Reduction in Turnover Tax to Boost PSO’s Earnings

Our Correspondent

PSO’s Earnings are expected to improve with Potential Reduction in Turnover Tax in budget 2023-24.

According to estimates, if the turnover tax is slashed by 50%, PSO’s projected earnings for the fiscal year 2024 would improve from Rs26.9 to Rs44.

This reduction in turnover tax would result in tax savings of approximately Rs8.5 billion for PSO during the next fiscal year.

It is important to note that while net revenue is projected to reach Rs3.5 trillion for the fiscal year 2024, higher financial charges, mainly related to circular debt borrowings, are expected to impact earnings growth, resulting in a higher effective tax rate of 59%, as the company would still be subject to turnover tax.

PSO has been grappling with declining pre-tax margins, which make a strong case for the reduction in turnover tax.

The company’s net revenue has significantly increased over the years, driven by higher product prices in both dollar and rupee terms. However, its pre-tax margin has experienced a downward trend, expected to be around 0.8% in fiscal year 2023.

The reduction in pre-tax margin during this period can be attributed to the absence of inventory gains and the mounting finance costs caused by the growing circular debt.

Considering PSO’s current stock performance, with a price-to-earnings ratio of 4.2x for the fiscal year 2024, market analysts maintain a ‘Buy’ stance on PSO at its present levels.

Boost in PSO’s Earnings

If the government indeed reduces the turnover tax by 50%, the target price for PSO is expected to increase from Rs138 to Rs190.

Reducing the turnover tax for PSO would offer the much-needed support required to mitigate the adverse effects of rising borrowing costs, primarily resulting from LNG expenses and unfavorable foreign exchange receivables. During the nine months of fiscal year 2023, PSO’s borrowing has increased to Rs410 billion due to these factors.

As the government weighs the potential benefits of reducing the turnover tax for OMCs, PSO stands to gain significantly, and investors are closely monitoring any developments in this regard.

In response to recent queries regarding the possibility of a reduction in turnover tax and its implications on oil marketing companies (OMCs), Pakistan State Oil (PSO), the largest OMC in Pakistan, is expected to benefit if the proposal is approved.

The potential reduction in turnover tax, from 0.5% to 0.25%, could lead to a substantial improvement in PSO’s earnings for the fiscal year 2024.

PSO, known as the largest company in Pakistan based on its annual turnover of over Rs3 trillion, has been facing challenges due to its lower pre-tax profit margin of only 1%.

The current turnover tax of 0.5% has negatively impacted the company’s earnings.

However, if the government approves the proposed 50% reduction in turnover tax, PSO is likely to experience a notable boost in its fiscal year 2024 earnings, thanks to significant tax savings.

Unconfirmed sources suggest that the government is considering this reduction in turnover tax for OMCs, as companies in the sector have faced lower earnings during the fiscal year 2023 due to exchange losses, rising finance costs, and inventory losses.ECC approves guarantee to extend Rs50 billion bank financing for PSO

These companies have still been subjected to higher income taxes, primarily due to the turnover tax.

To support OMCs and enable them to continue their operations, the government may lower the turnover tax from 0.5% to 0.25%, Sherman Research said in a report.