Historical performance
SEL faced declining profitability margins in FY14 as compared to the previous year. Net sales for the year also saw a decrease due to lower demand of furnace oil based electricity, according to the company report. The gross profit took a hit due to increased cost of generation amidst rising fuel costs, which ultimately led the gross profit margin to decline from 10.25 percent in 2013 to 7.83 percent in 2014. The average load of RFO-based electricity for the year was 23.12MW as compared to 24.34MW the previous year.
The company's performance took a further plunge in FY15 due to low sales revenue registering a fall of over 27 percent year-on-year. The EPS also fell almost by half to Rs 5.50 from previous year's Rs 10.71. The gloomy performance and the cause of the dip in gross profit could be attributed to both low revenue as well as increased cost in generation. The sales revenue took a hit due to the disconnection of power supply to FESCO in March 2015 as the Power Purchase Agreement (PPA) could not be finalised with the DISCO in Faisalabad.
Another reason for the decrease in sales and profitability was NEPRA's decisions regarding fuel price adjustment review and constant decrease in furnace oil prices from October 2014. There was also a decline in the amount of electricity generation due to severe gas shortage and shutdowns over a prolonged period.
Moreover, the generation mix of RFO: GAS changed from 69:31 in FY14 to 79:21 in 2015, which led to a surge in generation cost. The company also maintained a certain level of safety stock of furnace oil, which decreased the profitability due to fortnightly billing on price of furnace oil as per terms of the original power purchase agreement with FESCO.
Even though FY16 saw a 16 percent fall in revenue for SEL yet the cost of generation also declined by 21 percent. The result was in increase in gross profit for the company by an impressive 63 percent. Finance cost fell by 22 percent whereas other income also declined by almost 87 percent. However, the profit after tax increased by 54 percent, which translated into an EPS of Rs 8.51 compared to Rs 5.5 in FY15.
According to the director's report, the dip in sales revenue was attributable to the continuous fall in oil prices, which was a pass through item and the resultant fuel price adjustments by NEPRA. When it comes to operational performance, SEL generated 315,632 MWh in 2016 compared to 264,978 MWh in 2015 reflecting an increase in generation by 19.12 percent. This led to a reduction in per unit manufacturing cost by 13.94 percent, excluding cost of fuels and lubricant. Moreover, generation mix of RFO: Gas changed from 79:21 in 2015 to 73:27 in 2016 as a result of generation plans based on comparative cost analysis of both fuels.
FY17 saw the company's bottom-line going red on account of a dip in sales revenue with a more than proportionate increase in the cost of generation. There was lower demand from Bulk Power Consumers, while a comparatively higher fuel price adjustment by NEPRA led to a fall in gross profit. SEL generated 197,842 MWh in 2017 compared to 315,632 MWh in 2016 registering a decrease of 37 percent whereas overall unit overhead cost rose by 26 percent.
For the 1QFY18, SEL has continued its loss making streak on account of lower demand as the merit order has moved in favour of R-LNG and coal generation. The company's generation for the period went down by 9 percent on a year-on-year basis.
Stock performance
SEL has underperformed the benchmark KSE-100 index by a wide margin during the past year due to deteriorating fundamentals. The energy mix of the country is being shifted towards R-LNG and coal power plants with furnace oil power plants gradually losing their place in the merit order. Therefore, investor confidence in furnace oil based power companies has come down in the recent past.
Future outlook
SEL's profitability in FY18 will be contingent upon the supply of LNG for the power sector along with continued low RFO prices. The company should also focus on maintaining its existing Bulk Power Consumers (BPCs) along with diversifying its existing customer base. At the same time it should tweak its generation mix towards a higher composition of gas rather than the present inclination towards furnace oil.
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Sitara Energy Limited (SEL)
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Rs (mn) FY12 FY13 FY14 FY15 FY16 FY17
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Net Sales 4866 5184 5036 3659 3074 2116
Cost of generation 4341 4652 4641 3433 2706 1986
Gross profit 525 532 395 226 369 130
Other income 97 2 74 121 16 12
Finance cost 270 200 155 139 108 117
PAT 251 249 205 105 162 -97
EPS (Rs) 13.17 13.06 10.71 5.5 8.51 -5.06
Gross margin 11% 10% 8% 6% 12% 6%
Net margin 9% 9% 6% 3% 5% -5%
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Source: Company accounts
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Shareholding pattern (SEL)
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Shareholder Shares held Percentage
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Directors, CEO and children 7,336,040 40.59
Sitara Fabrics Limited 656,000 3.44
NIT AND ICP 256,617 1.34
Bank, DFIs, NBFIs 1,132,161 8.13
Insurance Companies 1,628,500 8.52
Modarabas and Mutual Funds 263,151 1.38
Foreign Companies 1,000 0.01
Joint Stock Companies 1,402,162 7.82
General Public (Local) 6,228,054 28.44
General Public (Foreign) 164,078 0.14
Others 24,237 0.13
Total 19,092,000 100.00
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Source: Company accounts