NEPAL > IPO Analysis of Dibyashwari Hydropower Limited

Dibyashwari1
Dibyashwari Hydropower 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
Dibyashwari Hydropower Limited is constructing 4 MW hydropower project at Sabha Khola in Dhupu VDC, Sankhuwasabha. The Required Commercial Operation Date (RCOD) was on Chaitra 2071. The project is planning to come into operation by the end of Shrawan, 2073 (according to the IPO prospectus).
a. Project status
The project has a design discharge of 17 cumes with a gross head of just 35 meters. It is near to completion. According to the IPO prospectus, 92% work has been completed as of 2073/01/30. The proposed substation is Tirtire substation which is 16 kilometers from the powerhouse. There is a possibility of evacuating 4 MW energy but few works still need to be completed.
b. Project cost
The total completion cost is estimated at NPR. 850 million. This makes per MW cost of NPR 212.5 million. Lack of prior experience in hydropower sector and extremely low head project are clearly reflected in the project cost.
c. 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.
d. Contract energy
The total contract energy is 21,784,799 kWh. This makes Plant Load Factor (PLF) of 62.17 percentage. This is an average project in terms of energy generation.
e. PPA rates.
The Power Purchase Agreement (PPA) was completed on Falgun 17, 2068 B.S which was later amended on 2070/08/19. 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). TheCompany is entitled to get five escalations from the date of commercial operation at 3 percent (simple growth).
2) SHARE CAPITAL
Authorized capital is NPR 560,000,000 while the issued capital is NPR. 264,000,000. The detail breakdown of the issued capital is presented in the table below.
Details
Amount (NPR)
Percentage
Promoter
   198,000,000
75%
Local
     26,400,400
10%
General Public
     39,600,000
15%
Total Issued Capital
   264,000,000
100%
3) MANAGEMENT TEAM
Mr. D. R. Niraula, chairperson, leads the Company. He seems to have no prior working experience in hydropower sector. In fact, none of the directors seems to have extensive experience in hydro.
4) KEY FINANCIAL HIGHLIGHTS
Actual
Fiscal Year
2069/70
2070/71
2071/72
Upto poush 2072
Share Capital (000)
100,000
100,000
160,568
198,000
Advance share capital
34,754
37,432
                 –
Reserves and surplus (000)
-4,723
-12,391
-11,516
-14,380
Long term debt (000)
 –
244,827
328,675
Short term loan
47,828
69,832
Revenue from electricity sale (000)
 –
Profit/loss (000)
-953
-7,668
-4,289
-2,864
Net Worth
95.28
87.61
94.18
EPS
-0.95
-7.67
-2.17
* Source : IPO Prospectus.
Projected
Fiscal Year
2072/73
2073/74
2074/75
Share Capital (000)
264,000
264,000
264,000
Reserves and surplus (000)
-26,832
-10,989
7,306
Long term debt (000)
 521,893
498,636
472,588
Revenue from electricity sale (000)
 37,960
112,514
112,514
Other income (000)
1,195
2,650
2,650
Profit/loss (000)
-15,316
15,844
18,296
Net Worth
86.45
95.84
102.77
EPS
-5.80
6.00
6.93
* Source : IPO Prospectus.
Although the Company has projected NPR. 37.96 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 funny thing about this projection is that the planned date for commercial operation is mentioned as Shrawan 2073 in the same prospectus.
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 and the higher construction cost.5)IPO

The Company is floating 15% 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. Ace Capital Limited is the issue manager. The amount collected from the IPO will be utilized to repay the project 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 Dibyashwari Hydropower 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.

7) MY VIEWSi) The project has been already delayed by more than a year. Its RCOD was on Chaitra 2071. This means, the number of PPA escalation will be decreased. Although theCompany is trying to extend the RCOD, the chances of extension is very slim. I am afraid this project has to pay penalty for the delayed operation if the developers fail to extend the RCOD.

ii) The price of electro-mechanical equipment is NPR 146.9 million. I think it is on the higher side.
iii) 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.iv) 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, Dibyashwari Hydropower Limited is issuing additional shares to repay its loan. More share capital means more hungry mouths to feed throughout life.

v) The per MW cost of NPR. 212.5 million is extremely at the higher side. When your cost per MW is like this, investors are advised not to expect dividend from the project for at least 5 to 8 years after the energy generation.

vi) The Company is entitled to claim NPR. 50 lakhs per MW after the commercial operation. 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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