Pakistan: Power Sector Shifting Paradigm

Hubco PlantThe Power sector of Pakistan outperformed the market (benchmark index KSE-100) by 11% during FY13, generating a return of 60% as compared to 49% by the market.  This write up presents an analysis of the performance of the sector along with the outlook.

After receipt of substantial amounts by various companies belonging to the energy sector in late June this year, a significant growth in final dividends of these companies was witnessed.  Two mega size independent power plants, HUBCO, KAPCO and Kohinoor Energy announced final dividend of Rs4.5, Rs4.5 and Rs3.0 per share respectively for the year ended June 30, 2013 (FY13) taking full year payout by these companies to 112%, 108%, and 104% respectively. Such payouts are significant improvement when compared with the payouts of 70%, 82%, and 54% respectively a year ago.

To analyze the results more objectively, analysts calculate the final payout ratio based on final dividend and 2H earnings and keeping all other factors constant for payout except for circular debt resolution.  In addition to a higher final dividend, surprise interim payout of Rs6.75 by KOHE and Rs2 by NCPL also delighted investors, placing these two stocks amongst the top dividend yielding scrips listed at KSE. Final dividend of NPL and NCPL is yet to be announced.

Analysts are bullish that such announcements bode well for investors’ sentiments. However, one point must be kept in mind that this exceptional payout can only be attributed to the circular debt settlement at end June this year. Going forward, analysts expect improved liquidity to prevail in the sector on account of recent power tariff hike. However, they do not foresee any surprise interim payouts during FY14.

It is estimated that the government is bearing Rs5/unit subsidy mainly due to high electricity generation cost. The current generation mix is 44% dependent on fossil oil that costs around Rs17/unit. The government is pursuing a shift in generation mix from oil based generation to low cost coal based generation. In the recently released Power Policy, the government has announced a gradual change in generation mix to coal along with increasing generation capacity in the country. Hubco, Lalpir power, Pakgen and NPL are likely to be the key companies to opt for this conversion. Currently IPPs are run on furnace oil.

Though, physical working on coal conversion remains pending requiring heavy upfront outlay, changes in existing contracts and various complex new agreements, analysts expect the government to pursue the conversion on war-footing basis. However, they do not expect any conversion before FY16.

Energy reforms undertaken by the present government and continuous efforts to resolve energy crises of Pakistan bode well for power sector of Pakistan. They also expect the sector to remain one of the best dividend yielding sectors during FY14.

 

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