Morning Call about – Penal income formula revision, is it possible? – Arif Habib Limited

Karachi, June 17, 2013 (PPI-OT): Ministry wants the interest rate down! As reported in print media, Finance Minister Mr. Ishaq Dar, in a meeting with IPPs, has requested for reduction in interest rate on credit to less than KIBOR plus 2% and increase in credit period from 45 days to 60 days.

According to Arif Habib Limited while the representatives from IPPs have declared it impossible to review their contracts in current circumstances, we have worked out the possible impact of aforesaid revision in interest income calculation if anything of the sort takes place.

KAPCO: The spread is already negative
Kot Addu Power Company Limited (KAPCO) has already been facing a negative spread of 2% between the interest charged from overdue Wapda receivables and amount owed to Pakistan State Oil (PSO). So, any revision in the PPA (Power Purchase Agreement) for KAPCO seems a far cry to us.

HUBC: it’s the quantum, not the rate that provides income
Hub Power Company Limited’s (HUBC) base plant has a PPA such that the rate differential on amount receivable from WAPDA and payable to PSO is zero. But, HUBC derives its penal income as the amount receivable is typically greater than the amount payable. Therefore, for base plant chances of revision in formula seems remote.

NCPL and NPL: Do-able, but unlikely!
The reported news seems to be addressing newer power plants operating under the 2002 power policy in which interest income is linked to KIBOR. Both Nishat Chunian Power Limited (NCPL) and Nishat Power Limited (NPL) charge a rate of KIBOR plus 4.5% on overdue receivables from NTDCL. On the other side, these companies rely upon short term borrowings at the rate of KIBOR plus 2%.

On the face of it, revision seems justified but to Arif Habib Limited discussions with the managements suggests that cost of working capital is barely met even under current scenario. Moreover, both parties have agreed and signed a legally binding PPA and altering the original contract will lead to further complications as well.

Even seems unlikely, Arif Habib Limited has worked out if the proposal is accepted by the IPPs (a compensative incentive may be provided), NCPL and NPL will have 4% negative impact on their bottom lines and PKR 1/share will be eroded from Arif Habib Limited targets prices for the companies, if Arif Habib Limited keeps Arif Habib Limited dividend payout ratio constant. Recommendation

Arif Habib Limited powers sector universe companies have reached their respective target prices on expected resolution of the circular debt. Arif Habib Limited also believe that resolving circular debt can provide impetus for a higher-than-expected dividend payout. Therefore, Arif Habib Limited recommends ‘HOLD’ for Arif Habib Limited powers sector universe companies including HUBC, KAPCO, and NCPL!