omc: no mention; hence safe - BMA Capital Management

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POWER OVERWEIGHT Budget Impact Neutral Nurali Barkatali Power Analyst The Backlog of Circular Debt Govt Entities & Others PIA Ministry of Finance Provinces PKR35bn End & Commercial Consumer 20 PKR3bn KESC PEPCO Power holding co. PKR90bn Power Distributors PKR43bn PDC PKR50bn WAPDA PKR9.2bn PKR13bn PKR38bn PKR1.3bn POWER: THE BACK OF BEYOND June 7, 2010 Budget FY11 is a non-event for the listed power sector entities as surprisingly the government did not touch upon the looming Inter-Corporate Debt (ICD). However, impressions gauged from the budget speech indicate that electricity tariffs would continue to rise in FY11, eliminating most of the subsidies under the fiscal reforms agenda supervised by international financial institutions (IMF, WB and ADB). Inter-Corporate Debt (ICD): In a Cleft Stick No tangible announcement was made in the budget for resolution of ICD which is estimated to have risen to over PKR100bn on net basis. While profitability for Independent Power Producers (IPPs) is dictated by their respective Power Purchase Agreements (PPA), this issue has nonetheless strained cash flows and has resulted in elevated finance cost. Moreover, there are far reaching effects as well; KAPCO, the largest IPP, initially cut down its 450MW capacity expansion plan to 280MW and then later decided to abandon the project altogether. To put things in perspective, federal budget FY09 laid out numerous promises to resolve the related issues; the major ones included formation of a Power Holding Company (PHC) which was suppose to assume all the loan liabilities and pay the mark-up on these loans from budgetary resources. But unfortunately only PKR85bn worth of TFC was issued during FY10. PKR2bn PKR41.1bn PKR58bn IPPs Other KAPCO HUBCO Total receivables PKR127.8bn PKR10bn PKR25.1bn PKR18bn PKR48.1bn PKR5bn OMCs & GMCs PSO SNGPL SSGC Total payables PKR120bn PKR31.5bn PKR12.4bn PKR18.2bn PKR9.3bn PKR4.8bn PKR43.4bn Refineries E&P PARCO PRL ATRL NRL BOSICOR Imports PKR48bn Source: Business Recorder, Annual Reports, BMA Research Total net circular debt: +PKR100bn PKR2bn OGDC
21 June 7, 2010 Moreover, seemingly the GoP abandoned the PHC formula and withheld further issuance of TFCs under the said regime. Alternatively, the government planed to resolve the issue by way of savings from un-utilized resources, cut in Public Sector Development Program (PSDP) for FY10 and Benazir Income Support Program (BISP). GoP released first instalment of PKR20bn in the first week of May 2010 with an assurance to release PKR50bn in the next few days; which again has failed to materialize as yet. Additionally, budget FY09 also announced that GoP would be assuming responsibility for all arrears of PEPCO against FATA (which at that point in time stood at PKR80bn) and payment of their electricity bills for the year. While the recent budgetary measures include PKR10bn subsidy for FATA, no allocation has yet been made to clear the backlog of the region’s dues. Budgetary Measures: Curry favour In an effort to curtail electricity demand, the government announced imposition of 10% FED on high energy consuming appliances (air conditioners and deepfreezers) and distribution of ~30mn free energy saver bulbs. Additionally with the help of ADB, PKR20bn has been allocated for an energy development fund whose modalities and uses were not outlined. While no comments were made on power tariff hike, we understand that the GoP will soon be announcing a 6% tariff hike with retrospective effect from Apr10. Furthermore, 1% increase in GST to 17% will also increase the electricity tariffs. On the flip side, in an effort to provide relaxation to the consumers, government has proposed a 5% decrease (from currently 10%) in Advance Income Tax charged on monthly electricity bills. Power Subsidy: Bite The Bullet For FY11, GoP will continue to subsidize WAPDA and KESC to the tune of PKR84bn and PKR3bn respectively. It is pertinent to note that in the previous budget, subsidy allocation for KESC under the head of tariff differential was fixed at PKR4bn, however the GoP is expected to end up paying massively higher at PKR32bn. For WAPDA, under different heads the subsidy increased to PKR147bn from the budgeted amount of PKR63bn in FY10. Thus cumulatively government will provide a relief of PKR87bn during FY11 against PKR180bn in FY10. Outlook FY11E Proposed budgetary measures are not likely to have any immediate positive surprises as uses of PKR20bn energy development fund are yet to be disclosed. While elimination of power subsidies will have inflationary implications; we consider it as a prudent measure given the lack of fiscal space available with the government. The budget in essence has no direct implications for the listed IPPs while no announcements for the resolution of ICD remain a grave concern. The government eyes Industrial sector growth of 4.9% for FY11; which we believe will only be achieved through capacity expansions in the power sector. Moreover, resolution of ICD will not only bode well for the energy chain but will also encourage large scale investments in the country. Having discussed the sector at large, we reiterate our OVERWEIGHT stance and maintain our ‘BUY’ call on HUBC which currently offers a USD based IRR of 17% based on our dividend forecasts.
Page 1 and 2: 65 Federal Budget 2010-11 Cautious
Page 3 and 4: 3 TABLE OF CONTENTS Budget FY11: No
Page 5 and 6: 5 June 7, 2010 package will have li
Page 7 and 8: 7 June 7, 2010 against an average o
Page 9 and 10: 9 Sector wise Budget Impact and BMA
Page 11 and 12: ECONOMY Budget Impact Positive Abdu
Page 13 and 14: 13 June 7, 2010 announced in the bu
Page 15 and 16: 15 KEY MEASURES Income tax June 7,
Page 17 and 18: E&P MARKETWEIGHT Budget Impact Neut
Page 19: OMC OVERWEIGHT Budget Impact Neutra
Page 23 and 24: CEMENTS OVERWEIGHT Budget Impact Ne
Page 25 and 26: CHEMICALS MARKETWEIGHT Budget Impac
Page 27 and 28: 27 Outlook FY11E June 7, 2010 Incre
Page 29 and 30: 29 Top Investment Ideas June 7, 201
Page 31 and 32: BUY Fair Value: PKR 282 Current Pri

omc: no mention; hence safe - BMA Capital Management

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