AKD Quotidian about — Circular Debt resolution leads to 8MFY14 FO based generation

Karachi, April 16, 2014 (PPI-OT): Following partial resolution of Circular Debt (CD) in which the govt injected Independent Power Producers (IPPs) with PkR270bn, massive improvement in cumulative power production of the country was expected.

However, the velocity of this improvement remained slow as Pakistan’s total power generation according to data released by National Electric Power Regulatory Authority (NEPRA) rose by mere 6%YoY to almost 11k MW, up 6%YoY (or 626MW) in 8MFY14 as against 10.3k MW during the same period last year. At the same time, production coming in from FO (Furnace Oil) based power producers (the prime beneficiaries of Circular Debt resolution) rose by an impressive 16%YoY (or 556mw) to 4.1k MW vs. 3.6k MW produced during the corresponding period last year while. Conversely, generation through gas witnessed a sharp decline, as demand for the natural resource kept rising while supply remained stagnant.

This led to gas-based generation diminishing by 15%YoY (365MW) to 2k MW from 2.4k MW last year. Once again, Hydel and other less costly generation sources came to the sectors rescue. Generation through Hydel improved by 8%YoY (or 227MW) to 3.8k MW in 8MFY14 as against 3.6k MW in 8MFY13, mainly down to better overall water flows especially during winter season (Dec13). Following suit, generation from other sources (coal, nuclear and wind) increased by robust 46%YoY (or 193MW) to 613MW from 420MW last year.

Generation mix tilting towards FO: Following partial resolution of circular debt in mid-2013, FO based energy generation remained highest during subsequent months. Apart from 16%YoY higher generation, this is further highlighted by 290bps improvement in FOs share in the country’s generation mix, which rose to 37.8%, from 34.7% during the same period last year. Following FO, significant improvement was seen in Nuclear energy generations share in total energy mix, rising to 5.3% from previous 4% while Hydel generations share was better off by 60bps to 35.2%.

Cumulative generation cost up just 5%YoY: Despite higher generation coming in from FO based sources, Pakistan’s cumulative generation cost rose by mere PkR0.36 per KWH. This is mainly due to 5%YoY decline in international FO prices, which are down to US$614/ton as against US$646/ton during 8MFY13. Furthermore, better Hydel generation lent its support to keep cumulative generation cost at bay.

Outlook: On an individual basis AKD Securities favours HUBC, which produced 910MW during Jan and Feb14, which is higher than 734MW produced during 2QFY14, but down 5% against 962MW produced during 3QFY13. We believe that investors should look at HUBC for share price gains, as the IPP is expected to post a strong rebound in sequential profitability. In this regard, AKD Securities Limited’s TP of PkR63/share for HUBC provides 20% upside.

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