Shell’s net profit overshadowed by high tax rate

KARACHI: Shell’s net profit dropped 29 per cent to Rs720 million due to an exceptional increase in the income tax following reintroduction of turnover tax and an increase in its rate, analysts said.

However, the company’s profit before tax jumped 83 per cent to Rs1.8 billion during January to June 2010 against last year’s Rs962 million, according to a notice sent to the Karachi Stock Exchange on Wednesday.

The company is being taxed at an extraordinarily high effective rate of 70 per cent because of an increase in the turnover tax rate, the company directors said in a review of the earnings.

The turnover tax was re-introduced in last year’s budget and was further increased in this year’s budget from 0.5 per cent to 1 per cent. This has heavily increased the cost of doing business for the company and mounted pressure on its bottom line, they added.

The cost of products sold rose 26.5 per cent to Rs84.4 billion compared with Rs66.8 billion in the same period last year.

The improvement in profit before tax is mainly on the back of continued volume growth in key business segments, better product mix, higher margin products and favourable higher international oil prices during the period, the directors said. The board of directors also approved an interim dividend of Rs4 per ordinary share of Rs10 for the year 2010.

More than 200 sites of the company have been affected by floods, the notice informed.

Gross profit increased 10 per cent as volumetric sales rose amid a 52.2 per cent increase on yearly basis in average Arab light crude oil prices. Gross profit went up to Rs5.7 billion from last year’s Rs5.2 billion.

Net sales of the company increased to Rs102 billion for the period under review against last year’s Rs82 billion.

No growth ahead

Industry demand for furnace oil is expected to continue as reliance of the power sector on thermal energy persists, according to BMA Capital.

Moreover, due to persistent power shortages industry demand for petrol is also expected to increase while reduced price differential between petrol and CNG will encourage demand for petrol, according to BMA Capital analyst Muhammad Ali Taufiq.

However, due to passive marketing by Shell and shrinkage of its retail outlet network, the company does not present any growth story, Taufiq added.

Published in The Express Tribune, August 19th, 2010.