IPO of Khani Khola Hydropower Company Limited

Khani Khola Hydropower Company Limited is the next hydropower company that is going to be listed in Nepal Stock Exchange. Here is my sincere opinion regarding the Company, its project and speculated share price when listed in Nepal Stock Exchange.

1) PROJECT BACKGROUND

Khani Khola Hydropower Company Limited is constructing cascade projects in Bhattedanda Lalitpur. There are two hydropower projects with a total capacity of 6.36 MW (2MW & 4.36 MW). The project is expected to come into commercial operation by the end of Jestha 2073 (according to the Company). The Required Commercial Date (RCOD) was on Chaitra 2071.

a. Project cost

The total completion cost is estimated at NPR. 1.17 billion. This makes per MW cost of NPR 183.96. The major cost components of the project are as follows.

Details	Amount (000)
Turbine	254,445
Transmission Line	15,357
Metal Works	168,295
Civil Works	546,243
Total	984,340

b. Machinery

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

c. Contract energy
The total contract energy is 32,941,439 kWh. This makes Plant Load Factor (PLF) of 59.18 percentage. This is below average. Currently, Nepali hydropower projects have PLF of at least 60 %.

d. PPA rates.

The Power Purchase Agreement (PPA) was completed on 2069 B.S. The applicable PPA rates for are 8.40 per kWh during dry season (4 months) and NPR. 8.40 per kWh during wet season (8 months). The company is entitled to get five escalations from the date of commercial operation at 3 percent (simple growth).

2) SHARE CAPITAL

Authorized capital of the company is NPR 500,000,000 while the issued capital is NPR. 465,714,300. The detail breakdown of the issued capital is presented in the table below.

Details	Amount (NPR)	Percentage
Promoter	326,000,000	70%
Local	46,571,400	10%
General Public	93,142,900	20%
Total Issued Capital	465,714,300	100%

 

3) MANAGEMENT TEAM

Mr. Bijayman Sherchan, chairperson, leads the company. He is associated with other hydropower companies such as Pashupati Energy Development Pvt. Ltd., Maya Khola Hydropower Company Pvt. Ltd. and Nabi Tradelink Pvt. Ltd.

4) KEY FINANCIAL HIGHLIGHTS

	Actual
Fiscal Year	2069/70	2070/71	2071/72	Upto poush 2072
Share Capital (000)	81,120	177,240	326,000	326,000
Reserves and surplus (000)	-	-1,026	-2,022	-4,172
Long term debt (000)	-	198,187	541,149	684,040
Revenue from electricity sale (000)	-	-	-	-
Other income (000)	1,101	1,040	2,497	-
Profit/loss (000)	-14,101	-140,704	-996	-2,150
Net Worth	100	100	99.38
EPS	-	-	-0.31
* Source : IPO Prospectus.

	Projected
Fiscal Year	2072/73	2073/74	2074/75
Share Capital (000)	465,714	465,714	465,714
Reserves and surplus (000)	-50,157	-31,131	-7,984
Long term debt (000)	-658,631	563,930	486,430
Revenue from electricity sale (000)	69,043	175,143	180,244
Other income (000)	100	100	100
Profit/loss (000)	-48,135	19,026	36,769
Net Worth	89.23	93.32	98.29
EPS	-10.34	4.09	7.9
* Source : IPO Prospectus.

Although the Company has projected almost NPR. 70 million revenue from electricity sale in its IPO prospectus for the fiscal year 2072/73, there is no way it can earn that revenue. The project is not in operation yet.

The average projected revenue of the Project is below NPR. 30 million per MW (below industry standard). Like every hydropower projects in recent times, its EPS projection is not that attractive. This is largely due to the over capitalization, higher construction cost and lower energy production. 

5)IPO

The Company is floating 20% of its issued capital to the general public and the Company's employee after issuing 10% of its issued capital to the local people few months back. Civil Capital Market Limited is the issue manager. The amount collected from the IPO will be utilized accordingly. 

Details	Amount (NPR)
Project Development & Admin. Expenses	20,000,000
Repayment of Bank Loan	73,142,900
Total Issued Capital	93,142,900

NPR. 46,571,400 collected from the local issuance had been used to repay the loan.

6) 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 Khani Khola 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. For the Grading categories 2, 3 and 4, the sign of + (plus) appended to the Grading symbols indicate their relative better position within the Grading categories concerned. Thus, the Grading of 2+, 3+ and 4+ are one notch higher than 2, 3, and 4 respectively.

7) MY VIEWS

i) The financial projection is made on the assumption that the project will supply total contract energy. Unfortunately, I have never seen any project not paying penalty to NEA whose machinery is supplied by Qiankang Allonward Hydro Equipment Co. Ltd. China. 

ii) Stock dilution to repay the project loan does not help to improve the earnings. A hydropower company will be more profitable if it maintains the loan and share capital ratio throughout the project construction period (normally 70:30, 75:25). Instead, Khani Khola Hydorpower Company Limited is issuing additional shares to repay its loan. More share capital means more hungry mouths to feed throughout life.

iii) The per MW cost of NPR. 183.96 is at the higher side whereas the energy production is comparatively at the lower side (below industry standard) I am afraid the project will not be able to give a healthy return to its investors. It looks like investors have to wait for a long time to receive dividend from this project

iv) The Company is entitled to claim NPR. 50 lakhs per MW. I haven't seen this amount included in the financial. This certainly is some sort of relief to the investors.

Finally 

After the overwhelming response shown by investors in recent hydropower IPOs, I am pretty sure this one will be oversubscribed too. As for the share price when listed in NEPSE, I will leave it up to you to speculate. I know you are experts. 

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