Juggling between notoriety and fame, K-Electric Limited (PSX: KEL) has always remained in the limelight. It is the only vertically-integrated power utility in Pakistan having generation, distribution and transmission functions. The company has over a hundred years of experience, being created in 1913 under the Indian Companies Act 1882. Following independence, it was nationalised in 1952, and then re-privatised in 2005, with the government keeping 26 percent of the stake and transferring 71 percent to a foreign consortium. The firm's turnaround story began when a new management, led by the Abraaj Group, took charge in 2008-09. In 2016, Abraaj Group decided to divest its controlling stake that it held under KES Power, the parent company of K-Electric Limited.
Shareholding and share price performance K- Electric, as can be seen from the illustration has been beaten by the benchmark index recently. The stock actually outperformed KSE100 index in early 2016 when the news of Shanghai Electric showing interest in the company's shareholding broke. However, the acquisition plans of Shanghai Electric Limited have hit a snag over pending dues; this can be seen in how the stock reacted.
Since then, KEL has also been underperforming the benchmark after a dismal multi-year tariff (MYT) was handed to it in March 2017 by NEPRA. KEL immediately decided to file a review petition for its concerns and demanded fair tariff. In response, NEPRA invited both interveners and KEL's management for comments. Interveners presented their case where they asked that no relaxation or upward revision be offered to the company.
The company's shareholding as of its June 30, 2016 Annual Report shows that 66.4 percent of the company is held by KES Power, while another 24.36 percent is held by the President of Pakistan. The breakup is given in the table.
Historical performance K-Electric has been a turnaround story in many regards. The benefits from its privatisation and change in management are reflected clearly in its numbers. From a company with negative gross margins (FY10 and before), KEL has transformed into an entity producing multi-billion-rupee net profits. From catering to bulk of the demand from purchases, K-Electric recently turned into a generation-intensive company.
K- Electric enhanced its generation capacity by around 1057MW through the addition of four new power plants and rehabilitation of BQPS-1 during the last seven years. Its fleet efficiency has also improved by over 23 percent in the last seven years along with 13.7 percent reduction in T&D losses.
Revenue growth has been strong in the past few years, barring FY14 and FY15. Revenue surged to Rs 194 billion in FY14 from Rs 104 billion in FY10 - recording solid double-digit growth rates in FY11, FY12 and FY13. However, in FY15, K-Electric's revenues saw a two percent dip, year-on-year.
A breakdown of revenue depicts that the company actually saw a year-on-year gain in sale of energy - from Rs 139 billion to nearly Rs 149 billion in FY15. Residential and industrial sectors accounted for the biggest chunks in this category, coming in at Rs 57 billion each. Tariff adjustment, which declined from Rs 55 billion in FY14 to Rs 42 billion in FY15, contributed to the year-on-year decline in overall revenue.
The electricity producer saw a significant decline in its expenses in FY15. Major components - purchase of electricity and consumption of oil and fuels grossed less than the year before. Gross margin, therefore, saw a massive 600 bps jump to 22.7 percent.
Net profits jumped over a hundred percent to Rs 28 billion in the year ended June 2015. Much of that is attributable to tax losses carried forward. Hence, net margin jumped over 800 bps to 14.9 percent.
Financial performance FY16 onwards The power company posted a significant drop in T&D loss in FY16, which became the reason for improved financial performance of the company. Lower T&D losses along with gains, resulting from higher electricity units sent out led to improved earnings for the year.
Revenue for FY16 was flat for KEL on a year-on-year basis, while the bottom-line was up by 15.65 percent year-on-year in FY16. Finance cost also aided the growth in the earnings of the company due to repayment of long term financing and revised favourable borrowing terms. Also better working capital management led to better current ratio for the company.
While the revenues were again flat in 9MFY17, the firm's earnings for the 9-month period were up by a staggering 40 percent, year-on-year. This was attributable to falling T&D losses that further came down by 0.6 percent in 9MFY17 along with improved contribution margins due to gains from sending out additional units and higher thermal efficiencies.
Outlook KEL's fleet generation, in the 9-Month period, improved by 13.28 percent. It has been working on its generation, transmission and distribution as well with a long list of projects underway. The ultimate aim for K-Electric is palpably to convert Karachi (and surrounding areas) from a power deficit to a surplus. However, bad luck continues to tag along; under the current MYT scenario, KEL is likely to opt for a legal way fight its case, which is likely to further increase the ambiguity on Shanghai Electric deal.
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Pattern of Shareholding
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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 1.67%
Public sector companies and corporations 0.13%
Bans, FDIs, Non-Banking Finance Companies,
Insurance, Takaful, Modarabas & Pension Funds 1.48%
General Public - Local 2.69%
Foreign Shareholders (IFC, ADB, Others) 3.09%
Others 0.18%
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Source: Company Accounts
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K Electric Limited
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Profitability FY11 FY12 FY13 FY14 FY15 FY16
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Gross profit margin 0.03% 9.60% 15.20% 16.60% 22.70% 30.37%
Net profit margin -7.20% 1.10% 3.60% 6.60% 14.90% 17.30%
EBITDA margin 2.70% 10.40% 14.30% 15.50% 18.00% 23.20%
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Liquidity
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Current ratio 0.57 0.69 0.71 0.76 0.88 0.98
Quick ratio 0.34 0.35 0.40 0.44 0.53 0.82
CFO to sales 0.08 -0.06 0.01 0.07 0.10 0.22
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Activity/Turnover
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Debtors turnover
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(including Circular debt) 2.45 2.16 1.98 1.76 1.54 1.54
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Creditors turnover
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(including Circular debt) 2.48 2.05 2.06 2.12 1.82 1.78
Operating cycle 2 -9 7 35 35 33
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Investment/Market
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EPS - basic -0.44 0.07 0.26 0.47 1.03 1.19
EPS - Diluted -0.39 0.07 0.26 0.47 1.03 1.19
PE 4.87 45.29 24.00 18.19 8.21 6.79
P/BV 1.73 1.94 3.20 3.30 1.81 1.38
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