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Morning Call about – It’s all about management! – Arif Habib Limited

Karachi, June 05, 2013 (PPI-OT): As soon as the general elections concluded, the market started expecting a quick solution of torturing hours of load-shedding in the country.

According to Arif Habib Limited this, of course, is not possible without pulling reins of monstrous circular debt standing in the proximity of PKR 700bn. In the local bourse, among the major gainers, power sector is most prominent as the market capitalization of this sector climbed up to PKR 193bn from PKR 164bn just before elections, a massive gain of 18%. In today’s morning call, Arif Habib Limited draws your attention towards possible solution of the aforesaid problems along with impacts upon key listed electricity companies.

Diversion of resources towards more efficient plants!
Lowering the cost of electricity generation should be the first goal, increasing consumer’s propensity to pay the electricity bills. Following table summarizes energy cost of different gas-based Gencos and IPPs. Clearly, the average cost of generation from the same source is 82% higher for Gencos (averaging around PKR 6.94/unit).

On the other hand, the more efficient IPPs are operating at a load factor of as low as 5% due to non availability of gas, a scarce resource indeed. Following the leads, 837 MW of electricity can be generated at an average cost of PKR 3/unit, way lower than the system is already generating.

GENCO            Cost (PKR)    Generation(GWh)   Capacity(MW)   Energy COst Units(PKR)
Guddu CC 11-13     1,271            153              390              8.32 
Jamshoro 1            86             12              205              7.35 
Guddu Steam 1-2      141             20              140              7.24 
Guddu Steam 3-4    1,064            157              340              6.76 
Guddu CC 5-10      1,642            261              530              6.30 
Kotri 3-7            205             33              107              6.15 
Average            4,410            636            1,712              6.94 

CPPA Mar-13 Energy Procurement Report

IPP        Cost(PKR mn)     Generation(GWh)    Capacity(MW)   Energy Cost/Unit(PKR)
Habib Ullah        310              59             129                5.24 
Fauji Kabirwala    430             109             151                3.94 
Rousch             387              94             395                4.14 
UCH              1,084             393             551                2.76 
Altern              95              19              27                5.02 
Foundation Power   622             126             172                4.95 
Orient              35               7             213                4.75 
Saif Power          18               4             205                5.01 
Engro Energy       726             162             214                4.50 
Sapphire Power       6               1             212                5.10 
Halmore             24               5             207                4.84 
Average          3,737             978           2,476                3.82 

CPPA Mar-13 Energy Procurement Report

Plant  Cost(PKR mn)    Generation(GWh)   Capacity(MW)  Energy Cost/Unit(PKR)
IPPs        82             17                  837            4.86 
GENCO    1,703            217                  842            7.84 
Savings                                                       2.98  

The market seems to be banking on the expected resolution of energy crisis. The major gainers in power sector include Southern Electric Power Company (SEPCO) and Japan Power Generation Limited (JPGL) yielding 194% and 114% respectively, post elections. Both of these companies have accumulated losses close to PKR 6bn and plant being non operational (efficiency issues).

Any attempt to bring these plants to generation line will also require additional cash flow for improving the efficiency (e.g. steam turbines for JPGL). In the short run, the gov’t may be urged to divert already scarce cash flows to operational and more efficient plants (NCPL, NPL) or the bigger power plants (HUBC, KAPCO, PKGP) while in the longer run, the authorities will be focusing to tilt the generation mix towards low cost hydel and gas-based power plants.

Among these circumstances, Arif Habib Limited recommends strong fundamental plays to investors, and maintain Arif Habib Limited likeness towards Arif Habib Limited power sector universe (HUBC, KAPCO, NPL, NCPL) recommending a HOLD!

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