IPO of Union Hydropower limited opened yesterday; Things to know before making your decision

Company profile

Union Hydropower Limited was established in August 2006. It converted into a public limited company on March 2016. Unon Hydropower has 11 promoters. The promoter holding is expected to dilute to ~51% after proposed IPO, assuming full subscription.

Union Hydropower's construction of 3.3 MW Midim Khola Project had completed in 2074 and has started production and sales of electricity since Magh 15, 2074. It has also received approval for construction of 23 MW Mewa Khola Project.

In the phase 1 of IPO, Union Hydropower had issued 7,50,000 unit shares for the locals of Lamjung district at par value of Rs 100. Out of the total units, only 1,28,210 units were subscribed and allotted to the valid applicants. The remaining units will now be issued to the general public.

The proposed projects include 72 MW Upper Tamor-A Hydro Electric Project (HEP) in Taplejung, 21.87 MW Hongu Khola HEP in Solukhumbu and 15.73 MW Mewa Khola HEP in Taplejung. UHL currently holds survey license for first two projects while the license for Mewa Khola HEP is held by a SPV Union-Mewa Hydro Limited where UHL plans to hold 35% stake (post IPO of SPV). UHL plans to have ~10% stake in each of the other two project SPVs but this may change at a later date. Preliminary feasibility studies for these projects have been completed which shows that capacity of Hongu Khola HEP and Mewa Khola HEP can be enhanced to 29.62 MW and 23.23 MW respectively. Given the nascent stage of the proposed projects, detailed project feasibility, cost estimates, funding mix and sources, tariff rates etc are not available (This paragraph is taken from ICRA Nepal's report on Union Hydropower's IPO rating).

Objective of the issue

Repayment of loans taken from finanacial Institutions to finance the construction of Midim Khola Hydropower Project.

About the issue

Union Hydropower Company Limited is issuing 35,34,340 units (including 6,21,790 units unsubscribed by locals) IPO shares at Rs 100 face value to the general public from today (Chaitra 13, 2075). The early closing date of this IPO issue is Chaitra 17, 2075 and if the issue is not subscribed till Chaitra 17 then this issue can be extended upto Baisakh 12, 2076.

Interested investors can apply for a minimum of 50 units and maximum of 35,000 units of shares for a par value of Rs 100. Application can be placed from the financial institutions providing C-ASBA facility or through Meroshare.

ICRA Nepal has assigned Grade 5 rating to the IPO issue which indicates poor fundamentals.

Laxmi Capital has been appointed as the issue manager for the IPO issuance.

Underwriters

Shareholding composition

Debt structure

Board of Directors

Management Team

Credit rating

ICRA Nepal has assigned an “[ICRANP] IPO Grade 5”, indicating poor fundamentals to the proposed Initial Public Offering (IPO) of Union Hydropower Limited (UHL). UHL is proposing to come out with an Initial Public Offer of 3,662,550 numbers of equity shares of face value NPR 100 each at par. Of the total shares, 750,000 shares will be issued to project affected areas while remaining 2,912,550 shares will be issued to general public and staffs of UHL.

Major factors affecting the grading:

• Weak project profile of the operational 3 MW hydel developed by UHL led by high project cost (~NPR 265 million per MW), and low leverage in the funding mix (Debt: Equity mix of ~50:50 as of now) which constrain the project’s return potential.
• Return indicators will also be impacted on account of lesser number of tariff rate escalations and penalties led by substantially delayed commissioning of the project (by ~34 months) compared to Required Commercial Operation Date (RCOD).
• The proceeds from IPO would be inadequate compared to the total equity requirement for proposed projects (equity requirement of NPR 7,361 million out of which UHL plans to invest NPR 1,103 million) and hence the ability to raise large funds from investors in future will be critical.
• Interest rate volatility in the market and the 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 Government owned and has been making timely payments to UHL so far.
• Volatility in revenue on account of inherent fluctuations in hydrology while lower tariff escalations can additionally reduce the return for investors.

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

Financial performance

Conclusion

Securities Board of Nepal (SEBON) had recently issued a directive whereby Hydropower companies with Ratings indicating poor fundamentals would not be allowed to issue IPO. Union Hydro Company’s ICRA rating is Grade 5 indicating poor fundamentals, but since it had been approved before the Directive came into application Union’s IPO was not affected.

The companies affected by it are here. 

The issue to Locals had gone under-subscribed, however the first day collection  of the issue to general public seems to have generated interest among investors.