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 Executive Summary
PSO’s leading retail brands include Premier-XL (petrol with multi-functional additive), Green-
XL (environment friendly diesel with an additive that provides more mileage, smooth running
& less black smoke), Deo (diesel engine oil) and Carient (passenger car motor oil). The growth
rate for the company is 18% projected the Performa income statement accordingly. After that I
calculate the capital intensive ratio and 100% capacity which are 651,682,280 while PSO
projected sales for two years is less than 100% capacity that’s why assets are not increasing.
Calculated EFN put in the equity and BV is calculated which shows the increasing trend.
As per sustainable growth rate i.e.18%, we increased our sales, distribution expenses,
administration expenses, other operating expenses with 18%. Whereas the finance cost is same.
For AFN treatment we are issuing new ordinary capital shares in the form of rights issue. The
trend which I observed is increasing in the Market value per share while book value has a slow
incremental trend. We should not allow the expenses to increase as that will be worst case
similarly reduction of expenses would be the best effort to increase the Net income.
Degree of operating leverage was -1.71 in 2007 that show the company relies more relies on its
fixed assets or can be periodic as less capital intensive company. In 2008 the operating
leverage is calculated to be 4.38. This shows that the company has increased its reliability on
fixed assets and increased its capital intensity. Degree of financial leverage in 2007 was 1.3 i.e.
the company relied heavily on debt but it reduced to a great deal in 2007 to 1.1%.
The change in NPV and sales is calculated which shows that if I increase 1 units of sale NPV
of PSO will also increase by 0.54.According to the trade off theory I calculate the EPS of the
company by maintain the current debt i.e. 81.94. If company uses no debt its EPS is 86.20.
Company is paying dividend in cash and as bonus shares as well. In 2008 company has
decreased its cash dividend and its payout ratio has decreased significantly. Company is
issuing bonus shares instead of paying more dividends in cash.
Capital Budget shows the planned expenditure on the fixed assets which adds the value to the
firm. In capital budgeting current assets ratio is more than the non current assets which shows
that company is interested in short term managing the assets. While in cash budgeting
evaluation PSO EVA is 1.5 so it must go for the business and other related projects.Net present
value and expected value addition of the company projects is positive. In order to find the short
term financial policy I bench mark with the shell and find Current assets to sale and current
asset to total assets ratio. Net working capital of the company is increasing in all coming years.
It shows that assets are increasing as compared to liabilities and it is a positive sign.
This table shows that PSO no more focus towards the sale its maintaining its assets. In
comparison with the shell it shows that Shell is maintaining its assets as well as sales. After
seeing the strategies of two companies it seems that PSO is going for short run and shell is
operating in long run. In cash management style I check the companies given cash and
balances I found that company have a less cash in hand and more relining on the cash at bank
which shows that company is interesting in taking the debt to avoid the taxation. Credit
management policy for PSO is determined by calculations of account receivable period and
account payable period which is not flexible as compared to shell.

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 Introduction of the company

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’s astounding growth in terms of sales and
turnover, combined with its 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” has made PSO a notable company world over.
PSO has the widest strategic oil distribution network. This network comprises of 29 storage
depots and 9 installations, 860,000 MTs of capacity i.e. almost 81% of total national storage,
numerous pipe lines network and equity partnership in White Oil Pipeline Project (WOPP)
from Karachi to Mehmood Kot. A most efficient product movement system for its POL
products facilitates the operations at PSO. This system includes a fleet of 6000 tank lorries,
tank wagons and pipelines. With the inception of white oil pipeline (WOPP) the pattern of
supplies from Karachi has changed drastically as the entire white oil movement from Karachi
has been switched over from tank lorries to pipelines. Moreover, to make this system more
efficient and effective, new pilfer-proof tank lorries equipped with satellite tracking system
have been introduced.
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 unmatched and diverse services to its customers,
all of which are comparable to international practices.
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.
In July 2002, ‘PSO Loyalty Cards’ were introduced to reward the retail customers for their
loyalty and patronage towards the company. In February 2003 PSO launched its ‘Fleet Cards’
and ‘Corporate Cards’, which are fuel-based credit cards for the business entities. These cards
along with the company’s Prepaid Cards, provide convenience, flexibility and security to
customers, while enabling them to earn redeemable loyalty points and avail attractive discounts
on non-petroleum products.
PSO’s leading retail brands include Premier-XL (petrol with multi-functional additive), Green-
XL (environment friendly diesel with an additive that provides more mileage, smooth running
& less black smoke), Deo (diesel engine oil) and Carient (passenger car motor oil). In order to
deliver the promised quality to its retail customers, PSO launched Mobile Quality Testing
Networks (MQTU) in October 1998 which has now been extended to 21 units operating from

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15 major cities of Pakistan. These units perform surprise visits to check the quality of the POL
products at different retail outlets.

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Make Performa Financial statement for next two years of Company and
calculate AFN / EFN.
First I calculate the growth rate of 4 years and 3 years and my growth rate is 18%, 14%
respectively. The growth rate for the company is 18% projected the Performa income statement
accordingly. After that I calculate the capital intensive ratio and 100% capacity which are
651,682,280 while PSO projected sales for two years is less than 100% capacity that’s why
assets are not increasing. Calculated EFN put in the equity and BV is calculated which shows
the increasing trend.

Pro forma Income Statement

As per sustainable growth rate i.e.18%, we increased our sales, distribution expenses,
administration expenses, other operating expenses with 18%. Whereas the finance cost is same.
For taxation we used the 35% tax bracket. I also check the trend of the net income previous and
projected income statement i.e. is show by the graph

See Annexure 1
25,000,000

20,000,000

15,000,000
Series1
10,000,000

5,000,000

0
2005 2006 2007 2008 Proposed 2009 Proposed 2010

Pro forma Balance Sheet

In Pro forma Balance Sheet, we used the same growth rate of 18%. We did not need extra plant
and equipment as we are already using only 76% of capacity. Further, we increased the current
assets with the 18% growth rate. Stock in trade may also be reduced and turned that asset in to
cash. In liabilities, we increased the current liabilities with the growth rate.

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AFN Calculations:
Additional fund need for PSO is calculated as below. For this amount we are issuing new
ordinary capital shares in the form of rights issue.

AFN/EFN Required Capacity Intensity

2,010 2009
Ratio
See
Equity 172,580,819 147,968,185 current 100%
Liabilities 163892113 143,982,540 Capacity sales capacity
EFN 8,688,706 3,985,645 76% 495278533 651,682,280

Annexure 1

Calculate the book value per share before vs after obtaining required
EFN/AFN
Calculated EFN put in the equity and BV is calculated which shows the increasing trend.

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 Years Book Value

2008 18.1%
2009 20.4%
2010 23.1%

To support above scenario I also calculated the relationship between book value and market
value per share. The trend which I observed is increasing in the Market value per share while
book value has a slow incremental trend.

5 0 000 . 00 %
4 0 000 . 00 %
3 0 000 . 00 % M a rk e t va lu e p e r s h a re
2 0 000 . 00 % B o o k va lu e p e r s h a re
1 0 000 . 00 %
0. 0 0 %
1 2 3 4 5 6

See Annexure 2

Conduct sensitivity analysis of the company to evaluate sensitivity of Sales,

CGS, Expenses, Finance cost to NET INCOME.

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Sales are highly sensitive to net income while CGS shows the less fluctuations that why less
sensitive to net income. An expense of the company is highly sensitive to the net income as
indicated by the graph. This shows that in any case we should not allow the expenses to
increase as that will be worst case similarly reduction of expenses would be the best effort to
increase the Net income. Finance cost shows the decreasing trend initially and than growing
but less sensitive to the company.

Break-even Analysis

Accounting break even in 2007 is calculated Rs. 1069 whereas in 2008 the sales level that
results in zero net income is calculated Rs. 581.
Cash breakeven in 2007 is calculated RS. 397 and in 2008 the sales that can result in zero
operating cash flow are Rs. 270.
Financial break even in 2007 is 229 and in 2008 the sales that can result in zero operating cash
flow are Rs. 313.

Formulae 2,008 2,007

Accounting Break Even= (FC+ Dep)/(p-v) 581 1,069

Cash Break Even= FC/(P-V) 270 397

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 Financial break even = (FC + OCF)/ P - V) 313 229

Leverages:
Degree of operating leverage was -1.71 in 2007 that show the company relies more relies on its
fixed assets or can be periodic as less capital intensive company. In 2008 the operating
leverage is calculated to be 4.38. This shows that the company has increased its reliability on
fixed assets and increased its capital intensity.
Degree of financial leverage in 2007 was 1.3 i.e. the company relied heavily on debt but it
reduced to a great deal in 2007 to 1.1%.

Degree of total leverage was -2.18 in 2007 and 4.80 in 2008. The normal of DTL is 1.5 where
as below 1 is good as then you are safe to take more debt. This shows that return on equity and
assets is not good and not allows PSO to use more leverage.

2008 2007
Degree of Operating Leverage= % change in EBIT 4.38 -1.71
% change in Sales

Degree of Financial leverage= % change in EPS 1.1 1.3

% change in EBIT

Degree of Total Leverage= DOL * DFL 4.80 -2.18

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Perform scenario analysis of the company showing base, best and
worst case while using realistic assumptions.
Scenario analysis is performed by increasing 5% in base best and worst scenarios.

Scenario Analysis

Worst Base 2008 Best 2,007

Sales 470,514,606 495,278,533 520,042,460 349,706,326

Variable cost 488,517,652 465,254,907 441,992,162 337,446,896
Fixed cost 8,522,005 8,116,195 7,710,385 4,872,749
Depreciation 9,314,005 9,314,005 9,314,005 8,231,728
OCF -13,981,381 17,499,732 48,980,845 7,682,447
NPV -5987481.137 7494203.389 20975887.92 3289983.186

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 Change in NPV 0.54

Change in Sales

The change in NPV and sales is calculated which shows that if I increase 1 units of sale NPV
of PSO will also increase by 0.54.

Calculate the optimal capital structure by using trade off

theory.
According to the trade off theory I calculate the EPS of the company by maintain the current
debt i.e. 81.94. If company uses no debt its EPS is 86.20. In optima capital structure WACC
and multiplies by short term borrowings, accrued mark up and provisions.
WACC is calculated by finding company share price and market index, I obtained the beta.
Beta is the measure to which the portfolio return should exceed the risk free rate. Here the
share price is the measure which increases the risk free rate.
See Annexure 3

Find out the company dividend policy

The dividend policy is calculated by dividend per share and dividend payout ratio in previous
years it has decreasing trend this is shown by the table. Company is paying dividend in cash
and as bonus shares as well. In 2008 company has decreased its cash dividend and its payout
ratio has decreased significantly. Company is issuing bonus shares instead of paying more
dividends in cash.

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Dividend Pay out Ratio Retention Rate

2005 79% 21%

2006 77% 23%

2007 77% 23%

2008 29% 71%

Proposed 2009 29% 71%

Proposed 2010 29% 71%

See Annexure 5

Discuss company capital budgeting process and policy.

Capital Budget shows the planned expenditure on the fixed assets which adds the value to the
firm. In capital budgeting current assets ratio is more than the non current assets which shows
that company is interested in short term managing the assets. While in cash budgeting
evaluation PSO EVA is 1.5 so it must go for the business and other related projects.Net present
value and expected value addition of the company projects is positive. This is a good sign to
the managers to decide about investment in different projects. Managers in future now should
accept projects that can give positive NPV and finally positive expected value addition.
Currently company’s operating projects are doing well.

See Annexure 6

Perform analysis of any right share issue and initial public

offering.
The calculated AFN is which the part of equity is so I don’t go for issuing the share for the
public because the flotation cost and dilution effect. The way to avoid this effect I give the
more rights to existing share holders for the two years.
See Annexure 7

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 Short Term Financial policy

Discuss the short term financial policy for your company what is the working capital
policy with the special emphasis.
In order to find the short term financial policy I bench mark with the shell and find Current
assets to sale and current asset to total assets ratio. Net working capital of the company is
increasing in all coming years. It shows that assets are increasing as compared to liabilities and
it is a positive sign.

2006 2007 2008 2009 2010

10,978,097 11,127,546 22,142,472 26,128,117 30,831,178

Change in NWC 149,449 11,014,926 3,985,645 4,703,061

PSO Shell

Current Assets 115,878,692 1 Current Assets 167177000

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Sales 495278533 2 Sales 1125939000
Total Assets 127,110,020 3 Total Assets 861716000
Sales ratio 23.39667163 Sales ratio 14.84778483
Total Assets
Total Assets Ratio 91.16408919 Ratio 19.40047533

This table shows that PSO no more focus towards the sale its maintaining its assets. In
comparison with the shell it shows that Shell is maintaining its assets as well as sales. After
seeing the strategies of two companies it seems that PSO is going for short run and shell is
operating in long run.

What is your company cash management style?

In cash management style I check the companies given cash and balances I found that company
have a less cash in hand and more relining on the cash at bank which shows that company is
interesting in taking the debt to avoid the taxation. And by taking debt its value increases.

Discuss the a) credit management policy b) operating and cash

cycle c) inventory management?
Credit management policy for PSO is determined by calculations of account receivable period
and account payable period which is not flexible as compared to shell. Inventory period of the
shell is more than PSO which shows that company is operating long run while PSO is
operating in short run. Cash conversion cycle of PSO is more than the shell.
Company is working on 4/20, n/60 terms, which means if they make payments in 20 days then
they can avail discount of 4 days but company is not using this facility and paying in almost 54
days, and hence calculation shows that company is losing an overall discount chances in a year.

PSO Shell
Inventory Period = 365 * (Average 48.9224 74.1768
inventory/ CGS) 8 days 1 days

A/R Period = 365 * 12.1746

(reciveables/ sales) 24.9864 days 1 days
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A/P Period = 365 * 54.4000 55.3388
(AP/CGS) 7 days 7 days

Cash conversion Cycle = Inventory period + 141.690

A/R Period + A/P Period 128.309 days 3 days

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 Recommendations
I suggest to the company to reduce its debt ratio to optimal capital structure ratio. The PSO
should increase its retention ratio so that we can use that for the assets required rather to take
debt.

The company should issue rights shares as I issued in the pro forma to use the external
financing needed. Company should make early payments to its suppliers.

In this way company can get 4% discount on one payment and almost 38% discount in a year which is a
great success if company achieves it.

Company should increase its sale because its plant is not till running 100% capacity as projected sales
even less than that capacity.

DOL shows company has increased its reliability on fixed assets and increased its capital intensity and
return on equity and assets is not good and not allows PSO to use more leverage. So company should
use mixture of assets and liabilities.

Pso more focuses towards the short term as I bench mark with shell so I recommend that company
should go for long run by marinating assets as well sales.

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