The week in focus

Initial public offering of power companies expected to bring funds to help cope with swelling inter-corporate debt.

The government’s plan to float shares of power distribution companies on the stock markets may meet with success if incentives are provided to investors and scrips of the more profitable firms are offered first.

The initial public offering (IPO) of power companies is expected to bring much-needed funds into the power sector to help cope with the swelling inter-corporate debt that has plagued the industry. According to reports, the debt has crossed a whopping Rs300 billion.

In the first phase of the power sector reforms, the inefficient and loss-incurring Pakistan Electric Power Company (Pepco) has already been disbanded. In the second phase, measures will be taken to turn loss-making companies into profitable ones; these will also be given decision-making autonomy.

Other steps include introduction of technology, installation of smart power meters, good governance and flotation of shares.

Under the present circumstances, the liquidity-starved stock market may not welcome the IPO of power companies and investors may just shy away from picking up shares of those firms that have been in the red for years. Nonetheless, the profitable ones may actually be a good buy.

JS Global Capital economist Muzammil Aslam says that the government should first offer shares of companies which have transmission and distribution (T&D) losses of less than 10 per cent. According to him, shares of Gujranwala and Islamabad electricity supply companies, which have low T&D losses, will attract investors while the likes of Hyderabad Electric Supply Company which have high T&D losses of 20-30 per cent will not stimulate investment for the time being.

The process of issuing IPOs (including the issuance of prospectuses and advertisements and finding investors) will take four to five months and by that time the current drab stock market will improve, he said.

In the absence of a much-touted margin trading system and after the imposition of the capital gains tax in July, volumes at the stock market have continuously been low for the past few months.

Discount and good return

Meanwhile, Khurram Shehzad – Research Head at InvestCap – believes the government can offer incentives to institutional investors to make the IPOs a success. Elaborating, he said institutional investors can be offered shares at a discount along with a guaranteed return. “Foreign investors, including those from the Gulf, may be offered a part of the offering. The government’s tag, or guarantee, is a real attraction.”

During the previous financial year, eight IPOs were floated in the stock market which included popular names like Nishat Chunian Power and Fatima Fertiliser.

Atif Zafar, another analyst at JS Global Capital, contends that conditions are not ripe for a share offering, which may turn out to be undersubscribed. In order to encourage investors, he called for unveiling a framework for power tariff hikes to bridge the gap between the cost of generation and the sale price and an improvement in the efficiency of companies.

“The market faces a dearth of liquidity right now and conditions are expected to improve in four to five months.” The potential launch of the margin trading system will also provide a much-needed boost to local bourses.

The Securities and Exchange Commission of Pakistan (SECP) has already approved the concept paper of the margin trading system with some amendments to strengthen risk management and the system is expected to be introduced in a few weeks.

the writer is incharge Business desk for the Express tribune

Published in The Express Tribune, October 11^th, 2010.