Kot Addu Power Company Limited (PSX: KAPCO) announced its financial performance for 1QFY21 last week and the independent power producer’s earnings soared by 23 percent year-on-year. Growth in KAPCO’s bottomline did not come from the topline as the revenues of the company decreased by 34 percent year-on-year.

The decline in the IPP’s revenues does not come as a surprise as the ongoing pandemic and the slowdown in the economy has resulted in subdued demand for power and electricity. The IPP’s revenues for FY20 were down by around 29 percent year-on-year with over 50 percent decline in 4Q alone; and in 1QFY21 the IPP’s topline slipped by 34 percent primarily due to lower dispatches of electricity to WAPDA by over 20 percent as well as over 35 percent drop in RLNG prices year-on-year during the quarter. However, KAPCO’s load factors have been better than the other key IPPs as it is multi-fueled operated that has also been run on RLNG. For the first two months of FY21, KAPCO’s plant operated at 50 percent load factor versus 64 percent in 2MFY20. However, decline in power consumption in September due to changing weather might have resulted in lower utilization levels for KAPCO in September 2020.

Decline in revenues also resulted in lower operating costs, while the currency depreciation also helped lift the gross profits by 11 percent year-on-year, and gross margins by around 10 percentage points. Administrative costs grew moderately, but the other income witnessed a decline due to lower interest rates during the quarter. This decline in interest rates was also a key factor that propelled growth in KAPCO’s bottomline as the company’s finance cost came down by 61 percent year-on-year.

The IPP’s have come under fire as a result of the government’s investigation, which has also affected the investor interest in the IPP sector. Also, KAPCO’s power Purchase Agreement with WAPDA is close to expiration (2021), while receivables continue to rise. However, KAPCO’s performance to start FY21 has been upbeat where the company also announced an interim cash dividend of Rs1.5 per share for 1QFY21. It is a multi-fuel plant and still has a useful life of 5-10 years which brightens its chances for PPA renewal.