KESC is one of the oldest companies in Karachi and was established even before the creation of Pakistan. Incorporated on September 13, 1913, under the Indian Companies Act of 1882, the company was nationalised in 1952 but re-privatised on November 29, 2005.
The KESC came under new management in September 2008, a significant number of professional managers with experience in running utility and other large companies have joined under this management and will be running it until the company is turned into a best practice utility. It is listed on all the three stock exchanges of Pakistan. At present, KESC is the only vertically-integrated power utility in Pakistan and manages the generation, transmission and distribution of electricity. KESC covers a vast area of 6,000 square kilometres and supplies electricity to all industrial, commercial, agricultural and residential areas that fall under its network. KESC is engaged in the generation, transmission, and distribution of electricity in Pakistan. It supplies electricity to approximately 2.1 million industrial, commercial, agricultural, and residential consumers located primarily in Karachi, as well as in the towns of Dhabeji and Gharo, and the provinces of Sindh and Hub, Uthal, Vindhar, and Bela. The company has an installed capacity of 1,890 megawatts. Its transmission network comprises approximately 1,117 kilometres of transmission lines with 59 grid stations.
RECENT RESULTS (1H11)
Due to reduction in gas supply from 212 to 169 MMCFD during the above period, units generated on gas at company's power plants were drastically reduced severely affecting the overall generation and cash flows of the company. Due to the drastic reduction in gas supply from SSGC, and increasing electricity demand of the city, furnace oil consumption increased by 84% compared to the same period last year, leading to an increase in the cost of production and tariffs.
However, there was an increase in total revenue of the company by 30.90% over the last period and mainly attributable to the increase in total units billed and increase in consumer tariff. A 3% decline in T&D losses was also witnessed leading to higher units being billed. Total revenue was Rs 61 billion as compared to Rs 46.8 billion in the same period last year. Higher consumption of FO led to an increase in usage of fuel consumption to Rs 23.3 as compared to Rs 17.7 in the same period last year. Due to curtailment of expenditure, the administrative expenditures increased in line with inflationary pressures, leading to a lower operating loss of Rs 1.4 billion as compared to Rs 4.8 billion last year. Financial charges have reduced drastically to Rs 2.5 billion as compared to Rs 4 billion mostly on account of lower interest surcharge on delayed payments. Net loss after tax was Rs 3.1 billion as compared to Rs 8.8 billion in 1H10.
INDUSTRY OVERVIEW
Since very beginning, Pakistan has relied on hydro electricity along with natural resources like gas. However, the country never focused on using coal to meet its ever-increasing energy demand and mostly relied on oil. Furnace oil being an imported resource is adding trade cost to already indebted nation as the country has limited refining capacity and has to rely on refined/value-added products, which is further deteriorating the country's balance of payments. Almost 40% of the global electricity is produced through coal, while 20% is produced from gas. In the context of the production of electricity on competitive rates, Pakistan has large reserves of gas and coal and if proper infrastructure is developed the country's per unit rate could have been lowest in the world.
As of 2007, the total installed capacity is 19,505MW, where fossil fuels (oil and coal combined) takes up 65% of the total production share, hydro 33% and nuclear 2% of the total production. Electricity consumption of the country (residential and industrial) for fiscal year 2010-11 is expected to be 74.6kWh whereas the existing generation capacity is likely to remain the same as no proposal of new dams is yet made by the government. With existing capacity, the country cannot meet increasing energy requirements and we have to rely more on renewable sources.
FINANCIAL PERFORMANCE (FY05-10)
Talking specifically about KESC year over year, the company has been able to grow revenues from Rs 40 billion in FY05 to Rs 103.9 billion in FY10. Most impressively, the company which reported its peak cost of sales as a proportion of sales in FY06 of 120.4%, has now been able to reduce it to 103.9%. This change has slightly reduced the loss reported by the company in FY10.
Profitability has remained negative over the five-year period under analysis. The main reasons for these losses are firstly the Transmission and Distribution (T&D) losses due to old and obsolete distribution network and theft of electricity.
Since KESC has a customer base which includes 1.6 million residential consumers, 520,000 commercial and 37,000 industrial and agricultural consumers, the unit cost is subject to political decision making as a huge chunk of domestic customers are affected by an increase in per unit price. In most of the preceding and the current year prices have been kept artificially low as fuel prices have sky rocketed during many previous years and for the most part last year as well.
Another reason for deteriorating profitability is the difficulty in getting bills from different regions of the city. In many regions meters are tampered besides widespread electricity theft.
Only for FY08 increase in revenue was more than offset by phenomenal increase in fuel bill by 25.47% outbalancing 2.2% increase achieved in units billed. Since then, the profitability has slightly improved as the net profit margin has enhanced by almost 6% in FY09 and a further 7% in FY10.
Gross losses increased from 15.83% in FY07 to 21.86% in FY08 and reflected the company's worsening profitability since privatisation. However, after the change of management in 2008, the company showed positive signals to investors as its profitability conditions are improving. Gross losses improved from 21.9% in FY08 to 5.7% in FY10. Similarly, the bottom line profits showed slight improvements as net loss decreased from 32% in FY08 to 20.7% in FY10.
Return on assets deteriorated from 1% in FY05 to negative return if 17% in FY08. Return on equity fell from -52.57% in FY07 to a staggering -232.27% in FY08 because of the rise in accumulated losses. Accumulated losses in FY08 increased by around Rs 16 billion. However, after FY08, the company reflected some improvements in its financial position. Return on assets and equity also shows an improving trend, where ROA fell from -17% in FY08 to -7% in FY10.
The liquidity position of the company has deteriorated in the past few years and reflected a continuous decline since 2005. However, like profitability, liquidity has also showed slight improvement after FY08. The current ratio showed a decreasing trend and this was mainly due to increase in current liabilities. Trade and other payables rose by 63% in FY06 as opposed to current assets, which rose by 14% only resulting in a decrease in current ratio from 1.7 to 1.2. The ratio further deteriorated as current liabilities continued to rise as opposed to current assets which did not rise by similar proportion. The trend continued till FY08, however, liquidity position of the company shows slight improvement. Though it might give a positive signal to the market, however, it is important to mention that this improvement is a result of increased receivables in the form of trade debt, which increased by 53% in FY09 reaching 19 billion as opposed to 12 billion in FY08.
It is also worth noting that as much as 96% of trade debts are unsecured and provisions against doubtful debts stand at Rs 14,271.67 million. The current liabilities registered a growth of around 13% for FY09. Power purchases registered a decline of 28.7%, 71% decline in fuel and gas purchases. This is principally due to the management's policy of saving on fuel and power purchases costs. Interestingly, the Electricity duty owed to the government stood at Rs 1157.9 million, a 76% from previous year's expense. Trade debt rose by another 51% reaching 29 billion in FY'10 and this is a result of circular debt whereas the liabilities side has shown a decreasing growth rate.
This is because the company was able to pay off a large chunk of its payable in FY09 as reflected in the company's financial statements. All of this ultimately improved the liquidity position. However, a lot of cash is still tied up in trade debt which means that the company's cash position is not good. Quick ratio has observed a similar trend as the company does not have any physical inventory in the form of finished goods. The entire inventory at KESC is in the form of supporting inventor, which is ultimately used in transmission and distribution of electricity.
Since FY05, total debt to total asset has shown a rising trend. This is because the company's long-term financing rose drastically showing 60% increase in FY08 and a further 117% in FY09 whereas total assets rose by 20% and 41.75% in FY08 and 09 respectively. As a result, long-term debt to assets ratio continued to increase. The company's increased reliance on long-term financing reflects the management plans to invest in new generation facilities and improving and upgrading of the existing facilities. The ratio showed a slight decrease and this is because of company's repayment of its current liabilities. Increased ability to pay off liability and expansion plans might give a positive signal to the market as it reflects growth. The increase in trade payables along with the increase in long term financing contributed to the rise in the total debt to total asset ratio.
Debt to equity ratio increased to a phenomenal figure of 1216.13% in FY08 because the already mentioned reason of decrease in equity due to higher accumulated losses. The ratio turned negative in FY09 and 10 indicating negative equity. This is because the losses are so high that total shareholders' equity has actually turned negative. This is a very troublesome situation for the company and KESC needs to curtail its losses and improve its profitability by cutting down its costs.
Negative Times Interest Earned ratio also reflects the company's poor profitability and ability to pay interest in debt. Overall, the company has poor debt management and this is reflected in its share prices.
Looking at the asset management of the company, one can clearly observe that the condition is worsening.
Days Sales outstanding (DSO) has increased from 52 days in FY07 to 67 days in FY08, further continued to increase and reached 101 days. This is mainly because of the rise in trade debts as a lot of corporate entities are tied up in the vicious cycle of circular debt. This was also the main reason for the increase in the operating cycle from 106.8 days in FY07 to 123.93 days in FY08 and further continued to rise in later years. Inventory turnover has reduced indicating that the company is using its inventory efficiently. However, it is important to note that KESC's inventory mainly comprises of spare parts used in distribution and transmission and higher utilisation of such inventory indicates higher fault rate and lack of maintenance in the existing transmission and distribution network. Total Asset turnover also shows a decreasing trend again indicating better asset utilisation of the company.
EPS and P/E ratio also show a worsening trend again because of increasing losses. Share prices have also decreased drastically from Rs 13.7 in FY05 to Rs 3.0 in FY09. In FY10, these ratios have shown slight improvements and this is due to slight decrease in bottom line profit.
The graph shows the decreasing trend of KESC stock price over the last five years. In FY10, the share price has also improved slightly. This improvement is a result of the company's announcement of rights issue in the end of year 2009 for generating more cash to finance its expansion and upgradation process.
FUTURE OUTLOOK
Privatisation of KESC and transfer of control to Hasan Associates and transfer of management control to Siemens Pakistan led to various disputes and ultimately the company was taken over by the current management in 2008.
The company is currently going through a transitional period although net losses have continued to increase over the past few years; however, the losses are slightly decreasing since the change of management. It is expected that the rehabilitation of transmission and distribution network, which has been under execution in a phased manner, will decrease these losses and eventually the company will start making profits.
There is a dire need of constructing new power plants to bridge the supply-demand gap and the company plans to develop a strategy to turn the company into an efficient and profitable entity at the earliest.
Asset utilisation of the company also portrays a deteriorating picture as a lot of cash is tied up in trade debts ultimately worsening the cash position of the company.
As the KESC is a highly leveraged firm, this indicates that the management's intention of investment in long-term growth projects, the recent increase in discount rate will adversely affect the company's ability to pay interest. The already struggling corporation will be further tied up in both short term and long-term liability. KESC is under pressure to pay its liabilities, as a huge chunk of tax was not yet paid by the company.
Despite such a gloomy picture, we can expect that KESC will improve performance in upcoming years because the company needs a lot of infrastructural development, which has been missing over the past so many years. Taking debt to finance its long-term projects is inevitable, as equity is not the right source in such circumstances. Now that the new management is working on it one can expect things to turn in the right direction by cutting down its current expenditure and minimising transmission and distribution losses.
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KARACHI ELECTIC SUPPLY CORPORATION
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KEY INDICATORS
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PROFITABILITY FY05 FY06 FY07 FY08 FY09 FY10
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Gross profit margin -17.87% -25.15% -15.90% -21.95% -11.42% -5.75%
Net Profit margin 1.74% -17.36% -27.26% -32.40% -26.67% -20.77%
Return on Total Asset 1.09% -10.97% -15.75% -17.27% -11.74% -7.05%
Return on Common Equity 1.84% -24.56% -56.16% -226.86% 177.22% 2788.21%
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LIQUIDITY RATIO
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Current Ratio 1.69 1.19 0.75 0.53 0.81 0.70
Quick Ratio 1.36 1.00 0.61 0.44 0.73 0.65
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ASSET MANAGEMENT
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Inventory turnover (days) 34 24 28 25 20 17
Days sales outstanding (days) 76 54 52 67 81 101
Total assets turnover(times) 0.66 0.78 0.77 0.72 0.65 0.50
Sales-Equity 1.10 1.66 2.56 9.47 -9.75 -197.93
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DEBT MANAGEMENT
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Total debt to total asset 40.39% 53.07% 70.05% 92.57% 100.06% 84.92%
Long term debt to assets 21.87% 24.88% 26.59% 35.40% 54.39% 39.89%
Times-interest-earned 0.00 -0.02 -0.11 -0.14 -0.57 -0.86
Debt to equity 67.76% 113.06% 233.85% 1216.12% -1510.94% -33579.24%
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PER SHARE
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Earning per share 0.15 -0.55 -0.92 -1.08 -1.04 -1.01
Price earning ratio 0.01 -0.05 -0.14 -0.29 -0.35 -0.27
Market value per share Rs 13.70 10.43 6.70 3.75 3.00 3.80
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