Liking for IPPs intact despite sharp Rupee appreciation

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    Economy Overview (Pakistan News)
    Economy Overview (Pakistan News)

    -The recent sharp Pak Rupee appreciation vs. the greenback lead us to ponder over the worst case scenario for IPPs as their tariff structure is US$ denominated.

    Incorporating an exchange rate of Rs100/US$ (currently at ~Rs98/US$) for the rest of FY14, JS IPPs Universe earnings are likely to come off by 2-5% in 1HFY15 due to indexation factor adjustment.

    -That said, other major causes of concern for older IPPs in our universe (HUBC and KAPCO), especially HUBC has been the (1) higher repairs and maintenance cost and (2) fuel efficiency losses.

    Pakistan Today (Pakistan News)
    Pakistan Today (Pakistan News)

    -We continue to maintain our ‘Overweight’ stance on IPPs with ‘Buy’ recommendation on HUBC (Revised TP of Rs68 vs. Rs69 earlier), alongside KAPCO (TP: Rs65) and NCPL (TP: Rs40).

    1HFY15 earnings to come off by 2-5% for IPPs in worst case

    In a dramatic U-turn from its discouraging start to the current fiscal year, the Pak Rupee has shown substantial strength recently (gained 6.8% in March 2014 vs. US$). This has lead us to ponder over the worst case scenario for IPPs as their tariff structure is US$ denominated. Incorporating an exchange rate of Rs100/US$ for the rest of FY14, JS IPPs Universe earnings are likely to come off by 2-5% in 1HFY15 due to indexation factor adjustment. However, note that for FY14, we keep our base case intact at Rs106/US$ as we believe US$ is likely to recover somewhat from its recent lows of ~Rs98 (Kindly refer to our report titled “FY14 currency outlook improves post sharp recent Pak Rupee recovery” released on March 11, 2014). Moreover, going forward we anticipate Pak Rupee depreciation trend (+3.5%) to continue from FY15 onwards. Hence, we believe the negative impact on profitability will only hit 1HFY15 earnings.

     

    HUBC: Earnings revised down to incorporate overhaul cost

    That said, other major causes of concern for older IPPs in our universe (HUBC and KAPCO), especially HUBC has been the (1) higher repairs and maintenance cost and (2) fuel efficiency losses. We have tweaked our earnings for HUBC over FY14- 15E down by 7-8% on account of higher maintenance cost after gaining management insight on plant overhaul. Consequently, our Target Price for HUBC has been revised down to Rs68 (vs. Rs69 earlier). Nevertheless, refurbishment of boilers is anticipated to result in efficiency improvement and higher load factor going forward. We flag that the company’s plan to convert its plant to coal based (not part of our base-case estimates) is likely to deliver further uptick in ROE.

    Liking intact – Maintain ‘Overweight’ on IPPs

    We maintain our liking for IPPs premised upon the healthy payouts of the sector, where HUBC, KAPCO and NCPL are offering FY14E D/Y of 11%, 12%, and 14% respectively. In terms of risk, we flag that sharper than anticipated Pak Rupee appreciation may lead to deterioration in earnings.

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