M.M. Securities (Pvt.

) Ltd Equity
Synergy of Finance & Opportunities
INITIATING COVERAGE
Jan 06, 2011

NISHAT POWER LIMITED

We initiate our coverage on Nishat Power Limited (NPL) with

a DDM based fair value of PKR 21.66/share. We recommend Shahid Ali
Senior Research Analyst
‘Buy’ stance on NPL as its currently offering upside potential
shahid@mmsecurities.com.pk
of 27.4% from our fair value. Further, NPL is offering attrac-
+92-21-35317703 Ext. 106
tive dividend yield of 17.6% at current level as compared to
sector dividend yield of 15% and trading discounted P/Ex of
Our research available on:
3.77 and P/Bx of 1.44. Bloomberg
http://www.mmsecurities.com.pk
Reason To Invest in NPL
Recommendation BUY

 NPL is the first Independent Power Producer (IPP) under Current Price - As of Jan 05, 2011 PKR 17.01
Fair Value - PKR 21.66
power policy 2002, which has completed Reliability Run (DDM )

Test (RRT) as required under Power Purchase Agreement Upside Potential % 27.4%
EPS - FY11E PKR 4.51
(PPA) in its first attempt at 132 KV transmission lines.
EPS - FY12E PKR 5.21
The project has finally started its commercial production
DPS - FY11E PKR 3.00
in June’10.
DPS - FY12E PKR 3.90

 NEPRA has approved revised tariff for the company Div Yield FY11E % 17.6%

which have increased overall profitability of the company Div Yield FY12E % 23.0%

for 1QFY11 and also positive for the forthcoming years. P/E FY11E x 3.77
P/E FY12E x 3.26

 we estimate that plant to operate at efficiency level of 95%

capacity factor in 2QFY11 which will be one of the highest
efficiency level in the country. Whereas, NPL plant effi- KATS Code NPL

ciency level in 1QFY11 was highest in power generation Bloomberg Code NPL.PA
Outstanding Shares mn 354.1
sector as plants operated at an optimal efficiency of 91.2%
Market Capitalization PKR-mn 6,023
capacity factor and dispatched 393,287 MWh power to
1Yr High - Low PKR 17.10-9.75
national grid during 1QFY11.
Daily Avg Volume in '000 1,414

 NPL is offering highest dividend yield in the power sec-

tor. We expect company to announce first ever cash divi-
dend of PKR 3.0 per share during FY11. Based on last
closing price of the stock, its currently offering attractive Relative Price Performance—PKR
dividend yield of 17.6% as compared to HUBCO &
KAPCO dividend yield of 15.8% and 14.3% respectively NPL KSE 100 Index
for the period of FY11.
20
FY10 FY11E FY12E FY13E FY14E 15
Net Sales (PKR mn) 1,018 17,095 18,702 19,892 20,464 10
PAT (PKR mn) 47 1,599 1,846 1,990 2,094 5
EPS (PKR) 0.13 4.51 5.21 5.62 5.91 0
Oct-10
Apr-10

Aug-10
Jan-10

Jul-10

Sep-10

Jan-11
May-10
Mar-10

Jun-10

Dec-10

- 3.00 3.90 4.50 4.85

Nov-10
Feb-10

DPS (PKR)
Dividend Yield 0.0% 17.6% 23.0% 26.5% 28.5%
P/Ex N/A 3.77 3.26 3.03 2.88
P/Bx N/A 1.44 1.30 1.20 1.11

Disclaimer: This report has been prepared by MMSPL. 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, express or implied is made as to its accuracy, completeness or correctness. All such information and opinions are
subject to change without notice. This document is for information purposes only. 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. MMSPL may, to the extent permissible by applicable law or regulation, use the above material,
conclusions, research or analysis before such material is disseminated to its customers. Not all customers will receive the material at the same time. MMSPL, their respective directors, officers, representatives, employees,
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, either as principal or agent. MMSPL may make markets in securities or other financial instruments de-
scribed in this publication, in securities of issuers described herein or in securities underlying or related to such securities. This document may not be reproduced, distributed or published for any purposes.
 M.M. Securities (Pvt.) Ltd Equity
Synergy of Finance & Opportunities
INITIATING COVERAGE
Jan 06, 2011

Valuation Methodology

We have used Dividend discounted model (DDM) for the valuation of NPL and derived a fair value of
PKR21.66/share. We recommend ‘Buy’ on NPL as scrip is offering upside potential of 27.4% and attractive
dividend yield of 00% at current level from our fair value.

DDM Valuation
Required Return 21.6%
Terminal Growth 3.0%
Risk Free Rate 15.0%
Risk Premium 6.0%
Beta 1.10
Target Price 21.66

Company Overview

NPL is a subsidiary of Nishat Mills Limited (NML) which owns 56.86% shares of the company, NPL is pri-
marily engaged in the business of power generation. The Nishat Power Project (NPP) was started in late
1995 with the permission of PPIB to NML for setting up new power generation project to offset the increas-
ing power deficit in the country. NPP has established a new power generation plant at district of Kasur
near Lahore, having gross generation capacity of 200MW a net generation capacity of 195.305 MW Residual
Furnace Oil (RFO) fired Independent Power Plant (IPP). NPL was incorporated in 2007 with the objective
to build and operate power generation plant in the country. The project has finally started its commercial
production in June’10.

Shareholding Pattern as of June’10

Source : Company Financials

Others
Individuals 11.51%
7.40%
ABL NML
15.62% 56.86%

NBP
8.61%

2
 M.M. Securities (Pvt.) Ltd Equity
Synergy of Finance & Opportunities
NISHAT POWER LIMITED
Jan 06, 2011

Project Detail

Plant Specification
The entire plant, machinery and equipment required for the project has been procured from Wartsila
Finland. Whereas, Wartsila Pakistan (Private) limited has been appointed for the construction, erection,
installation testing and commissioning of the entire project. The total cost of the project including interest
during the construction period is ~PKR R17.7 billion (bn). The project was finance with debt to equity ratio
of 75%:25% which is stander ratio for new IPP.

Power Purchase and Sale Agreement

NPL has entered into a 25 years Power Purchase Agreement (PPA) with Water and power development
authority (WAPDA) through National Transmission and Dispatch Company Limited (NTDCL), be the sole
purchaser of power generated by NPL. NTDCL has contracted to purchase the total net generation capacity
of 195.305 MW produced by NPL during the contracted period.

Fuel Supply Agreement

NPL has finalized its Fuel Supply Agreement (FSA) with Shell Pakistan Limited as the plant is operating
on residual furnace oil, for a period of ten years after the commencement of commercial production. Fur-
nace oil price will be depend on market price or as announced by ministry of petroleum for a specified time
period.

Commercial Date of Operations

NPL had successfully achieved Commercial Operation date (COD) on 09th June’10 after the delayed of
~5months due to some technical issues. However, plant of the company operated at an optimal capacity of
86% in FY11 and dispatched 88,692 MW electricity to the national grid. Further, NPL has become the first
IPP of under power policy 2002. Moreover, capacity utilization of the company has improved to 91.2% in
1QFY11 and expected to improve further in upcoming quarters.

3
 M.M. Securities (Pvt.) Ltd Equity
Synergy of Finance & Opportunities
NISHAT POWER LIMITED
Jan 06, 2011

Power Tariff

Power tariff has a typical two parts structure with and energy charges for the energy actually dispatched
and capacity charges based on available capacity. The capacity components is consist of two parts one is
scalable and the other one is non-scalable. Scalable component coated with fixed cost and an implicit return
whereas non-scalable component is coated with principal repayment and interest payment on the loan ele-
vated during the construction of project.

Further, any decline in the non scalable component depends on the payment of loan. If any decrease in the
electricity off take by WAPDA from NPL, the company’s fixed costs, implicit return and principal and in-
terest payments would still be covered through the capacity payments. The maintenance & fuel costs and
variable operations are covered by Energy Component and it is subordinated on the delivered electricity to
WAPDA and varies on the basis of fuel mix used to generate that electricity.

Reviesed Tarif Approved As of 29 Nov'10

Year Variable Charges (PKR/kwh) Capacity Charges (PKR/kwh)

Fuel Variable O&M Total Fixed O&M Working Capital Insurance ROE ROEDC W/tax Loan Payment Interest Total
1 9.12 0.6505 9.7705 0.1983 0.1997 0.122 0.3424 0.0596 0.0301 0.3755 1.2222 2.5498
2 9.12 0.6505 9.7705 0.1983 0.1997 0.122 0.3424 0.0596 0.0301 0.4365 1.1612 2.5498
3 9.12 0.6505 9.7705 0.1983 0.1997 0.122 0.3424 0.0596 0.0301 0.5075 1.0903 2.5499
4 9.12 0.6505 9.7705 0.1983 0.1997 0.122 0.3424 0.0596 0.0301 0.5899 1.0078 2.5498
5 9.12 0.6505 9.7705 0.1983 0.1997 0.122 0.3424 0.0596 0.0301 0.6857 0.912 2.5498
6 9.12 0.6505 9.7705 0.1983 0.1997 0.122 0.3424 0.0596 0.0301 0.7971 0.8006 2.5498
7 9.12 0.6505 9.7705 0.1983 0.1997 0.122 0.3424 0.0596 0.0301 0.9265 0.6711 2.5497
8 9.12 0.6505 9.7705 0.1983 0.1997 0.122 0.3424 0.0596 0.0301 1.0772 0.8206 2.8499
9 9.12 0.6505 9.7705 0.1983 0.1997 0.122 0.3424 0.0596 0.0301 1.2522 0.3456 2.5499
10 9.12 0.6505 9.7705 0.1983 0.1997 0.122 0.3424 0.0596 0.0301 1.4556 0.1422 2.5499
11 9.12 0.6505 9.7705 0.1983 0.1997 0.122 0.3424 0.0596 0.0301 0.9521
12 9.12 0.6505 9.7705 0.1983 0.1997 0.122 0.3424 0.0596 0.0301 0.9521
13 9.12 0.6505 9.7705 0.1983 0.1997 0.122 0.3424 0.0596 0.0301 0.9521
14 9.12 0.6505 9.7705 0.1983 0.1997 0.122 0.3424 0.0596 0.0301 0.9521
15 9.12 0.6505 9.7705 0.1983 0.1997 0.122 0.3424 0.0596 0.0301 0.9521
16 9.12 0.6505 9.7705 0.1983 0.1997 0.122 0.3424 0.0596 0.0301 0.9521
17 9.12 0.6505 9.7705 0.1983 0.1997 0.122 0.3424 0.0596 0.0301 0.9521
18 9.12 0.6505 9.7705 0.1983 0.1997 0.122 0.3424 0.0596 0.0301 0.9521
19 9.12 0.6505 9.7705 0.1983 0.1997 0.122 0.3424 0.0596 0.0301 0.9521
20 9.12 0.6505 9.7705 0.1983 0.1997 0.122 0.3424 0.0596 0.0301 0.9521
21 9.12 0.6505 9.7705 0.1983 0.1997 0.122 0.3424 0.0596 0.0301 0.9521
22 9.12 0.6505 9.7705 0.1983 0.1997 0.122 0.3424 0.0596 0.0301 0.9521
23 9.12 0.6505 9.7705 0.1983 0.1997 0.122 0.3424 0.0596 0.0301 0.9521
24 9.12 0.6505 9.7705 0.1983 0.1997 0.122 0.3424 0.0596 0.0301 0.9521
25 9.12 0.6505 9.7705 0.1983 0.1997 0.122 0.3424 0.0596 0.0301 0.9521

Net Capacity at COD: 195.305MW

Exchange Rate at COD: 85.40 PKR/USD
Fuel Price (Inclusive of Freight) 45,363.97 PKR/ Matric Ton
US CPI 218.03 For May 2010
WPI (Manufacturers) 170.15 For May 2010
Levelized Tariff at 60% plant Factor PKR 13,1.160/kwh

4
 M.M. Securities (Pvt.) Ltd Equity
Synergy of Finance & Opportunities
NISHAT POWER LIMITED
Jan 06, 2011

Circular Debt

The major issue for the power sector is prevailing circular debt issue in the country which has restricted
power sector to utilize their maximum capacity and lower dividend to their share holders. As for as NPL is
concern its receivables are continuously increasing from the starting of power generation business to date as
of Sept’10 NPL trade debt rises to PKR 4.44bn from PKR 2.66bn last year. However, we have discussed this
issue with the management they said that currently the impact of circular debt on NPL is not significant as
they are continuously receiving cash which is sufficient to meet their requirement.

Despite the fact Govt. had made commitment during IMF program in 2008 that Govt. to settle circular debt
issue but in last three year Govt. is not able to do so. However, recently IMF has mounted pressure on Paki-
stan to resolve circular debt issue due to which power tariff is rising on monthly basis. Govt. has plan to
rises power tariff by ~20% to eliminate overall subsidy on power sector.

Dividend Expectation
Power sector specially IPP are well known for the highest dividend payout history for investors as our cur-
rent listed companies HUBCO and KAPCO averagely maintain over 95% payout in last few years. We ex-
pect NPL to flow in same trend of paying higher dividend to its investors we have estimated that NPL to
maintain average payout of ~85% in upcoming five years. However, due to circular debt issue in the coun-
try dividend payout from the company may be on lower side.

NPL is offering highest dividend yield in the power sector. We expect company to announce first ever cash
dividend of PKR 3.00 per share during FY11. Based on last closing price of the stock, its currently offering
attractive dividend yield of 17.6% as compared to HUBCO & KAPCO dividend yield of 15.8% and 14.3%
respectively for the period of FY11.

Year EPS DPS Dividend Yield Year EPS DPS Dividend Yield
FY10 0.13 - 0.0% FY22 5.58 5.03 29.5%
FY11 4.51 3.00 17.6% FY23 6.12 5.82 34.2%
FY12 5.21 3.90 23.0% FY24 5.48 4.93 29.0%
FY13 5.62 4.50 26.5% FY25 4.95 4.45 26.2%
FY14 5.91 4.85 28.5% FY26 5.05 4.80 28.2%
FY15 6.23 5.30 31.2% FY27 5.23 4.97 29.2%
FY16 6.43 4.99 29.3% FY28 4.84 4.60 27.0%
FY17 8.06 6.45 37.9% FY29 4.65 4.41 25.9%
FY18 8.90 6.68 39.2% FY30 5.19 4.41 25.9%
FY19 9.48 7.59 44.6% FY31 5.76 5.48 32.2%
FY20 9.64 8.19 48.2% FY32 5.73 4.87 28.7%
FY21 4.93 4.19 24.6% FY33 5.10 4.59 27.0%

5
 M.M. Securities (Pvt.) Ltd Equity
Synergy of Finance & Opportunities
NISHAT POWER LIMITED
Jan 06, 2011

Financial Highlights

1QFY11 Performance Review

NPL has announced PAT of PKR 55.365mn and EPS of PKR 0.16 for 1QFY11, however after NEPRA notifi-
cation PAT of the company has increased to PKR 635.32mn translating into earning per share of PKR 1.79
as compared to LAT of PKR 1.55mn and LPS of PKR 0.005 in corresponding period last year. The signifi-
cant increase in bottom line earnings of the company is mainly due to startup of commercial power produc-
tion in last quarter of FY10. Further, during 1QFY11 plant operated at optimal efficiency with 91.2% capac-
ity factor which is significantly higher when compared to other power plants in the country.

During 1QFY11 top line of the company increased to PKR 4,919.2mn, primarily due to ~393K MWh electric-
ity produced and sold by the company. Moreover, company financial charges during the quarter were PKR
701.68mn as compared to negligible amount paid last year.

1QFY11 1QFY10
Net Sales 4,919.2 -
Cost of Sales 3,578.6 -
Gross Profit 1,340.7 -
Other Operating Income 13.2 1.8
Finance Cost 701.7 0.0
PBT 639.9 0.9
Taxation 4.6 0.6
PAT 635.3 (1.6)
EPS 1.79 (0.01)

FY11 expectation:
We expect NPL to post PAT of PKR 1,599mn and EPS of PKR 4.51 for the year ended June’11 as compared
to PAT of PKR47mn and EPS of PKR 0.13 in corresponding period last year. The massive increase in bot-
tom line earning of the company directly relates with the startup of commercial power production during
the year which has boosted overall profitability of the company. Further, we expect company to announce
cash dividend of PKR 3.0/share for FY11. Further, we estimate that power plant to operate at average ca-
pacity utilization of 85% during the year, whereas plant capacity utilization in 1QFY11 was 91.2%.

Moreover, in upcoming years we expect company profitability to rise significantly due to better capacity
utilization which will increase capacity charges as well as fuel saving will also support the bottom line
earnings of the company. We estimate that the company will declare handsome amount of dividend in
forthcoming years as other power plants paid in their initial face, as per our expectation scrip is presently
offering attractive average dividend yield of ~26.0% for the period of FY11-FY16.

6
 M.M. Securities (Pvt.) Ltd Equity
Synergy of Finance & Opportunities
NISHAT POWER LIMITED
Jan 06, 2011

Financial Highlights

P & L Statement
PKRmn FY09 FY10 FY11E FY12E FY13E FY14E FY15E
Net Sales - 1,018 17,095 18,702 19,892 20,464 19,219
Cost of Sales - 796 13,102 14,576 15,641 16,283 15,145
Gross Profit - 223 3,993 4,126 4,251 4,181 4,074
Administrative Expenses 8 17 55 83 91 96 97
Other Operating Income 58 52 206 335 280 365 511
Finance Cost - 185 2,473 2,415 2,352 2,229 2,102
PBT 50 72 1,671 1,963 2,089 2,221 2,387
Tax 3 25 72 117 98 128 179
PAT 47 47 1,599 1,846 1,990 2,094 2,208
EPS (PKR) 0.13 0.13 4.51 5.21 5.62 5.91 6.23
DPS (PKR) - - 3.00 3.90 4.50 4.85 5.30

Balance Sheet
PKRmn FY09 FY10 FY11E FY12E FY13E FY14E FY15E
Property, Plant & Equipment 14,971 16,667 15,829 15,032 14,276 13,558 12,876
Current Assets 67 5,769 15,845 18,974 21,136 22,886 21,173
Total Assets 15,037 22,437 31,673 34,006 35,412 36,444 34,050
Equity 2,940 3,615 4,171 4,634 5,030 5,407 5,738
Long Term Loan 11,397 13,897 12,958 12,250 11,430 10,480 9,379
Current Liabilities 701 4,924 14,545 17,123 18,952 20,557 18,933
Total Equity & Liabilities 12,098 18,821 27,503 29,373 30,382 31,037 28,312

Key Ratios
FY09 FY10 FY11E FY12E FY13E FY14E FY15E
EPS (PKR) 0.13 0.13 4.51 5.21 5.62 5.91 6.23
DPS (PKR) - - 3.00 3.90 4.50 4.85 5.30
BVPS (PKR) 8.30 10.21 11.78 13.09 14.21 15.27 16.20
PEx N/A N/A 3.77 3.26 3.03 2.88 2.73
PBVx 2.05 1.67 1.44 1.30 1.20 1.11 1.05
Dividend Yield 0.0% 0.0% 17.6% 23.0% 26.5% 28.5% 31.2%
ROE 1.6% 1.3% 38.3% 39.8% 39.6% 38.7% 38.5%
ROA 0.3% 0.2% 5.0% 5.4% 5.6% 5.7% 6.5%
EBITDA Margin N/A 29.4% 29.1% 27.7% 26.1% 25.3% 26.9%
GP margin N/A 21.9% 23.4% 22.1% 21.4% 20.4% 21.2%
Net margins N/A 4.6% 9.4% 9.9% 10.0% 10.2% 11.5%

7
 M.M. Securities (Pvt.) Ltd Equity
Synergy of Finance & Opportunities
NISHAT POWER LIMITED

Research Team

Amjad Nazir Chief Operating Officer & Head of Research coo@mmsecurities.com.pk +92-21-35396983
Shahid Ali Senior Research Analyst shahid@mmsecurities.com.pk +92-21-35317703
Muhammad Mohsin Ali Research Analyst research@mmsecurities.com.pk +92-21-35317704

Sales Team

Saqib Hussain Head of Sale & Portfolio Management saqib@mmsecurities.com.pk +92-21-35313911

Salma Aamir Sales Coordinator salma@mmsecurities.com.pk +92-21-35317706

Rana Saghir Ahmed Sales Coordinator rana@mmsecurities.com.pk +92-21-35317705
Sania Zulfiqar Sales Coordinator sania@mmsecurities.com.pk +92-21-35313912
Shahzada Haris Rashid Sales Coordinator hairs@mmsecurities.com.pk +92-21-35388719
Muhammad Imran Alvi Sales Coordinator imran@mmsecurities.com.pk +92-21-35396982
Muhammad Farhan Sales Coordinator farhan@mmsecurities.com.pk +92-21-35897063
Asif Raza Rawjani Sales Coordinator raza@mmsecurities.com.pk +92-21-35313913
Shahwaiz Jouzy Sales Coordinator s.jouzy@mmsecurities.com.pk +92-21-35396982

Contact us:

M.M. Securities (Pvt.) Ltd.

M. M. Tower, 3 – C,
Khayaban-e-Ittehad,
Phase – II, Extension,
Defence Housing Authority,
Karachi – 75500, Pakistan.
P.O.Box # 12414
Tel : +9221-35317703-04
Fax: +9221-35895328
http://www.mmsecurities.com.pk
E-mail: research@mmsecurities.com.pk

Group:
http://www.mmgoc.com.pk

Analysts’ Certification:

We, Mohsin Ali & Shahid Ali, are the authors of this report, hereby certify that all of the views expressed in this research report accurately reflect
our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of my compensation was, is, or will be di-
rectly or indirectly related to the specific recommendation(s) or view(s) in this report.

Disclaimer: This report has been prepared by MMSPL. 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, express or implied is made as to its accuracy, completeness or correctness. All such information and opinions are
subject to change without notice. This document is for information purposes only. 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. MMSPL may, to the extent permissible by applicable law or regulation, use the above material,
conclusions, research or analysis before such material is disseminated to its customers. Not all customers will receive the material at the same time. MMSPL, their respective directors, officers, representatives, employees,
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 8
and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise, either as principal or agent. MMSPL may make markets in securities or other financial instruments de-
scribed in this publication, in securities of issuers described herein or in securities underlying or related to such securities. This document may not be reproduced, distributed or published for any purposes.