Upper Tamakoshi – a reality check for much hyped hydropower?

After long delays due to various reasons, Upper Tamakoshi is now all set to float its local shares. According to its invitation letter, the projected cost is estimated to be Rs. 66.08 billion. This makes per MW cost of Rs. 14.49 crore. Although the per MW seems to be at the lower side compared to recent market trend (above Rs. 20 crore), the project, however, will not able to keep up its hype due to its lower PPA rate which is at Rs. 4.06 per kWh (average) for the first year.

Details	Billion	Percentage
Equity	10.59	16.03%
Loan	55.49	83.97%
Total	66.08	100.00%

*Invitation Letter

Even if we assume that the project is going to supply the full contract energy (personally it is very unlikely. Almost all projects in Nepal that are now in operation have not supplied full contract energy.), the project is going to earn only Rs. 9.5 billion (approx) in the first year of operation.  On the other hand, the project has to pay a yearly amount of Rs. 8.2 billion approx. for interest and principal payment (assuming 10.5% interest rate as mentioned in the invitation letter and 12 years repayment schedule, a common practice in hydropower financing).

*It should be noted that the major lenders are Employees Provident Fund, Citizen Investment Trust, Nepal Doorshanchar and Rastriya Beema Sansthan. Their lending rates fluctuates as their main basis for interest rate depends upon their interest on deposits. This is a huge risk to Upper Tamakoshi as floating interest rate offered by them will affect the profitability.

In addition to debt servicing, the project has to pay Royalty and Administrative Expenses. After deducting all these headings, the project will have Rs. 0.9 billion for Rs. 10.59 billion equity capital. It looks like the project will be able to distribute 5% dividend to its shareholders (assuming that the lending institutions will allow it).

Details	Billion
Revenue	9.5
Principal + Interest	8.2
Royalty	0.2
Administration Expenses	0.2
Balance	0.9

Above forecast is based on the fact that the project will supply full contract energy. Decline in energy even by 10% (this is very likely) will have a negative cash flow.

In the invitation letter, the project has shown Rs. 50 lakhs per MW. Few years back, government had proposed to give Rs. 50 lakhs per MW for the completed projects. But in reality, none of the completed projects has received it yet. So I have not included in the assessment.

The problem of Upper Tamakoshi does not end here. According to its prospectus (Invitation Letter), Upper Tamakoshi will come into full operation on 26^th Baishak, 2076 B.S. However, the validity of generation license is for 16 Mangshir, 2102 B.S. only. This means, it is valid for 26 and half years only compared to 30 years for other projects.

All these indicate that the much hyped Upper Tamakoshi is nothing but overrated.

What is more concerning is the date when this Invitation Letter is prepared. The figures (project cost to be specific) were approved few months back. Whether the project will be completed in the above cost is a million dollar question? Any increment in project cost will further deteriorate its financial. Among many factors, the FOREX might be one of the key elements to increase the project cost. The project has done agreement with various contractors and suppliers in Foreign Currency. About USD 120.51 million (including Electro-mechanical) and Euro 10.57 million are the Foreign Currency component. The exchange rate assumed are Rs. 105 to Rs 107 for 1 USD and Rs. 118.09 for 1 Euro while determining the project cost.

Also, the award of IPO Grade 4 (below average fundamental) by ICRA Nepal tells us the story of its financials.

Who will suffer the most?

As seen in the past IPOs, people will overwhelmingly participate in Upper Tamkoshi IPO (including local shares) for sure. But local shareholders are the one who are going to suffer the most. By the time when its lock-in period (3 years) will be finished, Upper Tamakoshi full cycle (operation) financial will be released and at that time, the share price won’t be that pretty as expected.