Sitara Energy Limited

Sitara Energy Limited (PSX: SEL) is incorporated in Pakistan as a public limited company. The company is engaged in the generation and distribution of electricity.

Pattern of Shareholding

As of June 30, 2023, SEL has a total of 19.092 million shares outstanding which are held by 1243 shareholders. Directors, CEO, their spouse and minor children have the majority stake of over 40 percent in SEL followed by local general public holding 30.23 percent of its shares. Insurance companies account for 8.53 percent shareholding of SEL while Banks, DFIs and NBFIs hold around 8.35 percent shares. 5.87 percent of SEL’s shares are held by joint stock companies and 3.44 percent by Sitara Fabrics Limited, an associated company of SEL. Mutual funds have 2.59 percent ownership of SEL with remaining shares being held by other categories of shareholders.

Financial Performance (2019-23)

With uninterrupted slippages since 2019, SEL’s topline has posted growth only once in 2023 during the entire period under consideration. The company’s bottomline also stayed in the negative territory during the period. SEL’s gross margin which drastically fell in 2019 greatly improved in 2020, remained subdued for the two subsequent years and then considerably bounced back in 2023. Its operating margin registered positive figures in 2018, 2020 and 2023 with the latter witnessing the highest level. The detailed performance review of each of the years under consideration is given below.

In 2019, SEL’s topline fell by a drastic 57 percent year-on-year. This was on account of non-availability of system gas for around seven months while RLNG and RFO were available at inflated rates, leading the company to curtail its operations. Not only that, the prices of system gas also surged by over 60 percent during the period while there was a very nominal Rs.0.78/kwh increase in tariff for bulk power consumers by NEPRA. Furthermore, the government also announced subsidized gas and electricity tariff for textile sector which formed the major consumer base of SEL. All these factors cumulatively contributed in squeezing the company’s gross profit by over 97 percent year-on-year in 2019 with GP margin falling down from 2.19 percent in 2018 to 0.13 percent in 2019. The company took intense measure to control its operating expense. It lay off a number of employees which compressing the tally from 205 employees in 2018 to 106 in 2019. This led to 20.7 percent erosion in its operating expense in 2019. SEL also disposed off its fixed assets at a loss to discharge its liabilities, resulting in 1659 percent escalation in its other expense. Other income couldn’t turn out to encouraging either as it dropped by over 29 percent in 2019. This was due to the fact that the company posted gain on the disposal of its fixed assets in 2018 while in 2019; the fixed assets were sold at a loss. As a consequence, SEL posted operating loss of Rs.36.75 million in 2019 versus operating profit of Rs.42.33 million in 2018. Finance cost mounted by 22.98 percent in 2019 on account of hike in discount rate. SEL also got its short-term loans restructured as long-term loans during the period with deferral mark-up to avoid the risk of default. Despite all the measures undertaken by the government to cut down on its expenses, thin gross profit of the company due to unfavorable external circumstances resulted in net loss of Rs.191.811 million in 2019 versus net loss of Rs.81.857 million incurred by the company in 2018. Loss per share also surged from Rs.4.29 in 2018 to Rs.10.05 in 2019.

In 2020, SEL’s net sales slid by 7.59 percent year-on-year as the subsidized tariff to textile industry continued along with high cost of fuel and irregular supply of system gas. This led to 15 percent lower sales volume and lower capacity utilization of 8 percent achieved by the company in 2020 versus 9 percent in 2019 (see the graph of installed versus actual energy generation). An increase in the sales price led to 6265 percent rise in gross profit in 2020 with GP margin mounting up to 8.71 percent. Operating expense slipped by 27 percent year-on-year in 2020 due to austerity measures adopted by the company which particularly led to a massive drop in payroll expense despite increase in the number of employees to 113. Skimpy gain on the disposal of investment property in 2020 drove down other income by over 76 percent. Other expense also shrank by 68.72 percent in 2020 as SEL incurred lesser loss on the disposal of its fixed assets in 2020 versus previous year. All such measures enabled the company to record operating profit of Rs.26.38 million in 2020 with OP margin of 2.75 percent. However, finance cost turned out to be unsympathetic as it spiked by 10.5 percent in 2020 due to higher discount rate for most part of the year and a slight increase in short-term borrowings. This led to net loss of Rs.143.814 million in 2020, down 25 percent year-on-year. Loss per share was recorded at Rs.7.53 in 2020.

SEL’s topline registered significant 46.5 percent year-on-year plunge in 2021. This was due to curtailed capacity utilization of 4.5 percent attained by the company during the year on account of higher international prices of RLNG and RFO which combined with Pak Rupee depreciation wreaked havoc on the cost of production of SEL. The government continued to provide subsidized gas and electricity to export oriented textile sector. Furthermore, the government also announced tariff discount on incremental consumption for industrial consumers with effect from November 2020. All these factors compressed SEL’s gross profit by 72.27 percent in 2021 with GP margin plummeting to 4.52 percent. SEL was able to trim its operating expense by 15.19 percent in 2021 by cutting down its workforce by 39 employees during the year. This took down the tally to 74 employees in 2021. The company sold its fixed assets at a loss in 2021, resulting in 76.87 percent spike in its other expense. Other income tumbled by 66.87 percent in 2021 as unlike last year there was no gain on the disposal of investment property. As a consequence, SEL registered operating loss of Rs.40.99 million in 2021. Monetary easing led to 36.88 percent reduction in the company’s finance cost during the year, yet couldn’t keep the company from posting net loss of Rs.149.48 million in 2021, up 3.94 percent year-on-year. Loss per share climbed up to Rs.7.83 in 2021.

Conforming to the descending trend of previous years, SEL’s topline marched down by another 5.91 percent in 2022. This was on account of lower demand by Bulk Power Consumers (BPCs) due to a steep rise in tariff as the average price of RFO and RLNG exorbitantly rose up by 78 percent and 110 percent respectively during the year. However, export oriented textile sector continued to enjoy subsidized gas and electricity tariffs. SEL capacity utilization fell to 2.2 percent in 2022. High cost of production due to extraordinarily higher fuel charges which were further exacerbated by Pak Rupee depreciation led to 76.34 percent thinner gross profit with GP margin falling down to 1.14 percent in 2022. SEL further cut down its operating expense by 16.11 percent in 2022 as its cut down its workforce by 8 employees to bring it down to 66 employees. Furthermore, there was an encouraging 108.88 percent rise in SEL’s other income in 2022 as there was higher rental income, scrap sales as well as greater balances written off during the year. This led to SEL recording 25 percent lesser operating loss of Rs.30.72 million in 2022. Finance cost magnified by 15.31 percent in 2022 due to hike in discount rate. This was despite the fact that the company paid off its partial loan facility during 2022. Net loss clocked in at Rs.154.896 million in 2022, up 3.62 percent year-on-year with loss per share of Rs.8.11.

SEL’s topline which had been sliding down until 2022 posted a tremendous 121.37 percent year-on-year rise in 2023. Not only did the company’s capacity utilization grew from 2.2 percent in 2022 to 4.8 percent in 2023, higher prices of RLNG and RFO coupled with Pak Rupee depreciation led to increased in tariff charged to BPCs. Upward revision in tariff along with lower auxiliary and line losses resulted in 791 percent year-on-year growth in SEL’s gross profit in 2023 with GP margin clocking in at 4.57 percent. Higher balances written back during the year as well as higher gain on the disposal of property, plant and equipment translated into 264 percent year-on-year growth in SEL’s other income in 2023. Operating expense posted a negligible downtick of 0.13 percent in 2023 as the company hired new employees which increased the total HR count to 75 employees in 2023. After two years of posting operating losses, SEL was able to record operating profit of Rs.41.02 million in 2023 with OP margin of 3.84 percent – the highest since 2018. While the company rescheduled two of its financing facilities in 2023, higher discount rate resulted in 15.52 percent higher finance cost in 2023. This led to net loss of Rs.103.282 million incurred by SEL in 2023 with loss per share of Rs.5.41.

Recent Performance (1QFY24)

SEL didn’t kick off FY24 on a good note as its topline slid by 96 percent year-on-year in 1QFY24 due to lower demand by BPCs. This resulted in gross loss of Rs.17.26 million incurred in 1QFY24 versus gross profit of Rs.0.88 million recorded by SEL in 1QFY23. SEL trimmed down its operating expense by 12 percent year-on-year in 1QFY24. Other income also tumbled by 29 percent during the period. This magnified SEL operating loss from Rs.8.08 million in 1QFY23 to Rs.25.64 million in 1QFY24. The company was able to reduce its finance cost by restructuring in finance facilities during the period. This translated into net loss of Rs.68.036 million in 1QFY24, up 32 percent year-on-year. Loss per share also inched up from Rs.2.7 in 1QFY23 to Rs.3.56 in 1QFY24.

Future outlook

The profitability of SEL is highly contingent on the prices of RFO and RLNG. The company is mulling over to add solar power plant in its overall generation mix to stay immune from rising prices of RLNG and RFO. While this may keep a check on SEL’s cost of production, it will require additional financing lines which will drive up the company’s finance cost.