EUR 150.00 For Business Accounts Only

Pakistan Power: Government, IPPs reach understanding; Analysis & Impact on listed IPPs

• The Government of Pakistan and Pakistan IPPs, as per the media reports, under the 1994 and 2002 policies have reportedly reached agreements, whereby IPPs have agreed to lower their returns along with mark up on late payments for the first two months.
• The IPPs should also be content with these MoUs as there is unlikely to be a stern action given the accusations made in the IPPs commission report.
• The most crucial part of this agreement in our view is release of outstanding receivables. This amount is estimated at Rs800-900bn, which is likely to be cleared after consultation with IPPs. Any deduction on account of previously received excess profits (from savings generated through O&M and Fuel) can not be ruled out, as for future the government has also decided to receive sharing from IPPs under same head.
• Our initial impression, suggest that it’s a good win for the government after the IPPs commission report, where the MoU shows material progress to handle the matter. The current agreements, in our view, will not lead to substantial decline in country’s power tariff, where the key will be the negotiations on CPEC projects, where the government intends to elongate the debt tenure to make a substantial impact on tariff.
• Recently built projects under CPEC are front loaded with heavy capacity payments due to their debt payments stretched over first 10 years. Extension of these payments to 20 years along with revision in spread (which is over 3% above KIBOR) would be key in reducing burden on consumers over next 4-5 years till government starts working on increasing denominator (consumers).
• In base case scenario, we believe this will reduce IPPs earnings by ~10-12%. This will also help in resolving circular debt situation in the country which will also be positive for sectors like OMCs and E&Ps.
• Key stocks that can gain based on our Base case Target price include KAPCO, PKGP, NPL and NCPL

We can not rule out a special dividend from companies like KAPCO, LPL, NPL, NCPL and PKGP going forward as working capital requirement of these companies will remain on lower side.