ICRA Nepal assigns Grade 5 rating to upcoming IPO of Aankhu Khola Jalvidhyut; Ratings indicate poor fundamentals

ICRA Nepal has assigned an “[ICRANP] IPO Grade 5”, indicating poor fundamentals to the proposed Initial Public Offering (IPO) of Aankhu Khola Jalvidhyut Company Limited (AKJCL).

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. AKJCL is proposing to come out with an Initial Public Offer of 2,000,000 numbers of equity shares of face value NPR100 each at par. Of the total shares, 800,000 shares will be issued to project affected areas while remaining 1,200,000 shares will be issued to general public and staff.

The assigned grading is constrained by the poor financial profile of AKJCL involved in development and operations of 8,400 KW hydro-electric project (HEP).  High project costs (~NPR 281million per MW) coupled with fixed tariff have impacted the profitability of the company.

The grading is also constrained by moderate operational performance of the HEP with plant load factor (PLF) at net generation of ~53% in FY 2017 and ~47% in 11M FY 2018 as against the contract energy PLF of ~63% and ~60% respectively, which coupled with high  financial  leverage, has resulted  in  weak earnings  and  insufficient  cash  flows. This  has,  apart  from  impacting  project  returns,  also  resulted  in  requirement  of  additional  funds  (in  the form of loans from promoters) to meet funding gap. Lack of strong institutional promoters and diversified promoter base limits the quantum of support that can be expected from  promoters  in future.

Grading concerns also emanate from risks arising from any loss of generation due to insufficient hydrology which could further impact the project earnings and returns.

The  project  is  also  exposed  to substantial  risks arising from interest rate volatility in the market as the loan repayment period has been extended over 20 years and  also to  counterparty  credit  risks  arising  out  of  exposure  to  loss-making  Nepal  Electricity Authority (NEA) for the energy supplied, although the same is partly mitigated by the fact that NEA is fully owned by the Government and has been making timely payments to AKJCL so far.

Aankhu Khola HEP  is  the  first  hydropower  project  developed  by AKJCL.  Delayed  by  ~18  months compared to Required Commercial Operations Date (RCOD)of February 2012, the project has been in operation since August 2013. The project was commissioned at a cost of NPR 2,364 million funded in a debt: equity mix of ~72:28. The tariff rates for contract energy as per PPA (Power Purchase Agreement) with NEA are NPR 4 and NPR 7 for wet and dry seasons respectively; subject to annual escalation after Commercial Operation Date (COD) @ 3% on base tariff for 9 years. Under the Government’s initiative of promoting private sector hydropower developers, the project is eligible for promotional tariff rates of NPR 4.80 and NPR 8.40 per unit in wet and dry seasons; which shall remain effective for up to 7^th year after proposed COD  with  5  times  annual  escalation  of  3%  on  base  tariff.  The  electricity  sales  revenue  shall thereafter  be  based  on  the  rates as  per  PPA.  The  power  generated  by the  project is  evacuated  via 12 km, 33 kVA transmission line to Dhading besi sub-substation. Since the revenues are entirely linked to unit sales from a single operational project, the project returns, and  the  financial  health  of  the  company are entirely  dependent  on  the  hydrology  of  the  project  stream. The project has operated at PLF (at net generation) of 50-55% during FY2015-FY2017 vs. annual design energy PLF of ~63% and thus generated an average of ~80-85% of contract energy resulting in sizeable revenue loss, in addition to occasional short supply penalty. Owing to slight improvement in generation in FY2017, net energy supplied was ~85% of contract energy (~80% in FY2016) and hence AKJCL posted gross sales revenue of ~NPR 218 million in FY2017compared to ~NPR 205million in FY 2016. However, despite the growth in revenue, the company reported higher losses of ~NPR 24 million over OPBDITA of ~NPR  183 million during  FY 2017  vs. losses of  ~NPR 6million during FY 2016 over OPBDITA  of ~NPR 1>1,100promoters hold 100% of capital as of now .171 million. This was mainly due to lower  non-operating  income;  AKJCL has  reversed  contractor  and other liabilities during last two years (~NPR 66 million and ~NPR 31 million respectively) that prevented the company from reporting higher losses.

As such reversals has remained nominal in 9M FY18 and also generation being slightly

Lower (net PLF of ~51% vs. contract PLF of ~61% for the period i.e. ~16% short of contract energy), the company reported loss of ~NPR 26 million over OPBDITA of NPR 148 million. As the company has sustained sizeable losses so far, its net worth per share has depleted to ~NPR 54 (vs.  face  value  of  NPR  100  each)  as  of  Apr-18. Significant  interest  expenses have been  impacting  the profitability,  accordingly  the  management plans to  utilize the current  IPO  proceeds  towards  downsizing bank  loans(with  plans  to  settle  other project  liabilities  later  on)  could  provide  some  comfort. The company had ~NPR 1,535 million of outstanding term loan payable to the consortium banks as on mid-April 2018 as  per provisional financials, translating  into a  gearing  ratio  of 4.79times. AKJCL’s track record  of  debt  servicing  (which  began  from  mid-April  2015  and  is spread  over  20  years) remains supported by ballooning  repayments which  entail  small  portion  of  principal  repayment  in  initial  years. However,  volatile  interest  rate  scenario  seen  in  banking  sector  remains  a  concern  to  this  end. Going forward, the  ability  of  the  project  to  achieve  its  design  operating  parameters  will  be the  most important driver for the project returns.

Company profile

Incorporated  in  2008  as  a  private  limited  company, AKJCL was subsequently  converted  into  public limited company in August 2010 to facilitate public participation. Promoters account for the entire paid up capital of the company as of now and the promoter holding is expected to dilute to 75% after proposed IPO, assuming  full  subscription. The  shares  of  the  company  are  proposed  to  be  listed  in  the  stock exchange  post  proposed  IPO.  As  a  part of  the  IPO  process,  the  company  would  issue  10%  of  its  post IPO  paid-up capital  to  the  local  inhabitants  of  project  affected  areas  following  which  remaining  15% capital shall be offered to general public and staffs of the company. The company is at present operating 8,400KW  Aankhu  Khola -1  hydro-electric  project,  located  in  Salyankot  and  Marpak  VDCs  of  Dhading District in Central Nepal.