Hubco takes the circular debt blow

The Hub Power Company Limited (Hubco) announced its half yearly financial results on Tuesday, and it was not good news for investors as the company reported earnings of Rs2.46/share, way below the consensus estimates of Rs2.65/share. The result confirms two things: a) the analysts got a few things wrong and b) the company is a victim of the inter-corporate circular debt.
Better things were expected of Hubco on the electricity production front as the company was expected to have bettered the load factor achieved in the same period last year. It obviously didn as the Hub Plant operated at an average load factor of 71 percent, down from 76.3 percent achieved in the same period last year, and further down from the 79 percent that was expected of them.
The 7 percent lesser electricity that Hubco sold to Wapda kept top line growth in check as the production bonus that the company is entitled to, trimmed by a considerable amount. Hubco, as per the IPP policy, is entitled to receive a production bonus if the utilisation during the period exceeds 64.6 percent, which it did.
The production bonus is also indexed to the CPI and the rupee-dollar parity, which moved in favour of Hubco, evident by the slight increase in sales revenue. The rupee stayed relatively stable against dollar as it depreciated by just 1.2 percent during the reported period, limiting the revenue upside.
Another factor that hampered electricity generation was the irregular fuel supply to the plant. The company owes a massive Rs76 billion to the Pakistan State Oil for fuel supply, which has resulted in regular interruptions affecting the plant operations, chiefly responsible for the low load factor.
As is the case with Hubcos major recipient, PSO, the financial charges eroded whatever little improvement was recorded in the operating profits. Hubco has Rs88 billion receivables on its books as Wapda has yet been unable to clear over Rs82 billion outstanding dues to the company.
This has naturally resulted in Hubco arranging for short-term financing to meet the liquidity and working capital requirements. The high interest scenario has just added insult to the injury, resulting in hefty financial charges.
The directors report states that commissioning of the 214MW Narowal Project, which has faced a long delay, might be achieved by March 2011 if things go as planned. But for now, the biggest worry for Hubco remains the circular debt and ensuring regular fuel supply, both of which are interrelated.
For the company to be back to optimal load factor, resolution of the circular debt is a must, which will both ensure timely fuel supply and lessen the financial cost burden. Unfortunately, for Hubco, the circular debt despite government assurances, is very much there, growing stronger with every passing day.

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HUBC

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P&L (Rs mn)         1HFY11    1HFY10    chg    2QFY11    2QFY10    chg

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Sales              49,202    46,168      7%   24,002    24,162     -1%

Operating costs    44,954    42,389      6%   21,680    21,898     -1%

Gross profit        4,248     3,779     12%    2,322     2,264      3%

Gross margin         8.63%     8.18%     5%      9.7%      9.4%     3%

Finance cost        1,216       783     55%      657       441     49%

PAT                 2,843     2,855   -0.4%    1,574     1,747    -10%

EPS (Rs)             2.46      2.47             1.36      1.51

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Source: KSE notice