IPO of Rasuwagadhi Hydropower opens tomorrow; Find out the fundamentals of company before investing

Company profile

Rasuwagadhi Hydropower Company Limited is a subsidiary of Chilime Hydro Power Company Limited and was incorporated in August 2011 as a public limited company. The company has been constructing hydro power of 111 megawatt in Rasuwa District.

The project is estimated to be completed by 2020 AD. Currently, there are 33 technicians and 700 workers (including 245 Chinese) working in the project. The Chinese construction company CWE China has prioritized the construction of tunnel.

The construction of the project had started back in 2014 AD which was delayed due to many factors like shortage of petroleum product, earthquake, landslide in the nearby area and such. The cost of the project has been estimated to be Rs 16.78 arba.

The total per megawatt cost of this project is estimated to be Rs 15.12 crore including interest during construction (IDC). The normal payback period for this project is 8.12 years and discounted payback period is 13.86 years.

Earlier, the company had issued 24% share of the issued capital for the members of Employees Provident Fund from Falgun 11, 2074 to Falgun 30, 2074 and for the employees of the promoter institutions as well as employees of the local offices, it was open from Chaitra 5, 2074 to Chaitra 13, 2074. The company will issue 10% share i.e. 68,40,000 units in the future to the locals of project affected people.

Objective of the issue

About the issue

Rasuwagadhi Hydropower Company Limited under the “Janatako Jalavidhyut” scheme of the government is issuing 1,02,63,150 units ordinary shares worth Rs 1.02 arba to the general public from Baisakh 6, 2076. The early closing date of this IPO issue is Baisakh 10, 2076 and if the issue is not subscribed till Baisakh 10 then this issue can be extended upto Jestha 5, 2076.

Government had selected eleven hydropower projects within “Janata Ko Jalavidhyut” among these, Trishuli Hydropower Company recently issued its shares at Rs 10. However, the newly added hydro powers Sanjen and Rasuwagadhi will be issuing shares at Rs 100 because both of the projects have already completed more than 50% of the work.

Out of the offered 1,02,63,150 units, 4% i.e. 4,10,526 units have been set aside for the employees of the company and 5% i.e. 5,13,157 units have been allotted for the mutual funds. The remaining 93,39,467 units are for the general public. The issue capital of the company is Rs 6.84 arba and 15% share of issue capital is being offered to the general public.

Applications can be place for minimum 10 units and maximum 5,000 units. The par value of share is Rs 100.

ICRA Nepal Limited has assigned a [ICRANP] IPO Grade 4+ (Pronounced as ICRA NP IPO Grade Four Plus) to the Rs.1.02 arba worth of Initial Public Offer of Rasuwagadhi Hydropower Company Limited. Instruments with this grading are considered to have below-average fundamentals.

Siddhartha Capital Limited has been appointed as the issue manager for the IPO issuance whereas as NIBL ACE Capital Limited, Sunrise Capital Limited and Global IME Capital Limited has been appointed as the co-issue manager.

About the project

Rasuwagadhi Hydropower Company is developing a run-of-the-river (ROR) hydropower project in the Bhotekoshi river with a capacity of 111 MW in the Rasuwa district. The Generation License for the project was obtained from the Ministry of Energy on December 2012, valid for 35 years including the period of construction. The PPA for the project was signed on November 2011 with the NEA. The agreed tariff for the wet season (mid-April to mid-December) is NPR 4.8 per kWhr and NPR 8.4 per kWhr for the dry season, with 3% annual escalation on successive tariff for eight years.

According to the ICRA Nepal report, the debt component has been initially tied up with the Employees Provident Fund (EPF) at a debt-to-equity ratio of 50:50 excluding IDC, which is to be capitalized separately. The agreement to finance the forex losses remains to be completed. Including these, the debt-to-equity ratio for the project would be ~63:37. The project loan is now to be repaid over a period of seven years following its operations, as against an earlier 10-year repayment tenure. This significantly reduces the equity cash flows in the initial years and hence also remains a concern.

Underwriters

Capital structure

Shareholding structure

*The 4% for employees being issued now refers to the employees of Rasuwagadhi Hydropower Company. Whereas, the employees mentioned in this table refers to the Employees Provident Fund (EPF)'s account holders, loan providing company's employees and institutional promoter companies' employees which has been already issued and subscribed.

Primary Shareholders

Board of directors

All of the board of directors are representative of promoter institutions, therefore they have no individual shareholding.

Management team

Credit rating

ICRA Nepal has assigned an “[ICRANP] IPO Grade 4+” grading, indicating below-average fundamentals to the proposed Initial Public Offering (IPO) of Rasuwagadhi Hydropower Company Limited (RHCL). RHCL is proposing to come out with an IPO of 10,263,150 equity shares with a face value of NPR 100 each, at par.

Weaknesses and threats:

• The assigned grading is constrained by the time and cost overruns seen in the 111-MW hydropower project (HPP) being developed by RHCL.
• The project is now expected to be delayed by around 13 months from its commissioning schedule and hence would face incremental interest capitalization costs, among others.
• The project is exposed to significant foreign exchange fluctuation risks on account of the unhedged USD denominated contractual liabilities (~55% of project costs).
• The relatively low leverage in the funding mix, constraints the equity holders of better returns.
• The hydrology risk for the projects is also high, given the lack of deemed generation clause in power purchase agreement (PPA).
• The interest rate volatility in the market and the counterparty credit risks arising out of its exposure to the Nepal Electricity Authority (NEA), which has a poor financial profile, poses threat. However, this is partly offset by the sovereign support to the NEA, being fully owned by the Government of Nepal and its track record of timely payment to private HPP developers.

Strengths and opportunities:

• The strength of promoter companies (NEA and Chilime Hydropower Company Limited, which are both direct/indirect Government undertakings) and their significant experience in development and operations of hydropower projects is transferred.
• With a firm PPA in place and positive demand outlook in the power sector, the tariff and off-take risks are also minimal.
• Funding risks for the projects are also minimal as debt requirements of the projects have been tied up with the Employees Provident Fund (EPF, one of the largest state-owned retirement fund operators) and the promoters have infused their share of equity; with the remaining equity being raised through a series of IPOs.
• The current physical progress (~65-70%) also minimizes the project implementation risks to an extent.
• Going forward, RHCL’s ability to commission the project within the budgeted time and cost estimates as well as the availability of sufficient hydrology and evacuation infrastructure will be the key parameters driving the project returns.

Source: ICRA Nepal (https://icranepal.com/releases.php)

Financial performance

*The reserves and surplus is inbuilt in Accumulated profit or loss account.

Conclusion

Rasuwagadi Hydropower Project is one of the 21 projects that the government is promoting under its “Janatako Jalavidhyut" initiative.

The company is issuing IPO to general public before the project locals, which is not the general trend. Prior to this issue, the company had issued IPO for the EPF's account holding employees, loan providing company's employees and institutional promoter companies' employees. In all of those issue, the response was quite encouraging, where the issues were being oversubscribed.

Given the detailed fundamentals above, now the decision is in your hand whether or not to invest.

Source: Company prospectus and ICRA Nepal