Pakistan: Energy Sector Outlook Improves


The government of Pakistan (GoP) has partially resolved circular debt issue by paying Rs260 billion to IPPs and another Rs60 billion to state owned companies belonging to energy sector. This on one hand is likely to ease load shedding of electricity and gas and on the other hands improve capacity utilization of industrial sector and enhancing availability of exportable surplus.

According to a report by InvestCap Energy sector stocks rallied in anticipation of fulfillment of the political promises made by newly elected government regarding the settlement of circular debt. A post budget analysis reveals that PSO’s stock appreciated by 9% during 4 days of the budget (2 days before and 2 days after the budget) while KAPCO was up by 5% during the same period.

The other stocks of energy sector also witnessed increase in quoted prices during these 4 days. However, a post settlement 3 days analysis reflected no significant gains in the same stocks. The main conclusion drawn from this behavior is that the market being confident about such realization of reforms has already been fully incorporated the impact of this news and therefore had adjusted the security prices accordingly. While this may holds true for all other energy chain stocks, InvestCap analyst believes PSO, being the main beneficiary of this transaction still remains undervalued.

PSO Fundamentals

The conditions attached with the transaction turned out to be significantly promising for PSO. The government laid the condition of optimum capacity utilization for IPPs along with stipulating the latter to increase electricity generation by 1700MW before Ramdan. Such conditions are likely to lead to higher FO sales by PSO, being the major FO supplier to Hubco and Kapco.

However, in the long run, FO sales of PSO may decrease as yet another condition set by the government is to convert four plants (Hubco, Lalpir, Pakgen and Saba) on coal. Furthermore, analyst expects the 2nd phase of the transaction which is promised till 20th August of this year will provide additional liquidity to PSO. This added liquidity would pave the way for successful implementation of growth projects: 1) setting up a refinery in KPK and 2) acquiring stake in Sindh Engro Coal Mining Project. PSO is currently carrying an upside of 19% to its December 2013 revised target price of Rs387/share after taking into account the current settlement. In addition to this, it is anticipated that final cash payout of Rs10/share will be announced by PSO for FY13.


Analyst remains positive on the GoP’s ability to fulfill its promise regarding the resolution of the remaining part of circular debt before 20th August. However, it is anticipated the debt may once again start accumulating if root causes, electricity theft hovering around 40% are contained and recoveries are not boosted.

Furthermore, the future occurrence of the same is hinged upon the ability of the policymakers to increase the electricity tariff such that the total cost of electricity generation along with the transmission and distribution losses are paid for. Nonetheless successful implementation of the plan will lead to smooth business conduct in the whole energy chain.



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