THE Kot Addu Power Company is looking to set up a 660MW coal-based power project in Sheikhupura, Punjab. Its existing power plant in Muzaffargarh district, Punjab, has 15 generating units and a nameplate capacity of 1,600MW.

Kapco owns, operates and maintain the multi-fuel fired power station.

The company’s CFO, Mohtashim Aftab, told Dawn last Friday that the process of conducting a feasibility study for the new project is underway. “The estimated cost of the project is around $1bn.”

The company is also undertaking an auxiliary coal-fired boiler project, which would help reduce its overhead costs and improve efficiency

He also stated that that the company is exploring the possibility of setting up a hydropower plant, but things are currently at a nascent stage. Kapco is also undertaking an auxiliary coal-fired boiler project, which would help reduce its overhead costs and improve efficiency.

The CFO was upbeat regarding the company’s performance. Kapco sells the electricity it produces to a single customer — the Water and Power Development Authority (Wapda) — under a power purchase agreement. While the mounting circular debt is a constant headache for Kapco, Aftab says things are on the mend.

“We have been able to recover payment for 96pc of invoices generated this year, which represents a sizeable improvement from over 76pc a year ago.”

During the financial year ending June 30 (FY15), Kapco operated at a 70pc capacity utilisation, up from 68.69pc in the previous year. Answering a question, the company’s CFO explained that full-capacity utilisation was thwarted by the low supply of furnace oil.

Meanwhile, the ‘risk factor’ of the rupee’s appreciation against the dollar, which was earlier thought to hurt Kapco’s earnings as its tariff is dollar-denominated, has now dissipated. And the depreciation of the local currency could help the company’s earnings, but according to Aftab, the impact would be reflected in the performance for the first half of 2015-16.

From the investors’ point of view, the stream of dividend payouts by the company makes its stock a ‘preferred defensive play’ in the energy sector during uncertain times at the market. Most stock strategists believe that whatever the market conditions, Kapco is likely to offer a dividend of 10pc for FY16.

The company’s paid-up capital stands at Rs8.8bn in 880.25m outstanding shares. At last Friday’s closing price of Rs97.56 a share, Kapco is valued at Rs85bn. By March 31 (the latest period for which detailed data is available), the company’s total assets stood at slightly over Rs92bn.

By June 30, 2014, two associated companies held a majority of 45.7pc of the company’s equity, followed by 22 banks, development financial institutions and non-banking financial institutions with 24pc shares, and 54,167 individuals with 15pc of the aggregate stock.

The company announced its FY15 results last Friday, posting an after-tax profit of Rs9.79bn, which translated into earnings-per-share (eps) of Rs11.13. This was a 27pc improvement from last year’s earnings of RsR7.73bn (eps Rs8.78). The company proposed a final cash dividend of Rs4.75, taking the total payout for the year to Rs8.75.

The earnings beat analysts’ expectations, but the dividend fell short of what the investors were looking forward to. Analysts at Arif Habib Limited, for instance, had estimated the firm’s earnings to rise 23pc to Rs9.52bn, with a cash payout of Rs5.50. A market expert said the company may have preferred to keep cash at hand for its expansion projects.

According to Jehanzaib Zafar, who follows the company for BMA Capital Management, the company’s sales clocked in at Rs101.48bn in FY15, down 10pc from FY14. However, its gross margins jumped 24pc due to reduced operating and management expenses during the year.

The research team at Taurus Securities observed that the ‘remarkable’ rise in Kapco’s profitability mainly came from a substantial decline in maintenance expenditures and 50pc higher other income due to a rise in penal mark-up income. However, the growth trend was partially offset by a 37pc increase in finance costs to Rs6.2bn; this was attributabed to higher penal mark-up expense linked to higher overdue payables to PSO.

Sidrah Azmat Khan, an analyst at Shajar Capital, said the company’s earnings for FY15 rose despite the imposition of the super tax, which she attributed to efficiency gains owing to the plant being run on LNG approximately 12-13pc of the time, with the remaining generation coming from furnace oil. As a result, its capacity utilisation improved.

Kapco’s bottom line was aided by a considerable decline in provisioning for turbine overhaul and plant maintenance. Owing to the decline in lower sulphur furnace oil prices by an average of 31pc, the company’s turnover dropped 10pc to Rs101.48bn. Yet, its profitability was reinforced by positive net interest income owing to the decrease in its cost of financing thanks to the plunge in the policy rate.

Published in Dawn, Economic & Business, August 31st, 2015

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