K-Electric Results Review

Company Overview

K-electric was incorporated as limited liability company in 1913 and is listed on Pakistan Stock Exchange. It is primarily involved in generation, transmission and distribution of electricity to industries and households in its licensed areas.

A three group consortium consisting of Abraaj Group, a Dubai-based private equity, Al-Jomaih Group of Saudi Arabia and National Industries Group of Kuwait, collectively operating under the name of KES Power Limited holds 66.4% shares in K-electric. Shanghai Electric had expressed interest to acquire that shareholding from KES in October 2016. According to an article published in Business Recorder around a month ago (K Electric stake sale – any chance?), even though Shanghai Electric has not backed out completely even after withdrawing and renewing that proposal a couple of times since 2016, there is still much uncertainty regarding the deal primarily due to circular debt and Multi Year Tariff (MYT) renegotiation issues..

According to Directors’ report of first quarter 2021, despite accumulation of huge amount of receivables from various Federal and Provincial entities and ongoing efforts to get tariff structure readjusted through court appeals, K-electric has continued to expand and update its power generation capacity and distribution networks to meet growing demands in its areas of operation.

Latest Results Review

Figures for receivables and payables make up the majority portion for current assets and current liabilities respectively; highlighting the often mentioned serious issue of circular debt. Other receivables is the head that primarily shows the amount owed by various Federal and Provincial entities while trade payables primarily shows payments for fuel and power purchases owed by K-electric. Both these heads increased in 1Q 2021 on YOY basis. Other receivables increased by 32% while trade payables increased by 34%. Company’s revenue was down by 5%. However, gross profit was up by 7%. This resulted in overall gross profit margin increase of 13% on YOY basis indicating improved cost control in 1Q 2021. Profit after taxation and EPS went down by 50% and 60% respectively. This was primarily due to recognition of impairment loss of nearly 4 billion rupees of trade receivables indicating the issue of recovery losses often mentioned in news articles related to power sector. Despite going down, profit after taxation remained positive.

Even though overall cash balance went down by 49%, Cash generated from operations remained positive. It was negative a year ago during same period in 2019. Still running finance was up by 14% indicating cash flow shortages due to receivables recovery problems. Current ratio was more or less maintained at same level as compared to 1Q of 2020.

Historical Review

As the charts indicate, since 2016, even though company’s revenue has been increasing, its gross profit and net profit margins are going down with NP margin becoming negative in 2020 due to net loss incurred.

Increasing finance cost and impairment losses for trade debts can be designated as primary factors for falling NP margin. When finance costs history is compared with that of company’s loan structure, it can be seen that it has gone up as a direct result of increased borrowing. Since 2016, both short term and long term loans have more than doubled and this has brought a sharp increase in finance cost.

Running Finance made up 40% of short term borrowings in 2020 while in 2018 it made up around 70% of short term borrowings. When compared with short term borrowings, it can be seen they follow almost the same pattern indicating that most of short term borrowings are a direct result of cash shortfalls.

Overall most of the company’s financial shortcomings are due to liquidity problems on account of receivables recovery most of which is part of infamous circular debt crisis. To meet this cash shortfall, company has to borrow which in turn takes a chunk away from potential net income in finance costs.