IPO of Arun Kabeli Power Limited

Arun Kabeli Power 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

Arun Kabeli Power Limited is constructing 25 MW Kabeli B1 HEP in Kabeli River in the border of Taplejung and Panchthar districts. The construction of the project is in the full swing.

Salient Features of Kabeli B1 HEP

General
Development Region	Eastern
Zone	Mechi
Districts	Panchthar/Taplejung
Name of River	Kabeli
Nearest Town	Ganesh Chowk
Type of Scheme	Run of River
Gross Head	93.80m
Net Head	82.45m
Installed Capacity	25,000 kW
Annual Energy after outage	141.746 GWh
Hydrology
Catchment Area	710 km2
Design Discharge	36.14 m3/s
Riparian Release	0.983 m3/s
Design Flood Discharge	1,022 m3/s (100 yr. flood)
Annual Precipitation	2,508 mm
Diversion Weir
Type of Weir	Free flow concrete weir
Length of Weir	38 m
Crest Elevation	EL 703.40 m
Intake
Type	Side Intake
Size	5m x 4m
Nos.	4
Undersluice Structure
No of gates	2 nos, Radial Gates
Size	6m x 5m
Desanding Basin
Type	RCC Rectangular, Surface
No of bays	2
Dimension (LxBXH)	140m x 14m x 7.18m~10 m
Particle size to be settled	0.20 mm (90% trapping efficiency)
Headrace pond/forbay at desanding basin
Length	28.50m
Size	15.75m x 17.40m
Headrace pipe
Type	Welded Ribbed Pipe
Diameter	3.95m
Length	4,479m
Thickness	10 mm ~ 20 mm
No. of Anchor Blocks	40 nos including T and bell mouth block
No. of Manhole	1
No. of Y	from 3.954m dia to 3.75 m dia
Surge Tank Facilities
Type	Vertical Cylindrical Concrete Structure
Material	Concrete
Diameter/Height of Surge Tank	16.00 m/18.50 m
Full Supply Level	702.80 m
Connection Pipe to ST	Buried MS pipe of 4 m dia
Length of Connection pipe	200 m
Penstock Pipe
Type	Welded Ribbed Pipe, open/buried
Dia	3.75m~2.85m
Length	288m
Thickness	14 mm~32mm
Powerhouse
Type	Surface
Size	38.20m x 18m
Height	12.5m
Tailrace
Type	Rectangular, Close Duct
Length	47.10m
Size	6.31m x 4m
Turbine
Type	Vertical Axis Francis
No. of units	2
Efficiency	91.50%
Generator
Type	Synchronous 3 phase
Rated Output Capacity per unit	16000 KVA
Power Factor	0.8
Voltage	6.3 kV
Frequency	50 Hz
No. of units	2
Efficiency	96.50%
Transformer
Type	Three phase, oil immersed outdoor
No. of Units	2
Vector Group	YND 11
Rated Capacity per Unit	16200 KVA
Voltage ratio	132 kV/6.3 kV
Efficiency	99%
Transmission Line
Voltage Level	132 kV, Single Circuit
Length	4.5 Km
From	Powerhouse
To	Amarapur Substation

a. Project status

 

Headrace pipe	2,000 m completed
Intake	50% completed
Desander	50% completed
River training	100% completed
Powerhouse	Foundation completed
Electro-mechanical	Mobilization advance paid by opening L/C
Transmission line	Land required for the construction of 4.5 km (17 towers) transmission line from Powerhouse to Amarpur Substation has been purchased. Also the Tower foundation parts have arrived at the project site.
Targeted COD	By the end of Ashad 2074

Source:- IPO Prospectus

b. Project cost

The total completion cost was estimated at NPR. 4 billion at the time of financial closure where debt equity ratio was 70:30. Consortium banks agreed to finance 70 percent or NPR 2.8 billion and the rest NPR 1.20 billion was supposed to be the equity investment. However, the developers raised the equity to NPR 1.5 billion from NPR 1.2 billion at the time of IPO issuance to mitigate the likely cost overruns during construction.

This makes the total estimated project cost at NPR. 4.3 billion that translates to per MW cost of NPR 172 million.

c. Machinery

Electro-mechanical equipment is supplied by Andritz Hydro, Austria. It is a renowned company in the field of electro-mechanical equipment. Reliability and efficiency will be ensured.

The price of electro-mechanical equipment is US$ 6,750,000 (US$ 270 per kW)

d. Contract energy
The total contract energy is 141,746,470 kWh. This makes Plant Load Factor (PLF) of 64.72 percentage. This is considered as a good project in terms of energy generation.

e. PPA rates.

The Power Purchase Agreement (PPA) was completed on Ashad 29, 2069 B.S. 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 Company is entitled to get five escalations from the date of commercial operation at 3 percent (simple growth).

f. Transmission line

The power will be evacuated by constructing a 4.5 km 132 kV single circuit transmission line from the power house to Amarpur substation which lies in the World Bank funded project “Mechi corridor transmission line project”.

Transmission line from Damak to Godak substation has been completed. However, from Godak substation to Thapatar substation (41 Km) and from Thapatar substation to Amarpur substation (13 km) are still under construction.

In order to speed up the construction of transmission line, the developers of the project (Arun Kabeli Power Limited) is leading/constructing the 13 km Thapatar-Amarpur substation (40 towers). Till now, 14 towers have been completed and now the developers are planning to complete this 13 km section by the end of Poush 2073.

The Thapatar-Godak 41 km section is the critical section which is also under construction. It is constructed by Jaguar-Aster JV. Erection of towers in Phidim is the most problematic area of this section.

2) SHARE CAPITAL

Authorized capital is NPR 1,500,000,000 while the issued capital is NPR. 1,500,000,000. The detail breakdown of the issued capital is presented in the table below.

Details	Amount (NPR)	Percentage
Promoter	1,050,000,000	70%
Local	150,000,000	10%
General Public	300,000,000	20%
Total Issued Capital	1,500,000,000	100%

 

3) MANAGEMENT TEAM

Mr. Guru Prasad Neupane, chairperson, leads the Company. He is a well known figure in Nepali hydro. Mr. Guru Prasad Neupane and his team have already constructed several hydropower projects in Nepal.

4) KEY FINANCIAL HIGHLIGHTS

	Actual
Fiscal Year	2070/71	2071/72	2072/73
Share Capital (000)	420,530	745,632	1,200,000
Reserves and surplus (000)	-8,236	-5,704	-11,080
Long term debt (000)	-	-	868,001
Short term loan (000)	-	-	170,000
Revenue from electricity sale (000)	-	-	-
Other Income (000)	1,177	15,295	1,217
Administrative Expenses (000)	3,223	9,390	2,619
Advance to others (000)	89,021	250,381	379,249
Profit/loss (000)	-3,938	2,532	-5,376
Net Worth	98.04	99.24	99.08
EPS	-0.94	0.34	-0.45
* Source : IPO Prospectus. The Company has been earning interest income in the past three years.

	Projected
Fiscal Year	2073/74	2074/75	2075/76
Share Capital (000)	1,500,000	1,500,000	1,500,000
Reserves and surplus (000)	-19,885	287,989	658,596
Long term debt (000)	2,800,000	2,664,107	2,515,466
Short term loan (000)	220,007	33,923	54,397
Revenue from electricity sale (000)	-	762,774	785,658
Other income (000)	450	23,195	36,420
Administrative Expenses (000)	3,873	21,124	22,173
Operation Expenses	-	28,788	30,797
Royalty	-	17,755	18,213
Interest Expenses	-	264,485	235,537
Profit/loss (000)	-8,805	307,874	370,604
Net Worth	98.67	119.20	143.91
EPS	-0.59	20.52	24.71
* Source : IPO Prospectus.

 The financial projection of the company seems to be attractive. However, the projection is based on the assumptions that the project will come into operation by the end of Ashad 2074, 9% interest rate and supply of total contracted energy to NEA.

5)IPO

The Company is floating 20% of its issued capital to the general public after issuing 10% of its issued capital to the local people few months back. Siddhartha Capital Limited is the issue manager. The amount collected from the IPO will be utilized in construction of the project itself. 

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 Arun Kabeli Power 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.

7) MY VIEWS

i) RCOD of the project is on Baishak 10, 2074 while the company is planning to commission the project by the end of Ashad 2074. This to me is very unlikely. Timely construction of transmission line will be the key factor.

Having said that, I am pretty sure the Company will get the extension of RCOD since Mechi Corridor transmission line is not completed which is in the scope of NEA.

ii) The financial projection is made on the assumption that the project will supply total contracted energy. Unfortunately, I have not seen any project supplying total contracted energy in recent times. So I take the developers' claim with a grain of salt.

iii) The Company has raised the issued capital to NPR 1.5 billion from NPR 1.2 billion. More share capital means more hungry mouths to feed throughout life.

iv) The price of electro-mechanical equipment is US$ 270 per kilowatt. It is on the higher side.

v) The contract for hydro-mechanical and civil works have been awarded to Api Hydro-mechanical Company and Palanchwok Construction Company respectively. These companies are affiliated to Mr. Guru Prasad Neupane. Conflict of interest may arise in such case. However, smooth and efficient construction is possible when in-house companies are involved. Unlike other projects, disputes between the contractors and the developers are not likely to occur.

vi) The estimated per MW cost of NPR 172 million even with the NPR. 1.5 billion equity is in the lower side compared to the per MW cost of recently completed projects. Having said that, time will tell the actual cost per MW.

vii) It is safe to say that the project will come into operation by the end of Chaitra, 2074 (in my opinion)

viii) Regarding the dividend, let’s do a realistic calculation. First, deduct 10 percent from the forecasted revenue since no hydropower company is delivering the designed Plant Factor. This makes the first year income of NPR. 686 million ( NPR. 762 million x 90%). Out of this amount, NPR. 402 million approx. has to be allocated for the interest and principal payment (assuming 10 percent interest rate with 12 years of repayment schedule). This leaves to NPR. 284 million. From this amount, NPR 72 million is deducted (Administrative expenses, operation expenses and royalty). So the net saving will be roughly NPR. 212 million. Now do your own calculation for the dividend purpose.

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.