United Modi Hydropower Limited: IPO analysis.

United Modi Hydropower Ltd. is a registered public limited company established under the companies Act 2063 of Nepal, with an objective of promoting hydropower in Nepal through private investment.

Last update: 01 March, 2017

It was registered as a private limited company on 5th Mangsir 2064 (21st Nov, 2007) at Office of the Company Registrar, Nepal Government. It was later converted into a Public Limited company on 28th Chaitra 2070 (11th Apr, 2014). The Company is promoted by well-known Builders and hydropower entrepreneurs having long experiences in the related field, including the local people of the project areas.

Name	Position
Sukuntalal Hirachan	Chairman
Sudhir Pd. Timilsina	Managing Director
Mukunda Prasad Timilsina	Director
Krishna Prasad Acharya	Director
Ashish Thapa	Director
Narendra Ballav Panth	Director
Sunil Bhakta Shrestha	Director

1. STATUS

Currently, the Company has two projects in hand. The first is the Lower Modi-1 Hydropower Project (10 MW) which is in operation since November 2012. The second is the Lower Modi-2 Hydropower Project (10.5 MW), a cascade project. Both projects are located at Modi Khola, along the Pokhara – Baglung Highway in Parbat District in Dhaulagiri Zone of Western Development Region of Nepal. The road distance of the project sites from the capital Kathmandu is 280 kms. 

I) Lower Modi-1 Hydropower Project (10 MW)

The project is run of the river project at Modi Khola of Parbat district. The construction of the project started in early 2010 and was completed in August 2012. The project started generating electricity since November 2012

a. Salient Features of Lower Modi-1 Hydropower Project:

Type of Scheme	Run-of-River (RoR)
River	Modi Khola
Location	Chuwa, Kushma Parbat (Along Pokhara-Baglung Highway)
Power and Energy
Gross Head / Net Head	50 m / 46.25 m
Design Discharge	26 m3/sec
Installed Capacity	10 MW
Annual Energy	61.01 GWh
Hydrology
Catchment Area	575 km2
Design Flow	26.0 m3/sec.
Mean Annual Flow	55.9 m3/sec.
Design flood Q1,000	1123 m3/sec
Structures
Intake	Side Intake, 4 orifices (7.15 m3 x 4)
Settling Basins	Double Chamber, 0.2 mm, 100m x 10 m x 6.5m
Headrace Canal	Rectangular RCC, length 2101 m, size 4.8 m W x 3.25 m H
Forebay	Rectangular RCC, 50m x 10m x 6.5 m, Volume 3000 m3
Penstock Pipe	Steel, 60 m x 2 nos., Internal diameter 2.4 m
Turbine	2 units Francis Turbine
Tailrace Tunnel	Rectangular, Length 39 m
Transmission line	132 kVA Single Circuit, 8 km ( to NEA Dimuwa Substation – 23 Towers)
Construction Time Period	2.5 Years
Test Operation	Since 2069 Ashwin 18 ( 04 October 2012) Grid Connection
Commercial Operation (COD)	2069 Mangsir 09 (24 November 2012)

b. Project cost

This project was completed at a cost of NPR. 2,114 million (NPR 214 million per MW) with a debt:equity ratio of 70:30. This is extremely on the higher side.

c. PPA rates.

The applicable PPA rates are 8.40 per kWh during dry season (4 months) and NPR. 8.40 per kWh during wet season (8 months). The project is entitled to get five escalations from the date of commercial operation at 3 percent (simple growth).

d. Contract energy
The total contract energy is 61.01 GWh. This makes Plant Load Factor (PLF) of 70 percentage which is extremely good. However, the project has not been able to generate energy no way near its designed PLF in reality. For the last two years, the PLF of this project is about 57%. This will result in revenue loss.

II) Lower Modi-2 (Cascade) Hydropower Project (10.5 MW)

Lower Modi-2 Hydropower Project (10.5 MW) is being developed as the cascade project of the upstream Lower Modi-1 Hydropower project. The project is almost ready for construction. The energy generated from the project will be evacuated to the national grid by 3 km, 132 kv transmission line to existing Lower Modi-1 switchyard and then on common system to NEA Modi Substation at Dimuwa, Parbat. The connection agreement is concluded with NEA, and the PPA is also concluded.

a. Salient Features

Type of Scheme	Run-of-River (RoR), Cascade of Lower Modi-1
River	Modi Khola
Location	Kushma, Parbat (Along Pokhara – Baglung Highway)
Power and Energy
Gross Head / Net Head	49.40 m
Design Discharge	26.0 m3/sec
Installed Capacity	10.5 MW
Annual Energy	62.15 GWh
Hydrology
Catchment Area	645 km2
Mean Annual Flow	55.9 m3/sec
Design flood Q100	1123 m3/sec
Key Developments:
Survey License	Owned by United Modi Hydropower Ltd.
Connection Agreement	Concluded in November 2014
PPA	Completed
IEE	Completed
Financial Closure	Final stage of completion

b. Project cost

The project with an estimated cost of NPR. 1,787 million (NPR. 170 million per MW) has received Letter of Intent (LOI) from Citizens bank international limited. Financial Closure is at the final stage.

c. PPA rates

The applicable PPA rates are 8.40 per kWh during dry season (4 months) and NPR. 8.40 per kWh during wet season (8 months).

d. Contract energy
The total contract energy is 62.15 GWh. This makes Plant Load Factor (PLF) of 67.4 percentage which is extremely good.

2) SHARE CAPITAL

Authorized capital is NPR 1,250,000,000 while the issued capital is NPR. 1,150,000,000. The detail breakdown of the issued capital is presented in the table below.

Details	Amount (NPR)	Percentage
Promoter	862,500,000	75%
Local	115,000,000	10%
General Public	172,500,000	15%
Total Issued Capital	1,150,000,000	100%

3) KEY FINANCIAL HIGHLIGHTS

	Actual
Fiscal Year	2070/71	2071/72	2072/73
Share Capital (000)	713,845	722,239	862,500
Reserves and surplus (000)	-48,716	-25,809	13,564
Long term debt (000)	1,414,490	1,340,428	1,192,384
Revenue from electricity sale (000)	277,333	271,274	147,188
Other Income (000)	919	5	127,674
Administrative Expenses (000)	14,172	17,892	20,019
Employee expenses (000)	11,917	12,869	14,562
Direct expenses (Royalty and Penalty)	10,028	9,232	7,586
Interest Expenses (000)	173,703	134,816	119,542
Profit/loss (000)	1,408	24,228	39,373
Net Worth	93.15	96.41	101.47
EPS	0.20	3.35	4.57
* Source : IPO Prospectus.

		Projected
Fiscal Year		2073/74	2074/75	2075/76
Share Capital (000)		1,150,000	1,150,000	1,150,000
Reserves and surplus (000)		35,338	41,972	61,131
Long term debt (000)		1,118,724	1,876,372	2,295,136
Revenue from electricity sale (000)		297,930	336,857	342,705
Other income (000)		50	-	-
Administrative Expenses (000)		31,084	34,042	35,356
Royalty (000)		6,969	7,757	7,874
Interest Expenses (000)		106,107	98,277	90,110
Profit/loss (000)		79,273	121,634	134,159
Net Worth		103.07	103.65	105.32
EPS		6.89	10.58	11.67
* Source : IPO Prospectus.

4) 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 United Modi Hydropower Limited (UMHL).

5) IPO

The Company is floating 15% of its issued capital to the general public after issuing 10% of its issued capital to the local people few months back. NIBL Capital Markets Limited is the issue manager. The amount collected from the IPO will be utilized for the construction of 10.5 lower Modi-2 hydropower project.

6) MY VIEWS
i) The combination of higher per MW cost of the Lower Modi-1 Hydropower Project (NPR 214 million per MW) and lower PLF (57% PLF in the past two years against the designed PLF of 70%) is the main reason why the Company has not been able to cross 5 EPS mark.

ii) Although the second project (Lower Modi-2 Hydropower Project) is claiming a PLF of 67%, I take this claim with a pinch of salt.

iii) The construction of Lower Modi-2 Hydropower Project will be much easier and cheaper than the first one since all the necessary infrastructures are already in the place. Also, I see no problem for power evacuation. The generated power can be evacuated through the existing substation.

iv) Unlike other hydropower companies which do IPO to repay its loan, the only intention of the Company is to use the IPO money for the construction of Lower Modi-2 Hydropower project (according to IPO prospectus). This is a good thing for investors.

v) Regarding the dividend prospects, I do not bother to forecast its dividend. First, Lower Modi-2 Hydropower project has not received the generation license yet so doing prediction of its total revenue at this stage makes no sense. Second, expecting dividend from new hydropower companies (compared to hydros’ glorious past) is irrelevant and it is not the fault of the Company. Hydro in Nepal is just a bubble. Yes the Company could have lower the construction cost of its first project to increase the profitability but it is too late.

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.