Kot Addu Power Company Limited (KAPCO) has outperformed the benchmark KSE100 index by 11 per cent since the start of FY12 due to the attractive dividend yield offered by the scrip. The company is also expected to post earnings of Rs1.68 per share in 2QFY12 compared to earnings of Rs1.36 per share in 1QFY12. Under the Power Purchase Agreement (PPA), KAPCO’s returns are hedged against rupee devaluation. Since the start of FY12, PKR has depreciated by 4.8 per cent to 90.5(FY12TD average: 87.54) whereas in 2QFY12 alone, it has lost its value by 2.83 per cent to 89.95. We believe that the rupee is expected to remain under pressure against the US dollar due to start of IMF loan repayment from Feb-12, widening of current account deficit and depleting foreign exchange reserves, said Usman Saeed at AHL. Due to gas shortage in last couple of quarters, KAPCO’s plant has mainly operated on furnace oil, which has led to higher repair and maintenance cost. In 1QFY12, company’s three gas turbines went through major over hauling, resulting in overall repair and maintenance cost to rise by 190 per cent YoY. Since FY08, this cost has increased by 2.98 times to Rs1.85 billion in FY10; however it contracted by 35% per cent to Rs1.2 billion in FY11. ‘We believe that the recurring capex will decline going forward as the company has already incurred a capex of Rs1.04 billion for FO based operations,’ he added. In June 2011, the company entered into a $14 million contract with General Electronic (GE) for upgrading four of its gas turbines. The upgradation process of turbine was scheduled to be completed in 2QFY12 after which the overall plant net combined-cycle efficiency will increase by 0.44 per cent. This will enhance the output of the plant by 12MW. However gas availability issue has forced the company to operate on furnace oil, which results in higher maintenance cost hence hurting company’s profitability.
