Power: HUB POWER COMPANY LIMITED - Analysis of Financial Statements Financial Year 2009 - 1H - Financial Year 2011

HUBCO has responded to the need for "future proof" planning in the power sector by initiating the construction of two new power plants.
The company is the first private company to go into hydroelectric power generation and its 84 MW run of the river hydropower complex is projected to come online by 2013. The other project, a 214 MW power plant at Narowal expected to be operational by October 2010 will help the company move better on its policy path of achieving "Growth through energy".
FY 2010 has brought in mixed results for the firm; where on one hand the ever rising financial difficulties of HUBCO's major client WAPDA have translated into soaring receivables of Rs 73 billion under the PPA, the blockage of fund flow from this end has served to increase the loan owed to PSO in lieu of RFO supply to Rs 63 billion on the other.
As far as the operational performance is concerned, the company succeeded in achieving a record high load factor of 79.3%, symbolic of the ability of HUBCO to operate at optimal efficiency levels. The turnover and operating costs simultaneously soared, due to a combination of the various factors discussed in the analysis below. Finance costs have exhibited a similarly dual phenomenon, whereby two trench loan repayment and issue of TFCs by GOP in HFY'10 helped to ease the burden to a certain extent but at the same time the existence of persistent and circular debt owed to PSO helped offset the favorable impacts.
Recent results (1H11)
Turnover for the period was Rs 49,202 million (2009: Rs 46,168 million) and operating costs were Rs 44,954 million (2009: Rs 42,389 million) resulting in a gross profit of Rs 4,248 million compared to Rs 3,779 million in the corresponding period last year. Financial charges were considerably higher at Rs 1.2 billion as compared to Rs 0.78 billion in the same period last year. The Company earned a net profit of Rs 2,843 million during the period (earning per share of Rs 2.46) compared to a net profit of Rs 2,855 million and (earnings per share of Rs 2.47) in the same period last year. Hub Plant operated at an average load factor of 71% and an average complex availability (ACA) of 85%. Electricity sold to WAPDA was 3,746GWh.
Operations
The operational performance for FY10 showed mixed results; as the chart below predicts both total revenue and cost of goods sold registered an increase. The 20.42708% rise in turnover was but marginally offset by a 19.97625% increase in the COGS. Also that the general administration expenses registered a rise of 8.868768% yielding a positive EBIT change of 25% and 46.9% increase in the net profit (Figure 2).
These movements have been a combined result of higher oil prices, an improvement in the indexation factor and the favorable movement of the PCE. A devaluation of the rupee as registered during FY10 increased the indexation factor by 15% and together with the 31% or so rise in the PCE led to the positive impact in turnover. Also that efficiency gains were more or less offset by the soaring repair and maintenance costs in lieu of the modernization program under way. The 14% decline in financial costs, in addition to the factors mentioned earlier was brought about due to a positive interest differential on overdue receivables and payables. The financial crunch experienced by WAPDA however helped lower the other income and gains figure and has thereby served to neutralize the positive results.
Profitability:
The impact of the operational changes discussed above has been quite pronounced on the profit position of the firm. Where on one hand the GP% has gone down perhaps due to the rising oil prices, the NP, ROA and ROE have all soared due to the combined impact of the indexation and PCE effects stated earlier. On a comparative level however, HUBCO has lagged behind KAPCO on all four fronts. One possible explanation for this is the comparatively inefficient use of short and long-term assets by HUBCO as opposed to KAPCO, the details of which have been presented in the next section.
Efficiency:
As mentioned earlier, FY10 was a period of record breaking performance for the company. An analysis of the firm's utilization ratios as depicted in Fig 3a and 3b below reveals that compared to KAPCO, the firm has a longer operating cycle and DSO but a substantially lower inventory turnover. The rising receivable figure entrusted to WAPDA may be sufficient explanation for the cited disparity. However, the adverse consequences that this might have on the liquidity position of HUBCO are yet to be examined. A consideration of the company specific trend in this regard provides some reassuring information as we can see in Fig 3b that a marked improvement in the operating cycle and DSO has been registered as compared to FY09.
Liquidity and debt management:
As highlighted by Fig 4, 2010 brought about a worsening of HUBCP's debt position. The long-term debt to equity position grew by 40 percentage points, whereas debt to equity percentage and debt to asset ratios soared phenomenally as well. This was primarily a result of the increasing inability of the company to channelize funds received by WAPDA towards retirement of debt taken from PSO on account of RFO supply. However, the favorable profit position helped to register a rise in the TIE despite the rising incidence of debt. The comparative debt standing with KAPCO registered similar movements. HUBCO's debt to asset percentage, debt to equity and long-term debt gearing ratios are substantially over those of KAPCO; one possible explanation for such a position could be the debt taken up by HUBCO to finance its pipeline power plants that are expected to become operational by late 2010 and 2013 respectively. However, yet again we see that HUBCO's TIE exceeds that of KAPCO thereby indicating that the firm is taking advantage of its financial leverage.
As far as the liquidity position is concerned, while KAPCO has succeeded in maintaining a stable current ratio over the period FY09-FY10, HUBCO has experienced a decline in its current ratio over the year. However, on a comparative level HUBCO has surpassed KAPCO's short-term financial position consistently as depicted in the chart below.
Investor ratios:
Despite the financial crunch in the industry, HUBCO has experienced a positive growth in its EPS from 3.27 to 4.8 in FY10 from FY09. While this seems to be an indicator that could boost investor confidence in the company, a comparative analysis wit KAPCO reveals that HUBCO has been consistently under-performing its competition in this regard. Also that the increase in the EPS reflected positively on the company's stock price which rose to a level of 34.35 rupees, however, the P/E ratio plunged to 7.3. Hence yet again the results for the company have been mixed on this front.
Future outlook:
The future of the company seems secure as long as the positive profitability growth can be sustained; also that the degree to which the firm is able to tap onto the benefits of its new power generation capacity as a source of competitive advantage will determine the improvement or otherwise deterioration in the comparative performance of the company relative to KAPCO in particular and other power generators in general. Only time will tell if such breakthroughs bring forth more positives for HUBCO or if worsening financial position of a client as significant as WAPDA serve to give a sour taste to the company for keeping all its eggs in one basket.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].