AKD Securities Limited – Power policy fails to generate power

Karachi, March 17, 2015 (PPI-OT): Two years since the one off payment of PkR500bn was made by the present gov’t with the aim of eradicating circular debt and curtailing the power deficit. Yet, the marked differential between cost of generation vs. bill receivables has risen, despite tariff rationalization in Oct’13 coupled with high T and D losses, persistent circular debt has once again reached PkR600bn. Resultantly, it has taken its toll on the sector’s power generation ability, which is evident by the latest generation statistics from CPPA (Central Power Purchasing Authority).

According to which, total generation for 7MFY15 was recorded at 56,320GwH (10,915MW), a slight 2.2%YoY down when pitted against the generation during the same period last year. This reduction in generation came at the time when the cost of generation witnessed a sharp fall to PkR6.75/KwH from PkR8.04/KwH over the same period last year. Being engulfed by the notorious circular debt, the sector lacked requisite liquidity to reap the benefits of lower int’l oil prices.

That said, higher output on Gas and HSD countered the decline, making up for the fall in Hydel and RFO based generation, while coal based generation failed to take off. In the light of increasing circular debt, RFO generation levels are back to where they were in 7MFY12 (prior to payment), while gas based generation has fallen further. In this scenario where the looming threat of liquidity shortfall looms large, generation levels are expected to taper further.

Generation Mix: Reliance on Hydel based generation continued, with 35.4% of units generated sourced from WAPDA, followed by FO based generation at 33.9% (a decrease of 3.9pts YoY). Gas based generation recorded the highest increase of 2.1%YoY, owing to better supply of gas to the power producers. HSD based generation levels were slightly improved, owing to HSD prices falling 18% during the period. All renewable energy sources experienced increases in their share of the power mix.

Low input costs: With the dramatic fall in global oil prices evidently pushing generation costs downwards, the average cost of electricity generation fell by 16%YoY to PkR6.75/KwH led by 16%YoY decline in cost of HSD based generation and while the same for RFO based generation clipped by 14%YoY. However lack of liquidity in the system accompanied by inadequate supply of imported fuels kept generation levels in check.

Off take to remain subdued: As the power shortfall reaches a non-winter month peak of 4,000MW questions arise as to the ability of NTDC to command load generation through the centralized system it implements. Recent forays by NEPRA and MoWP to counter mismanagement at DISCO’s is a step in the right direction. However, the approved reduction in the consumer end tariff set for IESCO, FESCO and PESCO are out of sync, especially at a time when low input costs raise the onus for reduction in subsidies allowing leeway to the GoP to improve liquidity in the space.

That said, HUBC continues to be AKD Securities Limited’s favourite in the power space, with a healthy bump of 4% in generation figures for the base plant and Narowal running at 80% load factor for the period. The scrip currently trades at FY15E P/E of 8.75x and offers FY15E D/Y of 9.6%, Accumulate!