Like many developing countries, Pakistan is energy deficient with demand of 21,000 MW against average generation of 17,000 MW approximately taking into account seasonal variation. This demand is expected increase up to 30,000 MW by 2014. This shortfall creates a huge opportunity for investment in this sector as well as growth for existing companies along with gradual removal of subsidy, the inability of distribution companies to pass on cost of electricity to customers, shall increase revenues of the companies.
As per officials of ministry of power and water, the current average base tariff, charged by power distribution companies, is PKR 7.80 per KWH, which is 20% less than the cost of generation. Additionally, a PKR 2 per KWH is charged as fuel adjustment surcharge. The gradual removal of this subsidy amounting to PKR 360 billion will add to the topline growth of the overall sector.
These subsidies have caused major issues in the sector as government is unable to fully furnish its commitment to fund subsidies to distribution companies which in turn is unable to pay power generation companies who in turn fail to pay fuel suppliers. In addition high dependence on imported oil and price volatility along with rupee depreciation against the dollar is a cause of major concern.
However, as depicted in the analysis of public companies below, many companies in the sector have performed exceptionally well with every company demonstrating at least double digit cumulative average growth rate (CAGR) over a period of 5 years.
Having discussed the risk and opportunity, we can screen an investment opportunity by identifying companies trading at lower EV and debt multiples while having higher operating profit margins and growth rates as compared to normalized industry median.
Nishat Chunian Power Limited is the only company which meets all the screening criteria defined in the above paragraph. The next step should be to read the financial statements of the company in detail and carry out fundamental analysis over a period of years to better assess the investment prospects.
