Stock market key player in the power sector development

The stock market has played a major role in the country's power sector development as it provided a huge amount of equity capital to the private sector power producers over the last decade, according to a recent review of the power sector by the EBL Securities Research. 

Also, the sector has consistently generated an above-average annual return for the shareholders even during the decade-long stock market depression, said the top-tier brokerage firm's analysts. 

Mohammad Asrarul Haque, power sector analyst of EBL Securities told The Business Standard, "The story of mutual benefitting has paved the way for a greater role of the capital market in the country's even bigger upcoming investments for the needed economic infrastructure by the next two decades." 

The power story 

As the government a decade ago prioritised power generation to meet the immediate need of the growth-hungry economy, the country's power generation capacity quadrupled to over 22,000 MW, excluding the off-grid solar and captive capacities.  

Now, the availability of electricity is not a problem for a factory or household anymore. 

Also, the private sector power producers have played a pivotal role to put an end to the cry for power energy in the economy, despite a concern regarding the high cost of their electricity being borne by the government. 

Bangladesh Independent Power Producers' Association in 2018 said they invested around $20 billion in a decade for 43% of the nation's currently installed power generation capacity and will inject another $50 billion to meet the projected demand by 2030 - thanks to the good rate of return offered on the injected private capital. 

The government, under the power purchase agreements with the companies, guaranteed and facilitated their handsome profits through a good margin amid a certain revenue, while their income tax was exempted for 15 years on top of no duty on machinery imports for plant establishment. 

The great stock investors  

In EBL Securities' report, it said under the title "Investment Opportunities in Bangladesh Power Sector", more than 4,500 MW generation capacity belongs to the 52 power plants fully or partially owned by 12 publicly listed companies. Other than two plants by Summit Power and Khulna Power Company that pioneered private sector power generation in the 1990s, all were installed in the last 11-12 years. 

The power-producing listed entities are Baraka Power, Baraka Patenga Power, Doreen Power, GBB Power, Khulna Power, Shahjibazar Power, Summit Power, United Power, Confidence Cement, Orion Pharma, Paramount Textile, and Energypac Power Generations Ltd.  

The primary market of the bourses catered to the 12 power companies with more than Tk1,400 crore in equity during their initial public offerings (IPO) over the last decade. 

Asrarul Haque said the equity support was stronger than it sounds, as the equity enabled companies to avail 3-4 times loans to implement their power plant projects on time. 

Power plants must ensure 20% of the project cost in the form of equity capital, to avail foreign loans a company must ensure 30% equity. 

Right now, more than half of the equity of the 12 power-producing listed firms, on average, belong to the stock market investors, Haque said. 

Alongside equity, the capital market is also catering to the power sector by investing in their bonds or preference shares. 

The lucrative return 

As the power producers need no sales and marketing costs, their main expenses from the initial profit margin go to debt repayment. 

In 2019-20 fiscal, the listed power producers secured net profit margins ranging from 10% to up to 69%, depending on their agreement with the government and the relevant companies' financial structure. 

The investment-heavy companies generate an annual return on their used assets at rates ranging from 3.3% to over 16%, while against shareholders' equity their annual profits range between 11%-25% until power plants' contract with the government expires. 

Most of the listed companies demonstrated their top-line growth through adding new power plants gradually, Asrarul Haque said. 

Each year, companies are paying lucrative cash dividends ranging from 10% to up to 170% on the face value of the shares, which generated an above-average of almost 4.5% dividend yield this year. 

Power producers have generated a lucrative double-digit annual compound capital gain on average for their primary market investors, said Asrarul Haque, whose assets grew at over 15% rate annually. 

Also, the secondary market investors who bought power producers' shares amid market dips enjoyed a decent double-digit return, including the capital gains and dividend yield, each year on average. 

It was a tremendous return in a decade when the depressed market was only eroding investors' capital. 

A greater role ahead

Haque said the power sector was a great story behind how a sector can be supported by the market and pay its investors back. 

It paved the way for the market to contribute more to the upcoming capital need for even bigger infrastructure development in the country, he added. 

In 2010, the government projected 17,304 MW peak demand for power in 2020, and 33,708 MW by 2030. It also planned to increase the installed capacity to 40,000 MW by 2030. 

Throughout 2019-41, power generation alone would need $150 billion investment, while power transmission sector would need $31 billion, and distribution would need $35 billion, EBL Securities report cited power sector master plans to show the growth potential of the sector. 

In the next 2 decades, an average of $9 billion in investments would be needed each year for power generation, transmission, and distribution. 

On top of its existing strength to provide equity, the capital market is also rising as a source of financing through bonds, preference shares, and asset-backed securities like Sukuk, Asrarul Haque said. 

He sees a great long term investment opportunity for both local and foreign investors in the country's power sector as foreign direct investment was still 10.12% of the total sector in March 2020. 

Asrarul said his team suggested their clients look into the power companies' records and details before investing. 

Tenure of the projects, terms of contracts with the government, and their accounting transparency are the key points there. 

He said, for example, some old power plants may show receivables from their sister concerns amid no apparent reason for intercompany transactions every year, which would deprive the public shareholders of the income from the receivable amounts. 

Expiring power supply contracts with the government have emerged as a concern for the shareholders of some listed companies. 

Also, the profit margin in the contracts needs to be checked as they are mostly dropping nowadays.