The next upcoming IPO: Api Power Company Limited.

Api Power Company Limited will be the next private hydropower company to float its public share. It is constructing an 8.5 MW project in Darchula district. Here is my sincere opinion regarding the Company, its projects, its future plans and projected share price when listed in Nepal Stock Exchange.

Last Update:- 4/19/2015

1) MANAGEMENT 

The Company is led by Mr. Guru Prasad Neupane. Mr. Neupane and his group have already constructed three projects in Nepal that are in operational stage.

Name	Designation
Guru Prasad Neupane	Chairman
Sanjeev Neupane	Managing Director
Mahendra Neupane	Director
Satish Neupane	Director

2) CAPITAL STRUCTURE 

The authorized, issued and paid up capital are NPR 1.2 billion, NPR 1 billion and NPR 700 million respectively

Breakdown of issued capital

Details	Amount	Percentage	Status
Promoters	NPR. 600 million	60%	paid
Local People	NPR. 100 million	10%	paid
General Public	NPR. 300 million	30%	due
Total	NPR 1 billion	100%

3) NAUGARH GAD SMALL HYDROELECTRIC PROJECT (8.5W)

It is a flagship project of the Company. It lies in Naugarh Gad River, a tributary of Chameliya River, in Darchula and Baitadi districts. The river originates from the Api Himalayan Range. 

The project is conceived as a run-of-river project with 155 meter gross head and a design discharge of 7.46 m3/sec.

The major structures of the project consists of 30 meter weir, twin settling basin, 4,500 m long penstock pipe, 31mx14.5mx13m (LxBxH) power house with 2 Francis turbine, 30m long tailrace canal and 5 km transmission line.

3.1) Technical aspect of the project

a) Hydrology and Power:- It is a snow-fed river. The contract energy is 51,934,939 kWh which makes 70% net plant factor. This is considered to be very good. In addition, 21% will be dry energy which is also a plus point of this project.

b) Geography:- The geography of the project is very favorable. Particularly, the penstock alignment area lies in the flat land making easier for construction. The risk of landslide and other geographical risks are minimal.

c) Electro-Mechanical Equipments:- The Company has used Adritz's electro-mechanical equipments. Adritz is a highly reputed Austrian company. Unlike other Chinese knock-offs, I believe this project will not suffer from penalty in the years to come due to machinery breakdown.

d) Transmission line:- The risk of power evacuation is nil for this project. The power will be evacuated through a 132 kV transmission line at Balanch Substation which is 5 km away from the powerhouse. 5 km is considered to be shorter for a size of 8.5 MW. Additionally, there is another alternative of a 33 kV transmission line for power evacuation. This can be used if there is any delay in 132 kV transmission line.

3.2) Local Problems

It is situated in Far Western Development Region of Nepal where total population is relatively small. Apart from this, hydropower project is not a new thing in this region. NEA’s 30 MW Chameliya project is just few kilometers away. So I believe local issue will be less and manageable. This will ensure smooth operation of the project.

3.3) Project Status

The project is almost completed. Test operation is scheduled to be conducted at the end of Baishak 2072. 

3.4) Project Cost

The cost per MW is about NPR. 155 million. This is one of the lowest costs I have seen in the recent time. Mr. Neupane and his team have done a commendable job.

3.5) Tariff 

The main downfall of this project is its PPA rate. It is not the new tariff. Its PPA rate is as follows.

Year	Dry energy rate per kWh	Wet energy rate per kWh
Commercial Operation Date (COD)	7.00	4.00
II Year	7.21	4.12
III Year	7.42	4.24
IV Year	7.63	4.36
V Year	7.84	4.48
VI Year	8.05	4.6
VII Year	8.26	4.72
VIII Year	8.47	4.84
IX Year	8.68	4.96
X Year	8.89	5.08

 From 10th year, the tariff will remain constant for the entire PPA period.

4) FUTURE PROJECTS OF THE COMPANY

The Company plans to construct an 8 MW Upper Naugarh Gad Small Hydropower Project that lies in upstream of existing project. Application for PPA has been made already.

 Similarly, it is planning to invest NPR. 150 million in Arun Kabeli Power Limited, a company owned by Mr. Guru Prasad Neupane. Construction of 25 MW Kabeli B-1 Hydropower Project that belongs to Arun Kabeli Power limited has just started. The construction period is expected to be three years.

5) FINANCIALS

	Actual
Detail/Fiscal Year	2068/69	2069/70	2070/71
Share Capital	10,213,000	82,748,000	502,150,000
Long-term Loan	-	2,394,000	173,435,000
Investment	-	-	90,100,000
Income from Energy Sale	-	-	-
Government subsidy
Income from Investment
Profit/(loss)	323,000	2,185,000	3,727,000
EPS	3.16	2.61	0.74
Book Net worth	89.34	96.08	98.61
	Projected
Detail/Fiscal Year	2071/72	2072/73	2073/74	2073/74	2074/75
Share Capital	1,000,000,000	1,000,000,000	1,000,000,000	1,000,000,000	1,000,000,000
Long-term Loan	970,693,000	960,558,000	1,799,222,000	1,705,202,000	1,600,210,000
Investment	150,000,000	150,000,000	150,000,000	150,000,000	150,000,000
Income from Energy Sale	55,308,000	241,870,000	292,317,000	572,396,000	589,047,000
Government subsidy	46,750,000	-	40,000,000	-	-
Income from Investment	4,135,000	6,540,000	1,740,000	16,740,000	16,740,000
Profit/(loss)	58,345,000	59,108,000	108,706,000	246,939,000	273,332,000
EPS	5.83	5.91	10.87	24.69	27.33
Book Net worth	100.14	101.05	101.92	106.61	111.95

 *NPR 5 million per MW as a government subsidy is included in the calculation.

By looking at the financials, the Company's projection doesn’t look lucrative for the first few years of operation. All the indicators are below average. The low EPS is due to over-capitalization. 

Apart from 8.5 MW project which is almost in a verge of operation, the income from 8 MW Upper Naugarh Gad Small Hydropower Project and 25 MW Kabeli B-1 Hydropower Project are just a mere forecast. 

If everything goes as per the plan, income from the entire NPR 1 billion investment will start arriving in the full swing after four years from the date of IPO.

6) IPO

NIBL Capital Markets limited is the issue manager. NPR 100 million has been raised already from the project affected area, a mandatory rule imposed by the Government of Nepal.

Please view Overwhelming response by the residents of Darchula and Baitadi districts.

The general issue of NPR 300 million will take place in about one month from now. The final approval from SEBON is yet to be received.

The collected amount will be utilized to construct an eight megawatt Upper Naugarh Gad Small Hydropower Project.

7) ICRA RATING

ICRA Nepal Limited (ICRA Nepal), the first Credit Rating Agency in Nepal, is a subsidiary of ICRA Limited (ICRA) of India. 

ICRA Nepal has assigned “IPO Grade 3”, indicating average fundamental, to the proposed initial public offering (IPO) of Api Power Company Limited. ICRA Nepal assigns IPO grading on a scale of IPO Grade 1 through IPO Grade 5, with Grade 1 indicating strong fundamentals and Grade 5 indicating poor fundamentals.

8) VERDICT

I was confident that this 8.5 MW would get new PPA rates but it looks like it is not going to be the case. Previously, government had assured to revise the tariff. The condition for such revision was to finish the construction by the end of Chaitra 2071. Now, the deadline has crossed. This is a huge blow by the way.

Confusingly, the Company is raising more capital than it actually needs. It looks like the craze in hydropower IPO is well understood by the Company and it is trying to cash-in the trend.

"You never know how market behaves tomorrow, so let’s collect capital as much as we can while market is behaving positively" I guess this is the strategy. 

I do not think it is a blunder mistake at all.  After all, our country lacks capital and whenever there is an opportunity to collect capital then, why not?

But this will directly affect the earning ratio. Hydropower revenue is pre-determined and fixed beforehand. Over capitalization means more hungry mouths to feed from its fixed income.

Finally, predicting share price is tricky in this case. It will largely depend upon the execution of future projects. However, it is safe to say that the initial price will stay in between NPR 200 to 300 i.e. 5.83x40 (EPSxPE ratio). 

There will be an increasing trend in share price if everything goes according to the plan. Assuming that the future projects will be timely constructed and the capital market remains ideal, I will not be surprised if the share price jumps above NPR 800, i.e. 24.89x40 (EPSxPE ratio) in four years time. However, it all depends on how and when the future projects will be executed. Only time will tell. We all have to wait and see.

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