We recently upgraded our recommendation for Companhia Paranaense de Energia (ELP), also known as COPEL, a fully integrated electric utility of Brazilfrom Underperform to Neutral.
The company is one of the leading Brazilian electric utility companies and accounts for approximately 7.0% of total electricity production in the region, with 99% of its production derived chiefly from hydroelectric sources.
With the global economy reviving gradually from the recent crisis, demand for electricity is seen to be rising, especially in emerging countries like Brazil. The country’s economy is growing with large investments being made to improve its infrastructure and power generation capabilities. The country derives the majority of its power needs from hydroelectric sources.
In the third quarter of 2010, the company’s bottom-line results soared 11.5% year over year on the back of a 13.5% top-line increase. Other positives were the company’s terminating the tariff discount policy and higher sales volume in the quarter.
Growth momentum was, however, restricted due to rising operating expenses, which registered a 12.4% year-over-year growth in the quarter attributable to a 17.7% year-over-year increase in electricity purchased for resale, a 56.4% hike in materials and supplies, and a 79.7% increase in raw material and supplies for electricity generation. Third party service expenses soared 21.3%, while provisions and reversals were up by 139.4%.
Looking on the positive side, uncertainties related to political interference have abated with the election of Beto Richa as the next governor of Parana for the 2011-2014 term. The newly elected governor aims at improving management and operational practices of the company.
Considering all these factors and expecting further improvements and good performance in line with the market, we upgrade Copel from Underperform to a Neutral recommendation.
COPEL-ADR PR B (ELP): Free Stock Analysis Report
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