Sitara Energy Limited (SEL) was incorporated in 1991 with commercial operations starting in October 1995. The company deals in generation and distribution of electricity with the head office based in Karachi. The power plant is located at Tehsil Jaranwala, Faisalabad. Starting off with a 48MW furnace oil based power plant SEL subsequently set up a 30MW gas based plant. The switch in plant type was done in view of the increase in furnace oil prices during the last decade.
Historical performance
The company witnessed declining profitability margins in FY14 as compared to the previous year. Net sales for the year also saw a decrease due to lower demand of furnace oil based electricity, according to the company report. The gross profit took a hit due to increased cost of generation amidst rising fuel costs, which ultimately led the gross profit margin to decline from 10.25 percent in 2013 to 7.83 percent in 2014. The average load of RFO-based electricity for the year was 23.12MW as compared to 24.34MW the previous year.
The company's performance took a further plunge in FY15 due to low sales revenue registering a fall of over 27 percent year-on-year. The EPS also fell almost by half to Rs 5.50 from previous year's Rs 10.71. The gloomy performance and the cause of the dip in gross profit could be attributed to both low revenue as well as increased cost in generation. The sales revenue took a hit due to the disconnection of power supply to FESCO in March 2015 as the Power Purchase Agreement (PPA) could not be finalised with the DISCO in Faisalabad.
Another reason for the decrease in sales and profitability was NEPRA's decisions regarding fuel price adjustment review and constant decrease in furnace oil prices from October 2014. There was also a decline in the amount of electricity generation due to severe gas shortage and shutdowns over a prolonged period.
Moreover the generation mix of RFO: GAS changed from 69:31 in FY14 to 79:21 in 2015 which led to a surge in generation cost. The company also maintained a certain level of safety stock of furnace oil which decreased the profitability due to fortnightly billing on price of furnace oil as per terms of the original power purchase agreement with FESCO.
Even though FY16 saw a 16 percent fall in revenue for SEL yet the cost of generation also declined by 21 percent. The result was increase in gross profit for the company by an impressive 63 percent. Finance cost fell by 22 percent whereas other income also declined by almost 87 percent. However the profit after tax increased by 54 percent which translated into an EPS of Rs 8.51 compared to Rs 5.5 in FY15.
According to the Director's Report the dip in sales revenue was attributable to the continuous fall in oil prices which was a pass through item and the resultant fuel price adjustments by NEPRA. When it comes to operational performance SEL generated 315,632 MWh in 2016 compare to 264,978 MWh in 2015 reflecting an increase in production by 19.12%. This led to a reduction in per unit manufacturing cost by 13.94%, excluding cost of fuels & lubricant. Moreover, generation mix of RFO: Gas changed from 79%: 21% in 2015 to 73%: 27% in 2016 as a result of generation plans based on comparative cost analysis of both fuels.
Snapshot 1QFY17
The sales of the company during the first quarter of the current financial year decreased due to lower load demand by Bulk Power Consumers (BPCs) and comparatively higher Fuel Price Adjustment (FPA) announced by NEPRA. This resulted in a loss for the company of Rs 24 million as compared to a profit of Rs 35 million in the corresponding period last year. As for operation performance, the power plant generated 58,250 MWh of electricity compared with 70,209 MWh generated during the first quarter of the last financial year.
Stock performance
SEL showed fared considerably better against the benchmark KSE-100 and moved in tandem from November, 2015 to May, 2016. However, it then continued to under perform the KSE-100 for the next four months. From September onwards, SEL was able to take a big jump in due to its positive 1QFY17 earnings report. But the momentum seems to have been lost with the stock again coming at par with the KSE-100 benchmark index.
Future outlook
SEL's profitability during FY17 will mostly be dependent on the reliable supply of LNG for the industrial sector along with continued low RFO prices. The company should also focus on maintaining its existing Bulk Power Consumers (BPCs) along with diversifying its customer base as supply to only one DISCO could be damaging as previously witnessed in the company's history.
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