Sitara Energy Limited

Jawwad Cheema, director projects at Sitara Energy Limited was sitting in his office in a relaxed

mode. He had a personal file of a trainee engineer in front of him; trainee engineers were paid Rs

10,000 per month for a probation period of one year at Sitara Energy. Jawwad was wondering

how businesses exploit the economic conditions and unemployment. He wanted to change this

culture. He had his sympathies with the employees.

Jawwad was a 68 year old man. He had studied engineering from Japan and then he worked for a

Saudi Arabia based multinational firm for 20 years. He came back to Pakistan in 1995 and joined

Sitara Energy as the General Manager. Then in year 2000, he was promoted as Director Projects

and since then he has been working in that capacity. He played a major role in setting up the

thermal power plant in association with a Japanese company. He was a respected figure in the

company. But even a person of his stature had a very limited influence on company operations

and policies.

Power Sector in Pakistan

The electricity and power sector of publically registered companies consists of 17 companies in Pakistan

with total paid up capital ranging from Rs.75.4 billion to Rs.80 billion. Sitara energy`s core competitors

are Nishat Chunian, Nishat Power, Kohinoor Energy, Kot Addu Power and Hub power company.

Nishat chunian Power started its operations in mid 2010 and has a total capacity of producing 200 MW of

energy. The total paid up capital of the company is Rs.3.67 billion and the company is a subsidiary of

Nishat Chunian Ltd which was founded in 1990 as a single spinning unit and is considered as a market

leader in spinning industry.

Nishat Power also has a gross capacity of producing 200 MW worth of energy; the company has a net

efficiency of 45% and started its operations in 2009. It has a total paid up capital of worth Rs.3.54 billion

and it comes under the head of Nishat Group of Industries.

Kohinoor energy was incorporated in 1994 and has a total paid up capital of Rs.1.69 billion and has a net

capacity of producing 124 MW of energy. The company is a subsidiary of Saigols group of companies.

Kot Addu Power Company was inaugurated in 1996 and was listed in April 2005. It has the highest

capacity of producing 1600 MW of energy among its competitors. The company is independent with a

total paid up capital of Rs.8.8 billion.

Lastly, Hub Power is one of the earliest independent power producers, which disclosed its financials in

1995 and started its operations in 1997. This station was co financed by several governments, the World

Bank as well as international private sector. It has a total paid up capital of Rs.11.57 billion. The plant

consists of four generating units; each consists of 323 MW gross outputs.

Sitara energy, however, has a total paid up capital of Rs.190 million, which is much lower than its

competitors and has a capacity of producing 90 MW of energy. The company incorporated in 1991 and

started its commercial operations in 1995 with an installed capacity of producing 48 MW of energy

initially.

Energy Crisis

Currently, Pakistan is facing a serious energy crisis. Despite strong economic growth in the past

decade and a rising demand for energy, no worthwhile measures have been taken to set up new

capacity for generation of the required energy sources Consequently, the demand exceeds supply

and so “load-shedding” is on the rise. Pakistan needs about 15000-16000MW electricity per day,

and the demand is likely to rise to approximately 36,000 MW per day by 2015. (Exhibit 1).

Presently, it can produce about 12, 500 MW per day resulting in a shortfall of about 3000-

4000MW per day. As per Pakistan Economic Survey 2009-10, electricity consumption has

increased by 9.6 per cent during first three-quarter of last fiscal year. However, a top level

WAPDA official said that electricity demand surged up to 14 per cent during last quarter. It is

argued that Pakistan needs a quantum jump in electricity generation in order to avoid load

shedding since there is a shrinking gap between demand and supply of electricity. The energy

supply needs to keep pace with the economic growth of the country.

According to an official report, the gap between firm supply and peak hour’s demand has

already been shrunk to three digit (440 MW) and will slip into negative columns next year

(-441 MW) and further intensify to (-1,457 MW) in future years. (Pakistan Economic Survey)

A renowned textile annalist Aziz Memon says “We have problems of infrastructure, inefficiency

and decades of mismanagement”

According to Fawad Khan, an energy analyst at a leading investment firm in Karachi, “in

Pakistan during 2008 the electricity cuts were as long as 3 hours a day on an average. However,

by 2011 this downtime has grown to eight hours per day on average”. Pakistan's reliance on oil-

based electricity has grown from 16% of total output in 2005 to 38% in 2010. Analysis’s are of

the opinion that this dependence is adding to the energy crisis in Pakistan. (Exhibit 2)

Aziz Memon was reported to have said "Most countries in the region like India, Nepal,

Bangladesh are facing energy shortages, but our problem is probably the worst”

Company

Sitara Group of Industries is one of the biggest industrial groups of Pakistan. The group began its

operations with textile weaving sector in 1956 under the leadership of two brothers, Haji Abdul

Ghafoor (Late) and Haji Bashir Ahmed. As of today, Sitara group is dealing in textile clothing,

fabric, chemical, chemtec, peroxide and energy sectors.

Sitara Energy Limited is a limited company which was incorporated in 1991. It started its

commercial production in 1995 with installed capacity of 48 Mega Watt. As of today, there total

production is 90 Mega Watt and out of this 40 MW is sold to Faisalabad Electric Supply

Company (FESCO), whereas remaining 50 MW is sold to the private sector. The plant runs 24

hours a day and 7 days a week.

Sitara Energy is a public limited company, which is listed on the Karachi Stock Exchange (KSE-

100 Index). The company is not a part of the KSE-30 Index however the company`s sales grew

at an average rate of 23% and has doubled its sales volume in last seven years (Exhibit 3). The

gross profit margin of the company in the latest year (2011) is 11.9% whereas the net

profitability margin of the company is 2.4%. This shows that the company has huge operating

costs that result in a decrease in its overall profitability. The total Equity of the company is

Rs.1.23 million. A major factor of concern is that the company`s quick ratio is 0.51 which is less

than 1, hence denoting severe financial situation of the company. The company does not have

enough cash available to cover its short-term financial needs. The net profit of the company is

also volatile in last seven years. It has been changing its trends all around. The company started

paying its dividends at the rate of 25% in 2008 but could not maintain the percentage and

decreased it to 10% in 2011.

Currently, there are 279 employees at Sitara Energy who are on regular pay roll and another 35

work as daily wagers. The company has implemented certain Human Resources practices in

order to effectively manage the workforce. The employees work in three shifts of 8 hours each.

Most of the employees are engineers and others are diploma holders. The positions like engine

room supervisors, engine operators, control room supervisors and boiler operators are filled with

diploma holders. Shift Engineer is the senior most technical position.

Human Resource Management at Sitara Energy Limited

The Personnel Management at Sitara Energy is merged with the general Administration

department and it is managed by only two people. Mr. Nadeem Gujjar was the Manager P&A

(Personnel and Admin) and Yasin was his assistant (Admin Supervisor). A workforce of nearly

300 was managed by these two people. Nadeem Gujjar was responsible for recruiting, appraising

and compensating employees. He was supposed to report directly to the CEO, Mr. Javid Iqbal.

(See Exhibit 4, the Organization Chart)

Recruitment at Sitara Energy is done by advertising a vacant position in the renowned

newspapers of the country. Once the applications are received, they are short listed on the basis

of document verification and then a pool of candidates is finalized for the interviews. The first

interview in done by a committee of four, which consists of Head of Department (from the

concerned department), a Head Office representative, Director Projects and Manager P&A. Once

the candidate is recommended by this committee then his final interview is done by the CEO.

Once the employee is on Sitara Energy’s payroll, he is eligible for all the benefits offered by the

company. The benefits include medical facility at the factory, provident fund and house rent

allowance. Moreover, in case a married employee dies during service, his widow will get the

pension throughout her life.

As far as the appraisal system was concerned, all the employees are evaluated on their

performances once a year. The performance is evaluated by the Head of Department and then it

is counter signed by Manager P&A. So it can be said that Management of Sitara Energy tries to

implement some basic HR functions in the company.

Comments of Employees

Jawwad was aware of rapidly increasing dissatisfaction among employees. He knew what an

engineer would feel when he is paid 10,000 rupees a month during one year training and then

after confirmation of job he would get rupees 25,000 a month (See Exhibit 5 for Employee

Profile). This was the salary of electrical and mechanical engineers from universities like UET,

COMSATS and BZU. The salaries of engine room supervisors, engine operators and boiler

operators were far below the engineers. Jawwad described this situation as follows:

“In Pakistan, a business man cannot be successful if he does not know how to exploit the

employees. Given the economic situation and unemployment, we can afford to offer the

minimum possible salary and we will get maximum possible output”.

He further explained the working of the Personnel and Admin department as follows:

“There is no HR department in the company. Certain HR policies are there on papers but they are

never implemented. If there is a vacancy in the company, I will get a CV from the CEO’s office

and the person is to be selected.”

Navid Mughal, who works as a shift engineer at Sitara Energy is in the company for last 11

years. He is 37 years old and has 4 children. His opinion about the compensation packages at

Sitara Energy is:

“I am at the senior most technical position in the company. The salary I am getting is hardly

enough for me to run my kitchen expenses and send my children to some good school. Normally

after spending this much time in an organization people get settled, but I am seriously thinking of

switching my job”.

Ghulam Murtaza, a trainee engineer who got his electrical engineering degree from UET, was

extremely unhappy with the company. According to him:

“I have been here for last 6 months, now that I have got the basic knowledge of the job, I try 24

hours a day to leave this job and go to some better place”

This is precisely the reason that turnover for engineers is very high. Most of the trainee engineers

leave after 8 to 10 months of training and they often get a job where they get better pay package.

Waqas Akram, Ex- Head of Electrical Department left the company after working there for 11

years. His experience at the company is as under:

“I was the Head of Department at the electrical department, but I was not happy with what Sitara

was paying me. So I left the company when I found a better opportunity. There is a very severe

communication gap between management and employees. Employees are unaware of certain

benefits which they can get from the company. For example, the managerial level employees

have this facility that they and their families can avail medical facility from Aziz Fatima Hospital

at a 30% concession. But no employee can avail it unless CEO approves the particular request.

So I was not happy with employees related policies of the company.”

Waqas was a very well qualified engineer. He got his degree in electrical engineering from NED

University of Engineering and Technology. Sitara Energy is facing this turnover issue of

engineers but it is not a major concern for the management.

Another thing which could affect people like Waqas to switch their jobs is the growth

opportunities within the company. Top two positions of Director and General Manager were

occupied by same persons for last 12 years or so. Similarly, Manager P&A was on that seat for

nearly 15 years. The department heads were not promoted from shift engineers, instead they

were appointed from outside and they were also there for a period of more than 10 years. In these

circumstances, young and enthusiastic people could not find any opportunity of reaching the

higher level.

Opportunities for Sitara:

A successful man once said “I like to tell people that all of our products and business will go

through three phases. There's vision, patience, and execution.” (Steve Ballmer)

Sitara energy is going through the phase of stagnation for a very long period of time and the

stagnant period seems to persist in the near future. There are tremendous growth and expansion

opportunities in the industry and also in this country which is short of the basic necessity,

“electricity”. The load shedding being a major problem of Pakistan in the year 2011 is thrusting

the nation back to the Stone Age when the seed of productivity and change was sown. But

unfortunately, no such seed is being sown at the moment of current crisis. Particularly in case of

Sitara Energy, here lies a great opportunity to attempt to meet the electricity requirements in the

country. Since the company deals in selling electricity to WAPDA, it can increase the production

and sell more units to WAPDA. Expansion in case of Sitara means that the company decides to

invest in new plants. For this purpose, the covered area of the company needs to be extended and

in order to do so; a huge initial investment is required. The initial investment consists of paper

money and more importantly an investment in knowledgeable workers. Sitara is at the stage

where it needs to grow. The growth can be carried out by using the present workforce in a

manner which results in higher productivity and efficiency of the company.

Alongside catering with the internal problems the external environment needs to be looked upon.

There is a high level of unemployment in the country. Highly educated electrical/ mechanical

engineers from well-established universities are wandering around unemployed. To top that,

there is availability of cheap labor which is highly qualified. Why isn’t Sitara looking at this

aspect as an opportunity?

Jawwad closed the file of that engineer with a lot of dreams and wishes in his mind. He knew he

could do a lot of things for the betterment of Sitara Energy, but for that he must own the

company.

EXHIBIT 1

DEMAND AND SUPPLY GAP PROJECTION FOR PAKISTAN

YEAR MW GAP (MW)2010 24,474 6,5772015 36,217 18,3202020 54,359 36,4622025 80,566 62,6692030 113,695 95,798Source: Pakistan Electric Power Company (PEPCO)

EXHIBIT 2

Pakistan's electricity generation by type

Oil: 38% Gas: 29% Hydel: 29% Others: 3%

Year: 2010 Source: Pakistan Energy Year Book (2000-2010), KASB

Exhibit 4 : Organization Chart

CEO

Director Project

HODElectrical

Supervisor

General Manager

HODMechanical

Supervisor

Manager P&A

HODUtilities

Supervisor

Supervisor

Exhibit 5: Employee Profile

Designation Qualification Tenure in the

company

Salary

Director Project Electrical Engineer(Japan) 16 years Rs. 102,000

General Manager Mechanical Engineer 13 Years Rs. 85,000

Manger P&A B.A (arts graduate) 17 Years Rs. 65,000

HOD Electrical BTech 6 Years Rs. 50,000

HOD Mechanical BTech 12 Years Rs. 50,000

HOD Utilities B.A (Art Graduate) 13 Years Rs. 40,000

Supervisor Electrical DAE 10 Years Rs. 20,000

Supervisor Mechanical FA (Intermediate) 13 Years Rs. 20,000

Supervisor Admin BA (Art Graduate) 17 Years Rs. 25,000

Supervisor Utilities FA (Intermediate) 10 years Rs. 20,000

Shift Engineers (3) Electrical Engineers 10 to 12 Years Rs 35,000

Shift Engineers (3) Mechanical Engineers 8 to 10 Years Rs. 35,000

Trainee Engineers Engineering Degree 2 to 6 Months Rs. 10,000

Boiler Operator B.E 5 Years Rs. 52,00

Note: Salaries of Engine room supervisors, Control Room Supervisors, Engine Operators and

Time Keepers vary between Rs. 5000 to 10,000, depending upon their experience.

Exhibit 3

Financials (All Figures are in ‘000)

Years 2011 2010 2009 2008 2007 2006 2005

Profit and Loss Statement

Net Sales3,753,49

23,875,481 3,009,929 2,286,357

1,461,24

01,346,031 1,154,752

Cost of Sales3,305,51

03,397,026 2,551,158 1,919,613

1,284,94

81,241,283 1,135,474

Gross Profit 447,982 478,456 458,770 366,745 176,292 104,748 19,278

Other Income 9,841 4,794 7,168 14,032 7,422 28,364 1,889

Operating Profit 366,296 376,323 404,518 310,083 136,108 97,012 (11,198)

Finance Cost 295,903 303,742 324,180 211,447 142,013 89,662 28,921

Profit Before Tax 91,527 106,927 80,338 112,669 1,518 7,351 (40,119)

Taxation 487 269 698 358 339 398 275

Profit After Tax 91,041 107,195 81,035 112,311 1,179 6,953 (40,394)

Dividend (%) 0 20 20 25 - - -

Bonus - - - - - - -

Right - - - - - -

Balance Sheet

Paid Up Capital 190,920 190,920 190,920 190,920 190,920 190,920 190,920

Total Equity1,236,27

71,183,420 1,114,409 1,081,104 968,792 967,613 960,660

Current Liabilities1,838,05

61,496,000 1,377,056 1,084,109

1,009,87

61,007,194 741,091

Long Term Liabilities 296,815 867,727 949,595 1,075,711 882,845 120,971 46,200

Total Liabilities1,234,87

02,363,727 2,326,561 2,159,820

1,892,71

21,128,165 787,291

Current Assets 951,136 1,065,017 1,067,153 950,716 662,945 1,043,688 806,477

Fixed and Long Term

Assets

2,399,78

32,451,382 2,373,817 2,290,208

2,198,55

81,052,090 941,474

Total Assets3,350,91

93,516,399 3,440,970 3,240,924

2,861,50

32,095,778 1,747,951

Investments 49,995 50,000 50,000 50,000 - 50,000 50,000

Total Capital Employed1,533,09

22,051,147 2,063,914 2,156,815

1,851,63

71,088,584 1,006,860