HUBCO and KAPCO performance improves

Hubco PlantPersistent liquidity problem faced by the power sector on account of lingering circular debt (estimated around Rs615 billion at end July) continues to mar performance of companies belonging to energy chain. However, a closer look at the detailed accounts released by HUBCO and KAPCO depict a different picture that include: 1) improved operational performance, 2) positive changes in working capital depicting reversal of outflows and 3) reduced reliance on borrowing ensued (short term borrowing for HUBCO, and payables minus disputed amounts for KAPCO).

Furthermore, the reduction in input costs coupled with the lower cost of borrowing have eased pressures on both IPPs, with HUBCO performing better as compared to KAPCO due to: 1) positive spread between receivables and payables and 2) furnace oil prices declining drastically. That said, analysts see a number of near term value enhancers for both the companies including the financial close of value accretive investments (SECMC + 1320MW Coal Project) and ownership offloading to trigger price performance for HUBCO and KAPCO respectively. Additionally, the possibility of a ‘minor’ but up to Rs25 billion circular debt mop-up cannot be ruled out.

A sharp reduction in furnace oil prices (down 34% CYTD) have had a multi-fold impact on the liquidity position of the cash strapped IPPs. In the backdrop of global oil prices remaining depressed in the medium term, circular debt buildup for the listed IPP is expected to ease. Measures adopted by GoP, including an increase in the consumer end weighted tariff are expected to raise funds that may be used to fund a mopping up of the current debt build up.



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