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BUSINESS RECORDER KARACHI FRIDAY 25 MARCH 2011

Brief recordings
HUBCO has responded to the need for “future proof” planning in the power sector by initiating the
construction of two new power plants. The company is the first private company to go into hydroelectric
power generation and its 84 MW run of the river hydropower complex is projected to come online by
2013. The other project, a 214 MW power plant at Narowal expected to be operational by October 2010
will help the company move better on its policy path of achieving “Growth through energy”. FY 2010 has
brought in mixed results for the firm; where on one hand the ever rising financial difficulties of
HUBCO’s major client WAPDA have translated into soaring receivables of Rs 73 billion under the PPA,
the blockage of fund flow from this end has served to increase the loan owed to PSO in lieu of RFO
supply to Rs. 63 billion on the other. As far as the operational performance is concerned, the company
succeeded in achieving a record high load factor of 79.3%, symbolic of the ability of HUBCO to operate
at optimal efficiency levels. The turnover and operating costs simultaneously soared, due to a
combination of the various factors discussedin the analysis below. Finance costs have exhibited a
similarly dual phenomenon, whereby two trench loan repayment and issue of TFCs by GOP in HFY’10
helped to ease the burden to acertain extent but at the same time the existence of persistent and circular
debt owed to PSO helped offset the favorable impacts.
Recent results (1H11)
Turnover for the period was Rs. 49,202 million (2009: Rs. 46,168 million) and operating costs were Rs.
44,954 million (2009: Rs. 42,389 million) resulting in a gross profit of Rs. 4,248 million compared to Rs.
3,779 million in the corresponding period last year. Financial charges were considerably higher at Rs. 1.2
billion as compared to Rs. 0.78 billion in the same period last year. The Company earned a net profit of
Rs. 2,843 million during the period (earning per share of Rs. 2.46) compared to a net profit of Rs. 2,855
million and (earnings per share of Rs. 2.47) in the same period last year. Hub Plant operated at an average
load factor of 71% and an average complex availability (ACA) of 85%. Electricity sold to WAPDA was
3,746 GWh.
Operations
The operational performance for FY10 showed mixed results; as the chart below predicts both total
revenue and cost of goods sold registered an increase. The 20.42708% rise in turnover was but marginally
offset by a 19.97625% increase in the COGS. Also that the general administration expenses registered a
rise of 8.868768% yielding a positive EBIT change of 25% and 46.9% increase in the net profit (Figure
2). These movements have been a combined result of higher oil prices, an improvement in the indexation
factor and the favorable movement of the PCE. A devaluation of the rupee as registered during FY10
increased the indexation factor by 15% and together with the 31% or so rise in the PCE led to the positive
impact in turnover. Also that efficiency gains were more or less offset by the soaring repair and
maintenance costs in lieu of the modernization program under way. The 14% decline in financial costs, in
addition to the factors mentioned earlier was brought about due to a positive interest differential on
overdue receivables and payables. The financial crunch experienced by WAPDA however helped lower
the other income and gains figure and has thereby served to neutralize the positive results.
Profitability
The impact of the operational changes discussed above has been quite pronounced on the profit position
of the firm. Where on one hand the GP% has gone down perhaps due to the rising oil prices, the NP,
ROA and ROE have all soared due to the combined impact of the indexation and PCE effects stated
earlier. On a comparative level however, HUBCO has lagged behind KAPCO on all four fronts. One
possible explanation for this is the comparatively inefficient use of short and long-term assets by HUBCO
as opposed to KAPCO, the details of which have been presented in the next section.
Efficiency
As mentioned earlier, FY10 was a period of record breaking performance for the company. An analysis of
the firm’s utilization ratios as depicted in Fig 3a and 3b below reveals that compared to KAPCO, the firm
has a longer operating cycle and DSO but a substantially lower inventory turnover. The rising receivable
figure entrusted to WAPDA may be sufficient explanation for the cited disparity. However, the adverse
consequences that this might have on the liquidity position of HUBCO are yet to be examined. A
consideration of the company specific trend in this regard provides some reassuring information as we
can see in Fig 3b that a marked improvement in the operating cycle and DSO has been registered as
compared to FY09.
Liquidity and debt management
As highlighted by Fig 4, 2010 brought about a worsening of HUBCP’s debt position. The long-term debt
to equity position grew by 40 percentage points, whereas debt to equity percentage and debt to asset ratios
soared phenomenally as well. This was primarily a result of the increasing inability of the company to
channelize funds received by WAPDA towards retirement of debt taken from PSO on account of RFO
supply. However, the favorable profit position helped to register a rise in the TIE despite the rising
incidence of debt. The comparative debt standing with KAPCO registered similar movements. HUBCO’s
debt to asset percentage, debt to equity and long-term debt gearing ratios are substantially over those of
KAPCO; one possible explanation for such a position could be the debt taken up by HUBCO to finance
its pipeline power plants that are expected to become operational by late 2010 and 2013 respectively.
However, yet again we see that HUBCO’s TIE exceeds that of KAPCO thereby indicating that the firm is
taking advantage of its financial leverage. As far as the liquidity position is concerned, while KAPCO has
succeeded in maintaining a stable current ratio over the period FY09-FY10, HUBCO has experienced a
decline in its current ratio over the year. However, on a comparative level HUBCO has surpassed
KAPCO’s short-term financial position consistently as depicted in the chart below.
Investor ratios
Despite the financial crunch in the industry, HUBCO has experienced a positive growth in its EPS from
3.27 to 4.8 in FY10 from FY09. While this seems to be an indicator that could boost investor confidence
in the company, a comparative analysis wit KAPCO reveals that HUBCO has been consistently under-
performing its competition in this regard. Also that the increase in the EPS reflected positively on the
company’s stock price which rose to a level of 34.35 rupees, however, the P/E ratio plunged to 7.3. Hence
yet again the results for the company have been mixed on this front.
Future outlook
The future of the company seems secure as long as the positive profitability growth can be sustained; also
that the degree to which the firm is able to tap onto the benefits of its new power generation capacity as a
source of competitive advantage will determine the improvement or otherwise deterioration in the
comparative performance of the company relative to KAPCO in particular and other power generators
in general. Only time will tell if such breakthroughs bring forth more positives for HUBCO or if
worsening financial position of a client as significant as WAPDA serve to give a sour taste to the
company for keeping all its eggs in one basket.