KE Earnings Hit as Recovery Loss Exceeds Limit: Topline

Staff Report:
Islamabad: In continuation of our previous report released on morning of May 26, 2025, we mentioned that company is yet to receive its tariff for Supply Business. Post that, supply tariff is announced by the regulator today. Key takeaways are below;

KEL will not receive any retail margin: KEL proposed retail margin of 1.5% (of Energy Payment and Capacity Payment etc.), however, regulatory has disallowed any retail margin, in line with previous MYT wherein no retail margin was provided.

Recovery loss floor and ceiling of 1.5% not considered: KEL proposed NEPRA to limit the recovery loss/gain exposure of KEL to 1.5%, in line with retail margin. However, at the surface it seems like, this ceiling and floor idea is not considered.

Recovery loss beyond allowed limit to directly hit KEL bottom line: NEPRA has approved a recovery plan (%) for KEL which slightly aggressive than proposed by KEL. On average NEPRA has allowed 0.8% higher recovery from KEL than its proposed. Snapshot is below;

Topline Projects OGDCL Earning in 3QE FY25

Actual Recovery in FY24 and likely recovery in FY25 is likely below allowed by NEPRA: NEPRA in its tariff report has mentioned that KEL has achieved recovery of 91.50% in FY24 and FY25 recovery is expected at 90.50%. This is 175bps and 310bps lower than allowed by NEPRA for FY24 and FY25, respectively. Amidst this, KEL bottom line is likely to take hit of Rs8-8.5bn in FY24 and Rs17-19bn in FY25, respectively.

We have arrived at above numbers through taking hint from NEPRA mentioned estimates of financial impact of under recovery. As per NEPRA the financial impact of 8.5% and 9.5% for FY24 and FY25, respectively would be Rs40bn and Rs57bn, respectively.

Furthermore, on top of the higher than allowed recovery loss, the company has incurred T&D loss of 16% in FY24, higher than approved benchmark of 14.58% or by 142bps. This expose brings hit of Rs6.7bn on the company bottom line, we estimate.

In previous note we mentioned that KEL can post earnings of Rs1.15/1.25/1.43 for FY24/25/26 from generation, transmission and distribution business commutatively, however, the supply tariff and excess T&D loss can erode 47% of our earnings expectations for FY24 (shared earlier) to Rs0.55-0.65. While FY25 estimates based on alone recovery loss estimate (as T&D is not out yet) are down by 54% to Rs0.55-0.65.

We await the conduct of analyst briefing session by the company, scheduled on Jun 02, 2025 to get further clarity on potential impact of this tariff and way forward for KEL (filing review etc.). The abovementioned estimates based on our back of the envelope working and may further change after hearing from management.