KapcoWhile remaining relatively immune from the circular debt build up, KAPCO has continued to benefit from falling input costs, supply of gas (although curtailment occurred in December’15) and improved outlook post GoP offloading. Paying out overdue payments to suppliers, as the receivable situation remains unchanged has imposed a greater burden on short term borrowing (up 13.7% from June’15), where the firm enjoys a lower cost of borrowing compared to the unfavorable spread between penal income and dues. Additionally, the set of incentives to be given to prospective buyers of KAPCO has the potential to raise investor returns. These incentives may include: 1) an extension in the PPA expiring FY21, which seems very likely, where the calculations indicate will add Rs36/share to TP for every 10-years of extension, 2) allowed for CAPEX (with tariff components to accommodate debt) to overhaul or augment the current plant machinery and 3) raising of allowed for returns may also be on the cards, as investors want to maintain returns comparable to greenfield project’s returns on offer. Analysts continue to cite the reluctance of the GoP to privatize DISCOs as a hindrance to clearing circular debt.

 

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