Power production: KOHINOOR ENERGY LIMITED - Analysis of Financial Statements June 2002 to December 2006
KEL was incorporated in 1994 with a paid up capital of Rs 1695 million. It is a joint venture between Saigol Group of Companies and Toyota Tsusho Corporation (a consortium of multi-industrial undertakings of Japan).
It is situated at 35-KM Link Manga Raiwind Road Lahore. It is one of the pioneer projects of Independent Power Producers in Pakistan. The principal business of the company is to own, operate and maintain a furnace oil power station with a net capacity of 124mw. WAPDA is sole customer the company. The company operates in two segments ie the energy payments and capacity payments. Energy payments accounted for 72% of fiscal 2006 revenues and capacity payments 28%.
The electricity tariffs of Pakistan power sector are determined by NEPRA according to the prescribed Tariff Standards and Procedure Rules 1998 keeping in view the principles of economic efficiency and service quality to minimize the price distortions and exploitation.
In the backdrop of rising electricity needs for commercial and domestic purposes, and acute shortage of power supply facing the country, KEL has embarked upon a capacity expansion plan. The company has received an invitation letter from the Private Power and Infrastructure Board (PPIB) to bid for fast track capacity expansion. The essential work has been completed in this regard and the bid has been filed to the PPIB for expansion. After the bid approval, the company will be the first Independent Power Producer (IPP) to go through the expansion program. KEL seeks to enhance gross generation capacity of its power plant to more than double the existing capacity. The land for expansion has been procured and soil-filling work has started.
After bidding for fast track capacity expansion program the company held talks with Private Power and Infrastructure Board (PPIB) and other relevant authorities for finalisation of terms and conditions of tariff structure. The Government of Pakistan through Private Power and Infrastructure Board (PPIB) has approved the negotiated tariff structure for capacity expansion project of the company. The company will now approach the National Electric Power Regulatory Authority (NEPRA) for formal approval of the tariff.
Further, after securing the ISO-9001, ISO-14001 and OHSAS-18001, the company has started work on Total Productivity Maintenance (TPM) program to optimize the use of machinery and other resources.
The FY06 was a landmark year as the company attained its highest ever level of pre-tax profit. The higher profits are attributable, largely to an increase in dispatch and sales revenue coupled with a reduction in fuel consumption and finance costs. During the year, sales revenue increased by 71%, resulting a surge in net profit after tax by 25.8%.
Despite these developments in sales revenue and net profits, the profit margins have registered a decline during the same period. The decline in profit margins can be traced back to a nearly 100% increase in the cost of sales against 71% increase in sales revenue. The rise in cost of sales was due to increase in furnace oil prices. The high cost of sales led to a decline in the gross profit margin and subsequently, the net profit margin also dropped.
However this declining trend of profitability is not limited to KEL, in fact the industry, as a whole, has been observing dwindling profits for the last two years. As a result, KEL continues to command a superior position in the industry even though its comparative advantage has been shrinking.
The finance cost also declined in FY06 as the company paid off the last instalment of the International Finance Corporation's Loan "B" of $36.6 million. This decline in finance cost played a role in enhancing the company's profits.
The liquidity position of KEL gained strength in FY06 after a temporary decline in the previous year when the current ratio dropped below the industry. The company was able to recuperate its position in FY06 but still remains slightly below average.
Compared to the industry, the company is not very efficient in the field of asset management. This is evident from the longer operating cycle of the company even though an improvement was seen in the FY06. This reflects the relative inefficiency in terms of inventory turnover (days) and days sales outstanding. However, in FY06, a significant improvement was witnessed in the ratio as the inventory turnover (days) dropped to its lowest level since FY02. The collection period of receivables also shortened in the same period.
The TATO and sales to equity have traditionally been below average and FY06 saw a continued trend. The company's TATO shot up in the same year, eliminating the discrepancy between the industry and the company. The 71% increase in sales and a slight decrease in total assets were main reasons for this trend. Moreover, an increase in the load capacity factor of the company from 41.86% in the previous year to 66.35% in FY06 (these figures take into account the affect of additional capacity of 4mw) also contributed to the increase. The increase in sales revenue boosted the sales to equity ratio but the company could not maintain pace with the industry in this respects, resulting in widening disparity between KEL and the industry ratio.
The KEL has more proficient in terms of debt management than the industry. The debt to equity, debt to asset and long-term debt to equity ratios of the company have been lower than the average firm. It is signified that the company is far less leveraged than the average trend in the industry.
The company's standing on the debt ratios had been steadily improving over the last few years and the decline in the amount of long-term loans over the five-year period under study is notable. In FY06, KEL was able to pay off the entire amount of the International Finance Corporation, further lowering the debt ratios. This trend in debt management ratios has brought about a corresponding increase in the TIE (Times Interest Earned) of the company. Once again, the company outshone the industry in the area of debt management. This is reflective of the strong financial position of the company and bodes well for the future.
The EPS has lingered below average for the last few years. However, high level of profits in FY06 enabled the company to marginally surpass the industry in this category. The company has always posted very low DPS and despite the growth in EPS in FY06, the DPS for the year suffered a decline. The company has decreased the DPS declaration in view of its capacity expansion plans. The net worth of the company is high as compared to its competitors.
Recent results (half year 2007)
The first half of FY07 enjoyed a 19% increase in sales as compared to the same period last year. This is attributed to an increase in dispatch and hike and Heavy Fuel Oil (HFO). Despite the higher sales in the period, the net profit for HY07 was lower than in HY06. This is mirrored in the lower net and gross profit margins for the period. A decline in pre-structured tariff and spending on preventive maintenance of engines are major reason for the dwindling profits. Moreover, a surge in the cost sales, manifested in a 31% increase, also hit profits. These changes added up and resulted in considerable decline in the EPS of the company, bringing it down to 2.17 for the period, from 2.78 in the corresponding period of FY06.
The capacity utilisation of the company also improved during the HY07, rising to 68.89% from 57.04% during the corresponding period in the previous year.
In the 3rd quarter of FY07, the company recorded sales of Rs 1.422 billion as compared to Rs 1.274 billion in the same period of FY06 pulling aggregate sales for the year up to Rs 3.936 billion against Rs 3.387 in FY06.
The government has announced a subsidy of Rs 98 billion to WAPDA and KESC in Federal Budget 2008. This will have positive spillover effects on the other IPPs in the industry and WAPDA, which is the sole customer of KEL will be in a better position to play its dues to the company. This may be manifested in an improved DSO and a reduced risk of losses.
In addition, the Total Productivity Maintenance policy of the company will enable it to maximize the effectiveness and reliability of the company's machinery by reducing losses through teamwork and continuous development and training of its employees. The policy also seeks to eliminate accidents, defects and breakdowns. These developments will greatly augment the profits of the company in future.
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KOHINOOR ENERGY LIMITED
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INCOME STATEMENT FY'03 FY'04 FY'05 FY'06
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Sales 2,397,091 2,335,476 2,918,583 4,984,208
Cost Of Sales 1,358,062 1,264,170 1,879,009 3,749,585
Gross Profit 1,039,029 1,071,306 1,039,574 1,234,623
Administration & General Expenses 110,952 108,484 107,120 128,497
Operating Profit/Other Income 928,077 962,822 42,331 45,195
Operating Profit & Other Income 967,313 1,009,171 974,785 1,151,321
Finance Costs 253,964 181,150 161,476 128,262
Profit Before Taxation 713,349 828,021 813,309 1,023,059
Taxation / Provision For Taxation 12,650 6,292 7,900 9,800
Profit After Taxation 700,699 821,729 805,409 1,013,259
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BALANCE SHEET FY'03 FY'04 FY'05 FY'06
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Property, Plant, & Equipment 5,164,693 4,971,587 4,799,639 4,666,324
Non-Current Assets 5,178,882 4,996,961 4,827,978 4,686,883
Inventory 297,596 324,898 415,904 464,215
Trade Debt 211,589 280,563 394,102 561,530
Cash & Check Balances 1,233,165 1,066,764 873,366 628,914
Total Current Assets 1,963,119 1,857,582 1,943,522 2,045,877
Total Assets 7,142,001 6,854,543 6,771,500 6,732,760
Paid-Up Capital 1,694,586 1,694,586 1,694,586 1,694,586
Unappropriated Profits 2,344,349 2,742,431 3,124,194 3,798,535
Total Equity 4,038,935 4,437,017 4,818,780 5,493,121
Long Term Loans (Secured/Unsecured) 2,023,242 1,411,778 805,885 286,965
Total Non-Current Liabilities 2,037,881 1,433,456 809,404 289,951
Total Current Liability 1,065,185 984,070 1,143,316 949,688
Total Liability 3,103,066 2,417,526 1,952,720 1,239,639
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LIQUIDITY RATIOS FY'03 FY'04 FY'05 FY'06
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Current ratio 1.84 1.89 1.70 2.15
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ASSET MANAGEMENT FY'03 FY'04 FY'05 FY'06
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Operating Cycle (Days) 76.47 93.33 99.91 74.09
Inventory Turnover (Days) 44.69 50.08 51.30 33.53
Days Sales Outstanding (Days) 31.78 43.25 48.61 40.56
Total Assets Turnover 0.34 0.34 0.43 0.74
Sales-Equity 0.59 0.53 0.61 0.91
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DEBT MANAGEMENT FY'03 FY'04 FY'05 FY'06
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Total debt to total asset 43.45% 35.27% 28.84% 18.41%
Long term debt to assets 50.46% 32.31% 16.80% 5.28%
Times-interest-earned 3.81 5.57 6.04 8.98
Debt to equity 0.77 0.54 0.41 0.23
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PROFITABILITY FY'03 FY'04 FY'05 FY'06
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Return on total assets 9.81% 11.99% 11.89% 15.05%
Return on equity 17.35% 18.52% 16.71% 18.45%
Gross profit on sale 43.35% 45.87% 35.62% 24.77%
Profit margin on sales 29.23% 35.18% 27.60% 20.33%
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MARKET RATIO FY'03 FY'04 FY'05 FY'06
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Price/earning ratio 6.61 7.18 5.47 4.32
Dividend per shares 3.00 2.50 2.50 2.00
Book Value per share 23.83 26.18 28.44 32.42
EPS 4.13 4.85 4.75 5.98
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HY'06 HY'07
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Sales 2,112,851 2,514,135
Cost Of Sales 1,520,813 1,996,065
Gross Profit 592,038 518,070
Admin and General Expenses 72,898 107,284
Other Operating Income 24,014 12,139
Profit From Operations 543,154 422,925
Finance Costs 68,119 51,225
Profit Before Tax 475,035 371,700
Taxation 3,700 4,000
Profit After Taxation 471,335 367,700
Gross Profit Margin 28.02% 20.61%
Net Profit Margin 22.31% 14.63%
Eps 2.78 2.17
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INCOME STATEMENT HY'06 HY'07
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Sales 2,112,851 2,514,135
Cost Of Sales 1,520,813 1,996,065
Gross Profit 592,038 518,070
Admin And General Expenses 72,898 107,284
Other Operating Income 24,014 12,139
Profit From Operations 543,154 422,925
Finance Costs 68,119 51,225
Profit Before Tax 475,035 371,700
Taxation 3,700 4,000
Profit After Taxation 471,335 367,700
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KEY RATIOS HY'06 HY'07
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Gross Profit Margin 28.02% 20.61%
Net Profit Margin 22.31% 14.63%
EPS 2.78 2.17
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi.
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