IPO of Barun Hydropower Company Limited

Barun Hydropower Company Limited is the next hydropower company that is going to be listed in Nepal Stock Exchange. The company has already floated 10% of the issued capital to project affected area, a mandatory requirement of Nepal government. It was oversubscribed by two times. Now, 20 percent of the total issued capital will be offered to general public, i.e. IPO. Civil Capital Market Ltd. is the issue manager. Here is my sincere opinions regarding the company, project and speculated share price when listed in Nepal Stock Exchange.

Project Background

Barun hydropower limited company owns 4.5 MW Hewa Khola Small Hydropower Project that lies in Jaljala VDC, Sankhasawa district. It can be accessed by Koshi Highway. The biggest advantage of this IPO is the status of the project itself. Unlike IPOs of other hydropower projects that do IPO during construction phase, the project of this company is in operation. It started its commercial operation on 2068/04/21. This means the company is actually generating revenue.

Intake

Desander

Surge Tank

Headrace pipe

Share Capital

Authorized capital of the company is NPR 350,000,000 while the issued capital is NPR. 243,000,000. The detail breakdown of the issued capital is presented in the table below.

Details	Amount (NPR)	Percentage
Promoter	170,100,000	70%
Local	24,300,000	10%
General Public	48,600,000	20%
Total Issued Capital	243,000,000	100%

Management Team

Mr. Shailendra Guragain, Chairperson, leads the company. He is a renowned figure in the field of Nepalese hydro. His team has constructed two projects that are in operational stage. Besides Mr. Guragain, there are professionals having diverse background, mainly in hydropower , political and financial sector. Overall, the company has a strong management team.

Machinery

Electro-mechanical equipment is supplied by Qiankang Allonward Hydro Equipment Co. Ltd. China. The reputation of Chinese machine these days is not so good. Most of the hydropower companies that have installed Chinese machinery are facing problems, mainly penalty to NEA because it does not deliver efficiency. Inefficient machinery reduces the actual generation of energy.

One of the problematic areas is the transmission line for power evacuation. Loss is inevitable in 33kV single circuit line.

Contract Energy
The energy generated from this project is sold to NEA. The total contract energy of this project is 16,699,754 kWh. This makes a net Plant Load Factor (PLF) of 42 percentage. This is where I see a huge concern regarding the revenue stream that is going to have an impact throughout the tenure of PPA. Normally, hydropower these days do have plant factor above 60 percent. In layman term, "the higher the PLF, the better". The lower PLF represents lower sell-able energy that will decrease the revenue stream.

PPA rates.

The PPA of this project has been categorized in two bands. Below are the ppa rates of the project.

Details	PPA rate per kWh
	2.4 MW	2.1 MW
Dry season	5.52	7
Wet season	3.9	4

*There is an escalation of 3 percent every year (simple growth) for the nine years from the date of commercial operation.

By looking at the PPA rates, the project has got older PPA rates. Currently, the standard PPA rate for the project below 25 MW is NPR. 4.80 per kWh during wet season and NPR 8.40 per kWh during dry season. Having said that PPA price is a relative term. This project was constructed when constructing hydropower project per MW was in between NPR 120-140 million. Now it is in the range of NPR 150-180 million.

Key Financial Highlights

Fiscal Year	Revenue	Long term Loan	Net Profit	Reserve
2068/69	69,202,000	401,414,000	(27,669,000)	(27,669,000)
2069/70	82,881,000	360,077,000	5,254,000	(22,415,000)
2070/71 (unaudited)	99,680,000	256,984,000	26,014,000	3,599,000
2071/72 (projected)	100,654,000	222,180,000	33,151,000	10,021,000

Fiscal Year	EPS	Book Net Worth
2068/69	(16.27)	83.73
2069/70	3.09	86.82
2070/71 (unaudited)	13.38	101.85
2071/72 (projected)	13.64	104.12

IPO

Civil Capital Market is the issue manager. It has already issued local share in the project affected area. The prospectus for the IPO has been submitted to SEBON. The IPO of this project will start from 1st of March 2015.

According to the IPO prospectus, the company will utilize the collected amount to repay loan although the company has a project called Down Piluwa Khola Hydropower Project (9.5MW). Generation license for this 9.5 MW project has been acquired. Similarly, another hydropower project called Upper Hewa Khola (8 MW) is also in the process of signing PPA.

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 4", indicating below average fundamental, to the proposed initial public offering (IPO) of Barun Hydropower 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.

Verdict

No doubt the IPO of this company is going to be oversubscribed. But what about the share price when listed in Nepal stock exchange?

By looking at the current market trend, project status and company financials, the debut price at NEPSE will be at around NPR 200 to 300. The company's revenue is around NPR 100 million. Given the project size of 4.5 MW, the revenue per MW is NPR 22.22 million which is at a lower side. I can say that this project is not a "real gem".  

The market price of this company will largely depends upon the dividend policy and  how it will utilize it's collected IPO money. The company is developing two projects (8MW and 9.5 MW). If company goes for the aggressive dividend policy without investing in-house earned (profit) money in these two projects, the share price of the company will be hampered in the long run. Likewise, if the company's intention is just to repay the debt from the IPO collections in order to distribute cash dividend to its shareholders, the company's share price will suffer in the long term. Hence, the company should adopt strict dividend policy, at least for few years. Its objective should be constructing these two projects from the company's in-house money rather than issuing right shares or collecting additional capital. If it does so, it has a bright future ahead.

As per the share price speculation for a short term, the price in between NPR 300 to NPR 400 down the line will be a safe bet if the current trend in NEPSE follows.

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