capacity of 30,000 barrels per day (bpd) and a market share of 12 per cent.

Established in 1995, BPL is listed on all the three stock exchanges of the country.

BPL is active in the production, marketing and sale of petroleum products. The

company started its operation with capital of Rs. 1,105.066 Million and assets of Rs.

2,248.063 million. This now stands at Rs. 3,921.044 million and Rs. 7,109.700 million

respectively. The company will use Country’s first Single Buoy Mooring (SBM) which is

being installed near the coastal belt of Balouchistan in close proximity of the refinery.

The company is in process of enhancing its storage capacity by 126,000 metric tons.


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Liquidity Ratios

Liquidity ratios attempt to measure a company's ability to pay off its short-term debt Obligations and reflect its short- term financial strengths or solvency.

Current RatioThe ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. The Current Ratio is one of the best known measures of financial strength and tells us about the liquidity position of the company. It is calculated in the following way:

Current ratio= Current Assets Current Liabilities

The current ratio tells us that how much current assets we have to pay off our current liabilities. Ideally your current ratio should be between 2 and 3, if it is above 3 it means that you are wasting away your assets instead of investing them.

The following table gives us the current ratio for the four companies over the last two years, along with the industry averages of each year.

FY08 FY07PRL 1.3 1.4NRL 1.51 1.61ARL 0.88 0.75BPL 0.91 1Avg. 1.15 1.19


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Analysis:

Looking at the figures, one can clearly see that all the four companies are in line with the industry average. Generally, Suitable current ratio lies between 1 & 2. But ARL and BRL both have liquidity problem because there ratios are less than 1. A ratio under 1 suggests that the companies would be unable to pay off their obligations if they came due at that point. While these shows the companies are not in good financial health, it does not necessarily mean that they will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign. NRL and PRL maintain their current ratio over fiscal years.


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Quick RatioQuick ratio is a liquidity indicator that further refines the current ratio by measuring the amount of the most liquid current assets there are to cover current liabilities. The quick ratio is more conservative than the current ratio because it excludes inventory and other current assets, which are more difficult to turn into cash. Therefore, a higher ratio means a more liquid current position.

The following table gives us the quick ratio for the three companies over the period of 2007-08, along with the industry averages of each year.

ANALYSIS:

The values given in the table above show that the subtraction of inventory from currents assets has lead to a constant percentage decrease in all of the current ratios; which means that all four companies have a similar level of inventory relative to their size.

NRL is again the group leader with the highest levels of quick ratios. NRL has abundant cash flows and it can utilize them by investing.

BRL being a new company doesn’t have very consistent current ratios as compared to other companies.

FY08 FY07PRL 0.8 0.7NRL 1.05 1.13ARL 0.73 0.57BPL 0.44 0.37Avg. 0.75 0.69


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Efficiency/Activity Ratios

Inventory Turnover Ratio:Inventory turnover ratio is one of the Accounting Liquidity ratios, a financial ratio. This ratio measures the number of times, on average; the inventory is sold during the period. Its purpose is to measure the liquidity of the inventory.

The following table gives us the inventory turnover ratio for the period of 2007-08.

INVENTORY TURNOVER (times)FY08 FY07

PRL 12.63 12.41NRL 11.32 12.01ARL 18.3 13.07BPL 2.78 3.64Avg. 11.2575 10.2825

INVENTORY TURNOVER (days)FY08 FY07

PRL 28.5 29NRL 32 30ARL 27.5 22BPL 129 98.6Avg. 54.25 44.9


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ANALYSIS:

This ratio shows that the how many times inventory was used and then again replaced. The higher the ratio, the better it is. The ratio shows that all companies follow industry average except for BRL which lowers the industry average. BRL performance is not good because its sales are 2-3times less than other three companies. A low turnover rate may point to overstocking or deficiencies in the product line or marketing effort. These trends also reflect in inventory turnover in days. The figures tell us that industry median turnover is 54.25days in 2008. PRL, NRL and ARL have low turnover in days that shows there high efficiency.


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Accounts Receivable Turnover:

It’s an accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets.

The following table gives us the receivable ratio for the period of 2007-08.

RECIEVEABLE TURNOVER(times)FY08 FY07

PRL 28.5 29NRL 32 30ARL 27.5 22BPL 129 98.6Avg. 54.25 44.9

AVERAGE COLLECTION PERIODFY08 FY07

PRL 13 13.38NRL 15.92 15.87ARL 9.98 9.487BPL 12.45 21.63Avg. 12.8375 15.09175


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ANALYSIS:

Account receivable turnover ratios companies ability to collect its account receivable. PPL’s position in this ratio is strong. NRL’s performance has been the best among all the companies. The company takes on average 22 days to collect its receivables. BRL's performance is not good at all. BRL have a receivable collection problem. The company takes on average 90-130 days to collect its receivables. This indicates that the customers are not paying their dues on time. The company should review its credit policy soon to improve the collection period. Except for BRL other companies’ collection period is in line with each other with a average of 29days.


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Average Payment Period:

A short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. Accounts payable turnover ratio is calculated by taking the total purchases made from suppliers and dividing it by the average accounts payable amount during the same period.

Average Payment Period = Account Payable * days in years

Purchases

The following table gives us the average payment period for the four companies over the last two years, along with the averages of each year.

ANALYSIS:

The payment period indicates the average period for paying debts related to inventory purchases. There is a mix trend found in payment period in industry. The figures show that industry payment period average is increased in 2008. PRL and NRL pays its dues more rapidly then industry. ARL payment period is near industry average whereas BRL

AVERAGE PAYMENT PERIODFY08 FY07

PRL 62 61NRL 80 74.43ARL 145.3 155.7BPL 236.7 133Avg. 131 106.0325


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have very high payment period that raise industry average. It shows that BRL is not able to pay its due on time.

Total Asset Turnover:

The total assets turnover is a measure of the firm’s overall effectiveness in generating sales that can be calculated by dividing sales by total assets. It simply tells us whether the firm is managing its assets efficiently or not. It is calculated as follows:

Total Asset Turnover = Net Sales Total Assets

The following table gives us the Total Asset Turnover ratio for the four companies over the last two years.

TOTAL ASSET TURNOVERFY08 FY07

PRL 4 3.9NRL 2.7 2.79ARL 1.87 1.84BPL 1.1 1.26Avg. 2.4175 2.4475


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ANALYSIS:

NRL shows a good performance. NRL managed its assets effectively and efficiently which is indicated in its performance. This indicates that the company doesn’t have liquidity problems and is able to collect its receivables within time. ARL and BRL performance lies below the industry average. The ratios indicate that the company is having liquidity problem or troubles in collecting its receivables. The company should improve its receivable policy and maintain more cash in the business. PRL performance has been impressive and consistent. This indicates that it had managed its current asset quite well. The company should maintain its existing receivables policy. PRL’s performance is well above the industry average and it indicates that the business could be easily liquidated.

BRL compared to the other companies has the most sluggish performance. Its ratios are below the industry average. The low ratios also indicate that the company fails to manage its assets properly. It needs to at least be at par with the industry average.


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Debt Management RatiosThe capital structure / leverage ratios throw light on the long-term solvency of a Company. This is reflected in its ability to assure the long-term creditors with regard to periodic payment on interest and the repayment of a loan on maturity or in a predetermined installment on due dates.

Debt Ratio:The debt ratio compares a company's total debt to its total assets, which is used to gain a general idea as to the amount of leverage being used by a company. A low percentage means that the company is less dependent on leverage, i.e., money borrowed from and/or owed to others. The lower the percentage, the less leverage a company is using and the stronger its equity position. In general, the higher the ratio, the more risk that company is considered to have taken on.

The following table gives us the debt ratio for the four companies over the last two years, along with the averages of each year.

DEBT RATIOFY08 FY07



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ANALYSIS:

The debt financing of the all companies except ARL is increased in 2008, even the industry debt ratio is also increased in 2008. If we look at all of the companies, we can clearly illustrate that all the companies are debt financed. Even the industry ratio shows that the industry itself is debt financed. If the Debt Ratio is increasing, this may be a sign the company has not been able to secure long-term, instead having to secure short-term. From the table, we can clearly see that the debt ratio of ARL has been decreased in 2008. by this, we mean If the Debt Ratio is decreasing, it is generally a positive sign, showing the company may be paying off its Short-Term debt or possibly refinancing its Short-Term Debt into Long-Term Debt. Refinancing is not a bad sign in itself, as they may simply be trying to reduce their interest payments.


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Profitability RatiosIt measures the profitability of the firm as the name suggests itself. These ratios help to judge the overall performance of the Company by looking at the profit of the Company.

Net Profit Margin Ratio:The capabilities of management to control all related costs and the effectiveness of its marketing and sales efforts and the firm’s overall reputation. It simply tells us for $1 of sales how much profit is made? It is calculated as follows:

Net Profit Margin = Net Profit after Taxes Net Sales

The following table gives us the net margin ratio for the three companies over the last 2 years.

ANALYSIS:

ARL has a profit margin ratio above that of PRL and NRL. This shows that when it comes to cost leadership ARL is the company in this sector.

NRL profit margins are more or less the same and show an increase in 2008 whereas.

BRL managed to get some profit after loss in FY07 that helps to increase industry average.

NET PROFIT MARGINFY08 FY07

PRL 2.2 0.4NRL 4.6 4.84ARL 6.68 1.26BPL 0.0422 -3.5Avg. 3.38055 0.75


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Gross Profit Margin:

A financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings.

Calculated as:

The following table gives us the gross profit margin ratio for the four companies over the last two years, along with the averages of each year.

ANALYSIS:

The overall industry ratio draws a good picture as all the companies had shown magnificent increase in their profit except for light decrease in NRL. NRL besides its decrement has the highest gross profit margin as compared to the other companies. BRL shows a considerable improvement. BRL being in loss in 2007 has managed to

Gross Profit MarginFY08 FY07



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gain 6% gross profit margin in 08, showing approximately 16times improvement. PRL and ARL illustrate approx. equal increase of 200% in their gross profit.

Operating Profit Margin:

Simply compares the EBIT with net sales. It is calculated as follows.

Operating Profit Margin = Operating Profits Net Sales

Analysis:

Here the trend shows that NRL has the highest Operating Profits in 07, as well as in 08. As other ratio show the overall increase in industry performance .BRL seems to show a good improvement as compared to its 07 performance, from negative profit to compete with other three companies. ARL and NRL ahs also showed great performance.

Operating Profit MarginFY08 FY07

PRL 3.6 1NRL 7.8 6.7ARL 4.9 2.02BPL 4 -1Avg. 5.075 2.18


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Return on Total Asset:

An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment".

The formula for return on assets is:

The following table gives us the return on total asset ratio for the four companies over the last two years.

ANALYSIS:

From the above figures we can see that industry average has increased magnificently because all of the companies showed effective utilization of their assets. NRL has consistent ratio & remained above the other companies. PRL and ARL have utilized their assets effectively as witnessed by the figures of 417% and 455% increase respectively. BRL covering its negative profit has managed to gain positive result which indicates that BRL'S return on investment is getting higher with each successive year which is good sigh of its prospects.

Return On Total AssetsFY08 FY07



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Return on Equity:

Return on Equity (ROE, Return on average common equity, and return on net worth) measures the rate of return on the ownership interest (shareholders' equity) of the common stock owners. It measures a firm's efficiency at generating profits from every dollar of shareholders' equity (also known as net assets or assets minus liabilities). It shows how well a company uses investment dollars to generate earnings growth. ROE is equal to a fiscal year's net income (after preferred stock dividends but before common stock dividends) divided by total equity (excluding preferred shares), expressed as percentage.

ANALYSIS:

It can be illustrated easily that industries average of return on equity amplified from last year. ARL leads the industry with 63.38% return to their share holder. NRL return is slightly decreased but still above industry average that keeps investors perception positive. BRL has grown over the time but its ROE can not appreciated when we compared it to industry average but this can affect its reputation positively as the investors can be hopeful for better return in future.

Return On Total AssetsFY08 FY07

PRL 31 5.2NRL 32.98 34.47ARL 63.38 19.8BPL 0.4 -32.4Avg. 31.94 6.7675


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Market Value Ratios

It is of great importance concerning the interest of stockholders of the Company. These ratios discuss the relationship between the share values in and outside the firm.

Market-to-Book Ratio:

Market-to-Book Ratio is the ratio of the current share price to the book value per share. It measures how much a company worths at present, in comparison with the amount of capital invested by current and past shareholders into it. The formula is:

Analysis:

The data of 2007 shows that all the Refineries being compared here are successful, because all of them, except BRL, are able to sell their stocks above their book values but in 2008 M/B ratios of BRL and ARL has increased because its market value has increased.

In2008 PRL and PRL has Shown a decrease in their ratio whereas ARL and BPL has shown a increase in ratio.

Market To Book RatioFY08 FY07



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Price/Earning Ratio:

A valuation ratio of a company's current share price compared to its per-share earnings.

Calculated as under:

ANALYSIS:

In 2007 PRL the highest price earning ratio. This shows that investors have confidence in company's good future. Investors have high expectation from the company. All the companies have decreased their P/E ratio except BPL in 2008.P/E ratio of BPL raised the Average bar of the industry from 11.94 to 118.55.

Price/Earning RatioFY08 FY07



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Dividend Payout:

The dividend payout is the ratio of dividends per share to earnings per share. For example, if this ratio is 0.63 it tells us that out of 100% earning the company is paying 63% dividends. It is giving more dividends this would increase the demand of the share.

Calculated as:

ANALYSIS:

This ratio tells us how much of the total profit the company gives away as dividends. Dividend payout of ARL and PRL are increased in 2008 and BPL and NRL showed a decrease in the ratio, which may be due to increase investment and expenditure.NRL has the highest payout ratio in 2007.

Dividend Payout RatioFY08 FY07

PRL 4.7 0.031NRL 13.96 22.14ARL 3.68 0.00582BRL 1.165 11.55Avg. 5.87625 8.431705


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Dividend Yield (%):

A financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. Dividend yield is calculated as follows:

ANALYSIS:

This ratio tells that how much the investor is getting return on his/her investment. By looking at the figures it is clear that NRL is giving highest returns in the sector in 2007.But in 2008 NRL dividend yield significantly decreased.

In 2008 PRL dividend yield is inline with the industry average.

BPL yield decreased and is lower than the average market ratio. The overall decrease in yield is may be due to macro environment factors.

Dividend Yield RatioFY08 FY07



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CONCLUSION

In accordance to the analysis from an investor point of view from all the four companies National Refinery Limited is the best company to invest in. Following are the points to support the above written statement.

The company’s liquidity ratios have increased and fall near the industry average.

NRL’s efficiency ratios show efficient utilisation of company’s assets however it takes at an average 32 days to collect its receivables.

NRL is less debt financed as compared to Industry average.

All profitability ratios are better than the other companies.

NRL has the highest dividend yield ratio among the remaining companies.


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RECOMMENDATIONS

ARL & BPL should increase its quick and current ratio. Lower ratios shows that they have more liability than their assets.

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ARL & BPL should have a more strict credit policy.

The companies should have the 60-40 ideal ratio of financing.

The return on Equity of NRL is increasing only . The companies should work towards an increasing return.

BPL should improve its dividend yield.


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APPENDIX:

ATTOCK REFINERY LIMITED


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BOSICOR REFINERY LIMITED


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NATIONAL RIFENERY LIMITED


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PAKISTAN REFINERY LIMITED


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ratio analysis of pakistani oil industries

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