KARACHI ELECTRIC SUPPLY CORPORATION (KESC) LIMITED

MULAZIM ALI KHOKHAR
Research Analyst, PAGE

Jan 21 - 27, 2008

COMPANY PROFILE

The Company's principal activities are to generate, transmit and distribute electric energy to industrial, commercial and residential consumers. It transmits and distributes electric energy to Water and Power Development Authority, Karachi Nuclear Power Plant & Pakistan Steel Mills Corporation. The Company also leases meters and equipment. KESC is the sole electricity distributor in Karachi and its near areas with employee number of 10,188. Its main supplier of extra needed electricity is Wapda. The company's share capital is Rs. 130bn and about 12.7bn shares are the closely held shares of which KES Power Limited holds 71.5% and the next 25% are held in the name of President of Pakistan.

OPERATIONS ANALYSIS

OPERATIONAL PERFORMANCE

JUL-SEP
2006

JUL-SEP
2007

CHANGE

% CHANGE

(IN MILLIONS - KwH)

Units generated KESC

2,216

2,416

200

9.04%

Units generated KESC

2,216

2,416

200

9.04%

Units sent out KESC

2,037

2,235

197

9.69%

Units purchased

1,771

1,953

182

10.25%

units available for Distribution

3,809

4,188

379

9.95%

Units billed*

2,461

2,696

235

9.56%

Transmission & Distribution losses %

35%

36%

   

Operational performance doesn't seem good with average 36-38 percent of transmission and distribution losses each year. The 1QFY08 was no exception to it with 36% of the losses occurred due to improper distribution management and recovery systems. KESC is going through an expansion process. The financing facilities of up to Rs. 37 billion were finalized with local & international (IFC & ADB) financial institutions mainly to finance the project cost of new power plant - phase-I (220 MW) and phase-II (560 MW) in addition to capex funding to improve transmission & distribution network. This expansion plan is the first ever after 1997. Her current electricity generation capacity is around 1756MW while it expected to increase to 3200MW within 5 years.

FINANCIAL ANALYSIS

FINANCIALS PERFORMANCE

Jul-Sep 2006

Jul-Sep 2007

% Change

 

(RUPEES I N MILLIONS)

Sale of Energy

11,747

13,705

16.66%

Other Revenue

433

489

13.13%

Gross Revenue

12,180

14,194

16.53%

Cost of fuel and Power

12,320

14,632

18.77%

Operation & maint. Expenses

2,079

2,540

22.21%

Finance Cost

222

445

100.33%

Total Cost of Sales

16,017

18,842

17.64%

(Loss) before tax

-3,837

-4,648

21.15%

(Loss) after tax

3,896

4,718

21.10%

Sales at Karachi Electric Supply Corporation Limited have increased during each of the previous five years (and since FY01, sales have increased a total of 58% approximately with CAGR of 6.74%). This has been impressive improvement but it is pertinent to the augmenting demands on both domestic and business consumers.

Sales of Energy saw an increase of 6.5% in FY07, while it surged by 16.66% to Rs. 13,705 millions in 1QFY08 from Rs.11, 747 millions in the corresponding quarter last year. The company's financial costs witnessed huge surge of 100.33% multiplying the expense from Rs.222 millions to Rs.445millions. The cost of fuel and power increased by 18.77% to mark Rs.14632millions and operational and maintenance expenses increased by 22.21% to hit Rs.2540 millions.

There is an ongoing trend of hiking losses in the company for the past few years. The profit after tax of the company is diving nose down continually with a 5 year CAGR of 7.94%. The PAT showed a decrease of 27.26% in the FY07, while in the 1Q FY08 it diminished by Rs.822 millions to stain the financial statement with Rs.4718 million of profit after tax.

FINANCIAL PERFORMANCE

AMOUNT IN MILLIONS

YEAR

SALES

YOY

COGS

%SALES

EBITDA

%SALES

PAT

%SALES

YOY

NO. OF EMPLO-
YEES

SALES PER EMP.

2001

28,289

-

36,369

128.56%

-8,080

-28.56%

-16,353

-57.81%

-

11,484

2.46

2002

30,012

6.09%

37,162

123.82%

-7,150

-23.82%

-17,894

-59.62%

9.42%

11,096

2.70

2003

32,452

8.13%

42,177

129.97%

-9,725

-29.97%

-8,311

-25.61%

-53.55%

10,767

3.01

2004

36,721

13.15%

41,897

114.10%

-5,069

-13.80%

1,086

2.96%

-113.07%

10,468

3.51

2005

38,603

5.13%

48,445

125.50%

-9,842

-25.50%

464

1.20%

-57.27%

10,188

3.79

2006

41,618

7.81%

54,649

131.31%

-13,031

-31.31%

-7,192

-17.28%

-1650.00%

10,188

4.09

2007

44,661

7.31%

57,963

129.78%

-20,778

-46.52%

-12,176

-27.26%

69.30%

10,188

4.38

STOCKS PRICE ANALYSIS

In recent years, KESC has performed terribly. In FY96, the stock traded as high as Rs.39, versus Rs. 5.75 on 15th Jan 08. The market capitalization of KESC is Rs. 75.05 bn ($1.23bn). Closely held shares (i.e., those held by officers, directors, pension and benefit plans and those shareholders who own more than 5% of the stock) amount to over 50% of the total shares outstanding: thus, it is impossible for an outsider to acquire a majority of the shares without the consent of management and other insiders. The capitalization of the floating stock (i.e., that which is not closely held) is 2.14 billion Pakistan Rupees (l$35.06 million).

INDUSTRY OVERVIEW AND COMPANY OUTLOOK

Pakistan has 19.3 gigawatts (GW) of installed electric generating capacity. The thermal electricity makes up about 64% of this capacity, Hydroelectricity about 33%, followed by nuclear (2 plant) accounting for less than 2% of Pakistan's total power generating capacity. There is vast surge and need of producing electricity through coal and the projects are under way. Soon the coal plants will be operative and their production may come online within near future.

The current demand has been increasing at a 5 year CGAR of 4.83% while the supply is increasing at the same period CAGR of 1.55%. Consequently wide power shortage will remain in the range of 1000 to 1500 MW during the current year. Moreover during countrywide power shortage, the Water and Power Regulatory Authority (Wapda) has reduced its supply to Karachi to 300 MW, making the power crisis of the city more severe.

The company needs work very hard on many aspects ranging from power generation to distribution and subsequent billing and recovery system. In this regard they can implement prepaid distribution and billing system to avoid losses.

They need to enhance consumer education programs to save and make efficient use of this power in the wake of current crisis. And on the other hand have to speed up the capacity enhancement projects in order to meet the increasing demands.

Lastly it is necessary to mention that the company has a very long way to go and has to keep up the good pace and we are hopeful the new surge of investment and capacity enhancements in power sector will soon bring recovery in the system and KESC will capitalize on it.