Circular debt in the limelight again: We have attempted to estimate the remaining stock of circular debt as of Mar 31st, 2011 and have made the adjustment for subsequent receipts and further accumulation to arrive at balance as of May end.
Estimation methodology: Originating largely due to tariff differential subsidy and below par operations (in efficiencies) of Discos and Gencos, circular debt is largely a throw forward for the IPPs (to fuel suppliers), which makes “overdue receivables” of fuel marketers / distributors (OMCs and Gas discos) a reasonable proxy for the outstanding circular debt stock.
Adding net over dues of IPPs (overdue receivables less overdue payables) would make the estimate more precise.
May-11 end balance of circular debt estimated at PKR153bn: We estimate that outstanding circular debt as of Mar 31st, 2011 was PKR221bn. Adjusting for PKR89bn received by PSO in May-11 and assuming incremental accumulation of PKR10bn/month during April-11 and May-11, we believe circular debt balance would reach PKR153bn by end of May-11.
Circular debt in the limelight again
With payments of PKR89bn to PSO in early May-11, coupled with talks of likelihood of further reduction in the receivable stock by Jun-11, the circular debt issue has come into the limelight again. We have attempted to estimate the remaining stock of circular debt as of Mar 31st, 2011 and have made the adjustment for subsequent receipts and further accumulation to arrive at a balance as of May 31st, 2011.
Estimation methodology
Originating from under-recoveries and un-allowed T&D losses of discos, tariff differential subsidy and efficiency losses of Gencos, circular debt is largely a throw forward for the IPPs, being partly absorbed by OMCs, gas discos, refineries and E&Ps.
While precise calculations would require calculation of net receivables (overdue receivables less overdue payables) of each entity involved, we believe “overdue receivables” of fuel marketers / distributors (OMCs and Gas discos) provide a reasonable proxy for outstanding circular debt amount. IPPs have at times been using their balance sheet to fund overdue receivables from power purchasers. Hence, adding net over dues of IPPs (overdue receivables less overdue payables) would make the estimate more precise. Since almost all the OMCs and gas discos are listed, as well as the major IPPs (HUBCO and KAPCO) the public availability of financials would make the exercise more convenient.
May-11 end balance of circular debt estimated at PKR153bn
We have undertaken the following steps to estimate the balance of circular debt as of May31st, 2011:
Measuring Mar-11 overdue receivables of OMCs and Gas Discos: Both OMCs and Gas Discos do not precisely report their overdue receivables. Hence Elixir estimates have been used to estimate overdue receivables by calculating days’ sales outstanding (DSO) of each entity under normal course of business, estimating normal receivables and then estimating over dues. Our estimates yield total overdue receivables of PKR189bn as of Mar 31st, 2011.
Adding Mar-11 “net” overdue receivables of listed IPPs: We have calculated end Mar-11 “net” overdue receivables of listed IPPs by subtracting overdue payables from the stock of overdue receivables. IPPs fund this “net” stock, either by short term borrowing or through own cash balances, and hence the impact is not transferred though to the fuel suppliers. Therefore the net overdue receivables of these IPPs need to be added to the receivables of fuel suppliers, in order to calculate the stock of circular debt as of Mar 31st, 2011. Our estimates yield a total of PKR32bn for the stock of circular debt being funded by IPPs, which takes the total stock of circular debt to PKR221bn as of March 31st, 2011.
Adjusting for PKR89bn paid in May-11 and further accumulation during April-May’ 2011: GoP released PKR89bn to PSO (by channeling the amount through Pepco and IPPs) on May 2nd, 2011, which the company utilized to make payments to refineries, international suppliers as well as pay government taxes. Hence Mar 31st, 2011 balance of circular debt needs to be adjusted for the said payments of PKR89bn. Although GoP made PSO and refineries clear its outstanding tax dues through a large portion of the paid funds, this is classified as reduction in financing of circular debt (an automatic result of reduction in circular debt stock) and hence the adjustment needs to be made for the gross amount (PKR89bn) instead of the net amount (PKR18-21bn). Also, further accumulation of circular debt during April-11 & May-11, estimated at PKR20bn, needs to be added to arrive at estimated stock as of May 31st, 2011. We estimate circular debt stock as of May 31st, 2011 at PKR153bn.
Some sources put the total amount released in May-11 by GoP at PKR120bn. In case the payment was indeed PKR120bn, then remaining PKR31bn would likely have either been paid to the gas discos via Pepco and gas based power companies or retained by IPPs. In that case, May end balance of circular debt would reduce to PKR122bn.
Reserves rise to USD17.07bn
Foreign exchange reserves rose to USD17.07bn in the week ending on May 21 from USD16.97bn the previous week, a central bank official said on Thursday. Remittances from overseas Pakistanis increased by 23.81% to over USD9bn in the first 10 months of the 2010-11 fiscal years.
Analyst Certification:
The research analyst(s) denoted AC on the cover of this report, primarily involved in the preparation of this report, certifies that (1) the views expressed in this report accurately reflect his/her personal views about all of the subject companies/securities and (2) no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
Disclaimer
The report has been prepared by Elixir Securities Pakistan (Pvt.) Ltd and is for information purpose only. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources, believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or warranty, expressed or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments.
Research Dissemination Policy
Elixir Securities Pakistan (Pvt.) Ltd. endeavors to make all reasonable efforts to disseminate research to all eligible clients in a timely manner through either physical or electronic distribution such as mail, fax and/or email. Nevertheless, not all clients may receive the material at the same time.
Company Specific Disclosures
Elixir Securities Pakistan (Pvt.) Ltd. may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis in which they are based before the material is disseminated to their customers. Elixir Securities Pakistan (Pvt.) Ltd., their respective directors, officers, representatives, employees and/or related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise. Elixir Securities Pakistan (Pvt.) Ltd. may make markets in securities or other financial instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. Elixir Securities Pakistan (Pvt.) Ltd. may have recently underwritten the securities of an issuer mentioned herein.
Other Important Disclosures
Foreign currency denominated securities is subject to exchange rate fluctuations which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. Foreign currency denominated securities is subject to exchange rate fluctuations which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk.
Contributed By
