ICRA Nepal has assigned a grading of [ICRANP] IPO Grade 4, indicating below average fundamentals, to the proposed rights issue grading of NPR 567 Million of API Power Company Limited (API). API is proposing to come out with a rights issue of 5,670,000 equity shares with a face value of NPR 100 each, at par. The proceeds from the proposed issue has been planned to be utilized for the development of 40 MW Upper Chameliya Hydropower Project (HPP).
The grading is constrained by the significant project execution risk and the funding risk in the 40-MW Upper Chameliya HPP amid the nascent stage of project development and the yet-to-be-achieved financial closure. Further, typical project implementation risks such as natural calamities/geological changes can result in time and cost overruns for the under-construction 40-MW Upper Chameliya HPP, exposing the project to various risks such as cost escalation, late COD penalty, loss of tariff escalations and reduction in the project period. The grading is also constrained by the 10% reserve margin clause in the PPA of the 40-MW project, which empowers the NEA to offtake 10% energy-based on the dispatch instruction of the load dispatch center without paying any compensation for non-offtake of the same. This can impact the revenue stream from the project to some extent. The grading is also constrained by the likely dilution in the profitability indicators over the medium term, arising from the proposed sizeable equity enhancement. Grading concerns further arise from the interest rate volatility in the market and the counterparty credit exposure of the Nepal Electricity Authority (NEA), which has a moderate financial profile (with recent improvements).
Nonetheless, the grading factors in the rich experience of the promoter group and the management team in the field of hydropower (Group has seven operational HEPs totaling 57.3 MW). The grading also considers the company’s track record of timely project execution so far. However, the ability to reflect a similar performance in the proposed 40-MW project remains to be seen. The grading action also notes the low evacuation risks for the two operational projects as well as the proposed 40 MW HPPs with the availability of the Nepal Electricity Authority (NEA) evacuation structures in Balanch substation. Further, the grading take comfort from the positive demand outlook for the energy sector owing to the supply-demand gap in the power sector as well as the increasing energy consumption in the nation. Also, firm long-term PPAs for each project with fixed tariff and fixed escalations eliminate the offtake and tariff risks for the project.
As of mid-January 2020, promoters held 60% stake in API while 40% was held by the general public. API plans to utilize the proposed issue proceeds in constructing the 40-MW Upper Chameliya HPP.
Source: ICRA Ratings Nepal