It is big and it is coming: HIDCL’s IPO

It may come as a surprise to some that HIDCL is going to do the largest IPO in the history of Nepal since many of us do not clearly know what HIDCL is all about. Here is my review of HIDCL and its upcoming IPO.

LAST UPDATE:- 18/09/2015

1) GENERAL BACKGROUND

Hydroelectricity Investment and Development Company Limited (HIDCL) was formally established on 11 July, 2011. The main objective of this Company is to invest its capital in middle to mega hydropower projects, transmission line and distribution.

The state-owned Company with an authorized capital of NPR 50 billion also provides refinancing facilities to banks for electricity generation.

Authorized capital	50 billion
Issued Capital	10 billion
Paid up Capital	8 billion

Issued Capital Breakdown

Details	Amount	Percentage	Status
Ministry of Finance	2 billion	20%	Paid
Ministry of Energy	1 billion	10%	Paid
Ministry of Law and Justice	1 billion	10%	Paid
Office of Financial Controller General	1 billion	10%	Paid
Employee Provident Fund	1 billion	10%	Paid
Rastriya Beema Sansthan	1 billion	10%	Paid
Citizen Investment Trust	1 billion	10%	Paid
General Public (including Employees)	2 billion	20%	Due
Total	10 billion	100%

2) What does HIDCL actually do?

a) invest either as debt or equity in hydroelectricity generation, transmission and distribution projects.

b) invest exclusively in hydropower projects.

c) invest in generation of projects above 25 MW. (lend at least NPR. 250 million in this category)

d) invest through bank consortiums in generation of projects in between 15-25 MW (lend at most NPR. 200 million in this category)

e) provide refinancing facilities to banks for generation of projects in between 10-15MW at Bank's Risk.

f) borrow loans and receive grants from foreign and international financial institutions so as to invest in projects with a certain margin.

g) issue financial instruments such as bonds, debentures, and certificate of deposit for long term capital mobilization.

Hydro business is bustling as we all know. The scope of work that HIDCL is into will be rewarded eventually (This is what I personally think). It is aiming to provide much needed capital to hydro developers.

3) What has HIDCL done so far?

HIDCL has never headed a hydropower project. But it has made commitment for the debt financing in few hydropower projects.

a) Mistri Khola

Location	Myagdi
Project Capacity	42 MW
Project Cost	NPR 5.8 billion
Debt Equity Ratio	75:25
Total Loan	NPR 4.24 billion
HIDCL Loan	NPR 1 billion

b) Lower Solu

Location	Solukhumbu
Project Capacity	82 MW
Project Cost	NPR 18.32 billion
HIDCL Loan	NPR. 600 million

c) Khani Khola 

Location	Dolakha
Project Capacity	30
Project Cost	NPR 3.304 billion
Debt Equity Ratio	70:30
Total Loan	NPR 2.6 billion
HIDCL Loan	NPR 400 million
Interest Rate	12%
IRR	20.58%

d) Dordi

Location	Lamjung
Project Capacity	27 MW
Project Cost	NPR 4.235 billion
Debt Equity Ratio	75:25
Total Loan	NPR 3.18 billion
HIDCL Loan	NPR. 500 million
Interest Rate	12%
IRR	14.35%

e) Kabeli B1

Location	Taplejung and Panchthar Districts
Project Capacity	25 MW
Project Cost	NPR. 4 billion
Total Loan	NPR. 2.80 billion
HIDCL Loan	NPR. 200 million

f) Solu Khola

Location	Solukhumbu
Project Capacity	23.5 MW
Project Cost	NPR. 4.099 billion
Debt Equity Ratio	75:25
Total Loan	NPR. 3.07 billion
HIDCL Loan	NPR. 200 million
Interest Rate	12%
IRR	16.99%

g) Bagmati Nadi

Location	Makawanpur
Project Capacity	20 MW
HIDCL Loan	NPR. 200 million

Although HIDCL has made commitment in various projects, the actual loan disbursement in these projects is almost nil. The construction of above projects is expected to go in the full swing in near future. In addition to the above projects, there is a preliminary agreement of NPR. 150 million with 21.6 MW Lower Hewa Khola.

h) Power Transmission Company Nepal (PTCNL)
HIDCL has made 14% investment in Power Transmission Company Nepal Limited (PTCNL). PTCNL is developing 40 km of the transmission line on the Nepali side of the boarder which is a part of the much hyped Dhalkebar-Mujaffarpur cross-border transmission line project. This transmission line will facilitate power trade between Nepal and India. The investment in PTCNL which is still under-construction has not earned revenue for HIDCL.

i) Agent Banking
HIDCL also acts as an agent bank for international development bank such as World Bank and ADB. A recent example is the management of US $ 40 million loan to 37.6  MW Kabeli-A from IFC. HIDCL will get fees for such management. Similarly, ADB is preparing to provide US $ 50 million soft loan to HIDCL. It is in the final stage. This concessional loan will be utilized in hydropower generation.

j) Remit Hydro Limited
It is going to be the subsidiary company of HIDCL. It plans to develop projects up to 200 MW. HIDCL will have a shareholding of 51% in this company. 24% of the investment will come from the migrant workers, 10% percent from the local people where project will be located and the remaining 15% will be raised from Initial Public Offerings (IPOs). The company is planning to come up with Equal Installment Method (EMI) scheme for migrant workers to buy the shares. However, this company is still at nascent stage.

3) FINANCIALS

The Company has consecutively distributed five percent dividend for the fiscal year 2069/70 and 2070/71. The key financial highlight of the Company is as below.

Particulars/Fiscal Year	Actual
	68/69	69/70	70/71
Share Capital (000')	6,500,000	8,000,000	8,000,000
Investment (000')	-	-	8,400
Net Profit (000')	355,220	417,503	433,454
EPS	5.46	5.22	5.42
Book Net Worth	105.46	109.65	110.06

Particulars/Fiscal Year	Projected
	71/72	72/73	73/74
Share Capital (000')	10,000,000	10,000,000	10,000,000
Investment (000')	328,400	890,400	1,818,600
Net Profit (000')	285,607	432,493	452,457
EPS	2.86	4.32	4.52
Book Net Worth	106.91	106.24	105.76

The projection shows a steady growth in investment which is always nice. Likewise, there is a steady growth in net profit too. The low net profit in the fiscal year of 71/72 is mainly due to the issue management expenses. The issue management fee is expected to be NPR 80 million.

On the contrary, the EPS is below standard. By looking at the financials, the Company is unlikely to distribute any sort of dividends for the next few years. (The financial mentioned above was submitted to SEBON for the IPO approval. The fiscal year 2071/72 was not over when the prospectus was prepared.)

4) CHALLENGES
 
HIDCL has not been able to disburse the committed loan so far. The loan commitment of NPR 3.1 billion is only in paper. The biggest challenge for HIDCL is to invest its capital in its core activities. Also, HIDCL other activities like agent banking, PTCNL and Hydro remit are still at a nascent stage. These activities have not earned a single penny for HIDCL.

Currently, the main income of HIDCL is the interest income.

Do not get confused by the term "interest income". The interest income in HIDCL's case is the interest from its capital that has been deposited in various banks and financial institutions. The Company is literally sitting on a big pile of idle cash (paid-up capital is NPR 8 billion).
 

In addition, HIDCL is mainly involved in debt financing only. This is where HIDCL should expand its work area. Debt carries fixed interest rate whereas the return on equity is significantly higher (risk is also higher, by the way).

5) IPO

HIDCL is floating NPR. 2 billion (20 million ordinary shares) in the market very soon. This is going to be the largest IPO in the history of Nepal so far. It is expected to float its share before Dashain. Citizen Investment trust is the issue manager while NCM Merchant Banking and NMB Capital are the co-issue mangers. One can apply from 50 to 5 million shares.

The collected amount from IPO will be utilized in the core activities of the company such as debt financing. Apart from this, HIDCL is planning to develop a project within a range of 100 to 200 MW.

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 3", indicating average fundamental, to the proposed Initial Public Offerings (IPO) of HIDCL. 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.

7) SHARE PRICE SPECULATION

No wonder, HIDCL’s IPO will be oversubscribed by looking at the present market trend. The share price should stay at no more than NPR 200 (EPS x Industry Average PE ratio). I have taken the Industry average of 40 (PE ratio).

One should take a note that 20 million ordinary stocks in the capital market is quite huge. I am afraid the supply side will be much higher when listed in NEPSE. This will eventually lower the share price.  

8) MY FINAL VERDICT

For those investors who are looking for a steady dividend income, this is not their cup of tea; at least for few years.
 
The long term prospect, however, seems to be very bright. Firstly, this Company is backed by the government. Secondly, this Company is planning to construct a project in the range of 100 to 200 MW on its own (This is the ‘must’ for HIDCL in order to boost its cash flow).

Lastly, there is a huge scope of Agent Banking for HIDCL since international development banks such as ADB and World Bank are more likely to mobilize their funds through government backed organization rather than private banks.

As for the capital gain is concerned; there are claims by some share pundits that its share price will go above NPR 200 within a short period of time. But I take such claim with a pinch of salt. To me, anywhere in between NPR 140 to 180 is fair price in the short term.

In the long term, the sky's the limit. We will have to wait and see how HIDCL will tackle its challenges.
 
Finally, it may be worthwhile to mention that the chance of getting allotment in this IPO is pretty high. Those who are frustrated with the amount of shares they actually receive during allotment in previous IPOs will be smiling. 

For similar reviews of upcoming hydropower IPOs, please follow the link below.

Upper Tamakoshi Hydropower Project and Its IPO; Fully Explained 

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United Modi Hydropower Limited: IPO analysis.

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