K-Electric Limited (PSX: KEL) is the only vertically-integrated power utility in Pakistan having generation, distribution and transmission functions. Formerly known as the Karachi Electric Supply Corporation, KEL was established in 1913, to meet the power needs of Karachi. Following independence, it was nationalised in 1952, and then re-privatised in 2005.The firm's turnaround story began when a new management, led by the Abraaj Group, took charge in 2009, and the organisation posted a profit for the first time in 17 years in FY12. Its name from Karachi Electric Supply Corporation was changed to K- Electric Limited in 2014.
KEL provides electricity to customers in Karachi, Dhabeji and Gharo in the province of Sindh and Hub and Uthal, Vindhar and Bela in Balochistan. It produces electricity from its own generation units with an installed capacity of 2,341 megawatts. From 2009 till 2017, the company claims to have added 1,057 MW in generation capacity, while transmission and distribution capacity of the company increased by 21 and 55 percent, respectively
Shareholding pattern and stock performance Majority of the company's shareholding lies with the parent company, KES Power Limited (over 66 percent), while another significant chunk of over 24 percent lies with the President of Pakistan. The breakup is given in the table. In 2016, Abraaj Group decided to divest its controlling stake that it held under KES Power, the parent company of K-Electric Limited to Shanghai Power Limited of China, but the deal hit a snag as the MYT determination and finalisation for FY17-FY23 was pending for a long time. However, it is now expected that acquisition by Shanghai Power will come through tariffs are notified.
This delay in MYT and finalisation of the annual financial performance along with the issues of overdue weighed heavy on the stock's performance as well. Apart from that, other factors that affect the company's share prices include interest rate environment, exchange rate, fuel prices, etc.
Historical performance K-Electric has long been taken as turnaround story in many regards. The benefits from its privatisation and change in management were highlighted by the improvement in its financials. At the same time, it has also remained in the limelight as many continued to criticize its privatisation process as well as the results. In a recent working paper by World Bank, it has been highlighted that the privatisation of KEL did not yield result that were the rationale for the strategic sale.
Over the years, its financial performance however, has improved. K- Electric enhanced its generation capacity by around 1057MW thought the addition of four new power plants and rehabilitation of BQPS-1, while also improving its fleet efficiency and reducing the high T&D losses.
The company's revenues growth remained strong from FY10 till FY13, after which, revenues grew by 3.1 percent and 0.5 percent in FY14 and FY15, respectively. Whereas the revenue growth turned negative in FY16 falling by 3.2 percent, year-on-year. Profitability has improved as can be seen from improving margins.
Financial performance FY17 For K-Electric, there has been not significant change in the revenues FY17; they remained flattish. However, the company's earnings slipped by 67 percent year-on-year, which the company attributed to significant reduction in tariff level along with change in tariff structure. Apart from that, higher cost of sales that include cost of fuel, oil, purchases, generation and T&D remained high and dragged gross margins. And even with lower finance cost and higher other income during the year, the company's earnings for FY17 slipped.
Its operational performance shows that between 2009 and 2017, the company has invested over $1.7 billion across the energy value chain resulting, added over 1,057 MW in generation capacity, improved overall fleet efficiency from 30 percent in 2009 to 37 percent in 2017, along with a reduction in transmission and distribution (T&D) losses by 14.2 percentage point to 21.7 percent in 2017.
Beyond FY17 K-Electric has not announced its financial performance for FY18 and period beyond that due to the delay in its MYT agreement. Recall that NEPRA came forth with some major alterations in the tariff structure including a seven-year period as against the ten-year period in the MYT determination. Also, the regulator revised the base tariff downwards to around Rs 12.07 per KWh from the existing Rs 15 KWh, while KEL had sought a higher MYT at Rs 15.57 per KWh. Following the review petition, NEPRA revised the tariffs up twice to 12.77 and 12.81 per KWh to which KEL filed a reconsideration request.
The company then approached the Appellate Tribunal under the NEPRA Amendment Act, 2018; however, the Appellate Tribunal is yet to be made functional by the GoP. KEL has also approached the Sindh High Court against NEPRA's decision on the reconsideration request and filed a suit in which a stay order was granted on July 26, 2018.
The Appellate Tribunal is still not functional, so the issues regarding tariff remained unresolved, which according to the company has affected investment plans significantly. However, the company withdrew the lawsuit filed with the High Court of Sindh against MYT implementation and the tariff was notified by the Ministry of Energy on May 22, 2019. It is only after that the company announced its much delayed results for FY17.
This delay has also affected KEL's prospective deal with Shanghai Electric Power Limited. Not only had the delay in notified tariffs kept the company from holding its AGM for FY17 and beyond as the tariff adjustment is a key component in the company's top-line determination, but it had also put the long awaited takeover of the company by Shanghai Electric Power of China in stagnation. However, now that the tariffs have been notified, the Chinese firm is expected to complete the acquisition of KEL from the Abraaj Group soon.
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KEL Pattern of Shareholding as at June 30, 2017
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Categories of Shareholders Percentage
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Associated Companies, Undertakings, & Related Parties
KES Power Limited (Holding Co) 66.40%
President of Islamic Republic of Pakistan (GOP) 24.36%
Mutual Funds 2.96%
Public sector companies and corporations 0.18%
Bans, FDIs, Non-Banking Finance Companies, 1.51%
Insurance, Takaful, Modarabas & Pension Funds
General Public-Local 3.24%
Foreign Shareholders 0.92%
Others 0.43%
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Source: Company Accounts
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K-Electric Limited
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FY12 FY13 FY14 FY15 FY16 FY17
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Profitability
Gross profit margin 10.40% 14.70% 16.30% 24.50% 30.30% 21.50%
Net profit margin 1.90% 3.20% 6.30% 16.60% 16.90% 5.70%
EBITDA margin 10.90% 13.90% 15.20% 19.70% 22.80% 14.20%
Liquidity
Current ratio 0.76 0.76 0.81 0.95 1.06 1.00
CFO to revenue -0.06 0.01 0.07 0.10 0.22 0.15
Capital Structure
Long-term D/E (excluding revaluation surplus) 0.71 0.52 0.36 0.27 0.21 0.17
Interest Cover ratio 1.4 1.23 1.79 2.96 5.89 3.24
Financial Leverage Ratio (local and foreign lenders) 1.6 1.26 0.91 0.49 0.32 0.25
Investment/Market
EPS-basic/diluted 0.12 0.22 0.44 1.17 1.15 0.38
PE 25.94 28.75 19.19 7.17 7.00 18.29
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Source: Company accounts
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