Managerial Finance

Assumptions based on Financial

Statement analysis of KESC

Group Members

• Maria Abdullah• Faiza Asghar• Nayyera Anbreen• Asmara Rani• Iffat Saleem• Zakia Sultana

Presented to

• Sir Asif Naqvi

INDUSTRY OVERVIEW

In Pakistan Electricity is generated, distributed and supplied by two public sector utilities:

• Water And Power Development Authority (WAPDA) • Karachi Electric Supply Corporation (KESC) • And others16 independent power producers

INDUSTRY OVERVIEW Continued

• The country has a total installed generating capacity of about 19522 MW.

• At the beginning Pakistan has relied on hydro electricity along with natural resources like gas which incurred more cost.

• Pakistan has large reserves of gas and coal and if proper infrastructure is developed, country’s per unit rate could be amongst the lowest in the world.

Generation Capacity

• Total Power Generation Capacity of Pakistan (including all sources) is 19,855 MW and the electricity demand (as of April 2010) is 14,500 MW

• Pakistan’s total installed power generating capacity increased from 5229 MW to 19,522 MW, contributed 64% of the total, while hydroelectric power plants accounted for 33%, and Pakistan’s two nuclear power plants produced 3% of the total production.

Energy Sector in

Pakistan

Generation Capacity Continued

• The share of thermally generated electricity increased from 54% to 71%

• Electricity – production: 88.42 TWh (terawatt-hour per year) 2005

• Electricity – production by source (2003)• Fossil fuel: 63.7% of total• Hydro: 33.9% of total• Nuclear: 2.4% of total

Generation Capacity Continued

• Water & Power Development Authority (WAPDA): 11327 MW• Karachi Electric Supply Corporation (KESC): 1756 MW

Consumption• Between 1990/91 and 2003/04, total

consumption increased by more than 84%, from 31 TWh to 75 TWh

• An average annual increase of 7% has been estimated.

• The short-term national energy demand has expanded significantly since 2001 due to massive rise in sales of durable goods like refrigerators, washing machines, split air conditioners.

Consumption Continued

• Electricity – consumption: 74.62 TWh (2004)• Electricity – exports: 0%• Electricity – imports: 0%• Electricity Consumption per Capita = 430.183

kWh/capita (2006)

Percentage in GDP

• Pakistan's industrial sector accounts for about 24% of GDP

• The Federal Bureau of Statistics provisionally valued this sector at Rs.215, 662 million in 2005 thus registering over 62% growth since 2000

• In budget of 2010-2011 the Govt spent Rs.28423.8 million for Water and Power Division

Major CompetitorsWater & Power Development Authority Pakistan Atomic Energy Commission Independent Power Producers • Genertech• Hub Power Co.• Japan Power• K.E.S.C.• Kohinoor Power• Kot Addu Power• Nishat Chun Pow• Nishat Power Ltd.• Pakgen Power Ltd.• Sitara Energy• Southern Electric• Tri-Star PowerXD

Industry phase

• Electricity generation in Pakistan has shrunk by 50% in recent years due to an overreliance on hydroelectric power

• In 2008, availability of power in Pakistan falls short of the population's needs by 15%

• During 2010 Pakistan floods and 2005 Kashmir earthquake power stations, power distribution and transmission and other energy infrastructures were damaged The current shortfall is 7500 Megawatts

Karachi Electrical Supply Company

• KESC is one of the oldest companies in Karachi and was established even before the creation of Pakistan in 1947 Was incorporated in 1913.

• KESC is engaged in the generation, transmission and distribution of electricity in Pakistan

• It supplies electricity to approximately 2. 1 million industrial, commercial, agricultural, and residential consumers located primarily in Karachi, as well as in the towns nearby.

• The company has an installed capacity of 1,890 megawatts.

• The revenue of KESC for year 2007-2008 is PKR 49.606 billion

• The total assets amounted to PKR 93.076 Billion• In November 2005, the Privatization Commission

in Pakistan sold KESC to Hassan Associates, a group of local and Saudi investors.

• The Pakistani government has supported the company with a $200 million annual subsidy

• The Pakistani government will maintain a 26 percent share of the company

FINANCIAL PERFORMANCE (FY05-FY10):

• The Company has been able to grow revenues from 40 billion in FY05 to 103. 9 billion in FY10.

• Gross losses increased from 15. 83% in FY07 to 21. 86% FY08

• Gross losses improved from 21. 9% in FY08 to 5. 7% in FY10.

• Return on assets decrease from 1% in FY05 to negative return of 17% in FY08

• ROA fell from -17% in FY08 to -7% in FY10• Return on equity fell from -52. 57% in FY07 to

-232. 27% in FY08

• The liquidity position of the company has decreased in the past few years and reflected a continuous decline since 2005

• The current ratio showed a decreasing trend and this was mainly due to increase in current liabilities

• liquidity has also showed slight improvement after FY08

• Debt to equity ratio increased to a figure of 1216. 13% in FY08 The ratio turned negative in FY09 and 2010, indicating negative equity.

• Days Sales outstanding (DSO) has increased from 52 days in FY07 to 67 days in FY08, further continued to increase and reached 101 days.

• Inventory turnover has reduced indicating that the company is using its inventory efficiently (inventory mainly comprises of spare part used in distribution and transmission)

• Share prices have also decreased drastically from Rs 13. 7 in FY05 to Rs 3. 0 in FY09. In FY10

• The company s long-term financing raised drastically showing 60% increase in FY08 and a further 117% in FY09 whereas total assets rose by 20% and 41. 75% in FY08 and 2009 respectively

• KESC is a highly leveraged firm the recent increase in discount rate will adversely affect the company s ability to pay interest.

ASSUMPTIONS:Revenue will increase • Customers increase as annual population growth rate is 3%.• Increase in customer demand especially in winter when gas

supply is cut domestic users increase electric appliances for cooking and heating homes and workplaces.

• Due to increase in inflation rate the prices increase and revenue will grow

• The market growth rate increase• Increase in unit bills and fuel bills• Increase in tariffs• Increase in sales mix• Increase in power generator’s fuel prices

Profitability will remain negative

• The main reasons for these losses are firstly the Transmission and Distribution (T&D) losses due to old and obsolete distribution network

• Theft of electricity• Difficulty in getting bills from different regions

of the city• Government institutions non- payment which is

the biggest defaulter of WAPDA

Total debt to total asset will rise

• Company needs to finance its new projects• Because the company’s long-term financing and

poor financial position• The company will have to pay high interest

rates due to more leveraged firm.

Sales outstanding (DSO) will increase

• Days• The company has an inefficient or overburdened

credit and collections department• Inadequate analysis of applicants for open account

credit terms• The larger volume of disputes specially in Karachi

over load shedding and power failure issues• customers are dissatisfied with the company's

product or service

EPS and P/E ratio will indicates a decline

• Because of increasing losses• Share prices will decrease drastically due to the

bad performance of the company.• The company has poor debt management• The cost of the company will increase due to

the high cost raw material will effect profitability and ultimately result in low EPS

Current ratio will increase

• Repayment of some short term loans reduce the current assets and current liabilities and current ratio increase

• Company has the ability to pay its current obligations

• Increase in sales inventory, will increase the current ratio

• The company has money in cash or investments

Return on asset decrease

• Management is not efficient, poor management• Assets are used inefficiently

Threats to KESC

• Government agreements to private companies for rental power supply

• Shortage of gas supply by SSGC & SNGC• Machinery is old and refurbishment needs a lot

of investment• Sabotage is possible• Biggest distributor is WAPDA which is

government owned entity.

Any Question

Thank you