Know the status and financial performance of Chilime Hydropower and its 4 other subsidiaries; also find out the projects understudy

Company Information:

Chilime Hydropower company limited was incorporated in 1995. Chilime owns and operates 22.1 MW power plants commissioned on August 25, 2003, and located in Rasuwa district. The plant started its commercial generation from 8^th Bhadra 2060 (24^th August 2003). The company sells bulk electricity to NEA in the long term PPA price.

Board of Directors:

The situation of Hydropower in the country:

With the first hydropower project “Pharping Hydropower Station” with an installed capacity of 500 KW to 98 hydropower projects (Power Trade Department) with an installed capacity of 1,233.1 MW. With NEA declaring Nepal as load-shedding free in 2018, Nepal has come very far in terms of energy generation and utilization and there are different projects which are being constructed and yet to be included in the grid.

It is estimated that a minimum of 1,300 MW will be connected to the power system in the upcoming fiscal year. As per NEA, the total connected capacity of the country will reach 2,533 MW after the subsidiaries run by NEA of 600 MW, including 456 MW from Upper Tamakoshi and 700 MW from the private sector. To inform that the electricity of consumption in Nepal will be higher, the government had projected total demand of 2,300 MW in 2020-2021.

Projects:

Chilime obtained the license for the generation of 22.1 MW Hydropower Plant from the then Ministry of Water Resource (Current: Ministry of Energy) for a period of 50 years (i.e. from 26 Shrawan 2054, 10 Aug 1997 to Asadh end 2104, Mid July 2047), therefore the useful life of plant assets (which need to be handed over at the end of the BOOT period) cannot exceed 50 years even if the economic life of the assets is more, as the entire generation unit needs to be transferred to the Government of Nepal at the end of this license term.

Aside from the main project of 22.1 MW, the company has 4 other subsidiaries which are mentioned below:

As per the Annual report of the company published in FY 2075/2076, CHCL has invested a sum of Rs. 1.43 Arba in Sanjen Jalavidyut holding a stake of 38% in SJCL. As per the report, Sanjen Jalavidyut is running 2 power projects namely Sanjen (Upper) HEP (14.8 MW) completing 87% of the project and estimated to be completed at the end of 2076/2077 and Sanjen HEP (42.5 MW) which is 78% completed and expected to be completed in the mid of 2077/2078. However, due to uncertain external factors, the completion date might get extended.

As per the Q4 report of FY 2076/2077 published by the company, the company has incurred loss which is mainly because of the unfinished project resulting to no revenue.

CHCL has an investment of Rs. 2.22 Arba in Madhya Bhotekoshi Jalavidyut Company Limited holding 38% of the stake. The company has an installed capacity of 102 MW. Completing about 50% of the project, the company has estimated that the project completion date of mid 2077/2078 and start selling the electricity to NEA but due to heavy flooding in 8^th July, 2020 causing heavy damage and losses the project completion date will be delayed.

The project that was earlier set to start generating in August 2018, could not be completed on time mainly due to 2072 earthquakes and blockade.

Apart from the above-mentioned projects, the company has been studying the following power projects for commercial operation:

Financial Performance and other information:

With a moderate increase in net profit, modest payout to the shareholders, and focused investment in different projects, the company’s reserves have been fairly consistent. The increase in shareholders' equity has mostly contributed by the increase in paid-up capital which due to higher bonus shares.

Profitability Ratio:

Despite the uneven growth, the company has overall increased the revenue with a compounded annual growth rate (CAGR-6 years) of 1.45%. The unsteady growth of revenue is seen mainly due to lower unit sales in FY18 and FY19. However, the company is able to increase its revenue over a long haul.

The decline in the company’s bottom line in recent years has been affected by different factors; some of them being slower growth in revenue itself and not being able to cut the cost relative to the growth of revenue. Also, the company’s profitability is affected by the increasing cost in royalty payment which has increased to 10% of Net Revenue with Rs. 1000 per KW of installed capacity which was 2% of net revenue with Rs. 1000 per KW of installed capacity before FY 2075. This increase is because the project has completed 15 years of operation. The decrease in net profit is mainly contributed by an increased royalty and increased tax liability amount in the last 2 fiscal years.

However, the company is able to maintain its margins above 65% which shows a positive sign.

Key Ratios:

Since the company’s net profit has stayed lower but the equity of the company has significantly increased, the return on equity has decreased to 7.47% in 2020 (Q4) from 11.57% in 2015. This might be a concern for most investors because the decreasing figure shows inefficiency in the utilization of shareholders' money by the management.    However, the company has used higher equity financing rather than debt financing to fund the project which will enable the company to generate higher shareholders value in the future. Nevertheless, the profits have also declined in the last 2 years which might be a concern and worth looking at in the next report.  

With the current ratio of 9.70 in 2020 (Q4), the company sits at fair liquidity which signifies that the financial health of the company is in a good state for the time being.

It is interesting to observe the numbers of CHCL which it had reported for the past 5 years. The company has reported an increase in capital over a 5-year period which certainly has increased the number of shares resulting in lower earnings per share. In this case, the company’s bottom line has also been squeezed resulting in lower earnings per share.

Dividend History:

Future Outlook:

The company has invested a total of Rs. 5.90 Arba in 4 subsidiaries namely Sanjen Jalavidyut Co. Ltd (57.3 MW), Madhya Bhotekoshi Jalavidyut Co. Ltd (102 MW), Rasuwagadhi Hydropower Co. Ltd (111 MW), and Chilime Engineering & Services Co. Ltd; 100% owned subsidiary. The company has the capacity to generate 270.3 MW of electricity per year once the projects are completed. Some of the projects are in the final phase and soon start to generate saleable electricity. With these investments, Chilime Hydropower will be able to earn a fair share from those subsidiaries. However, this mostly depends on how efficiently management carries out the projects. Due to the enforced lockdown around the nation and construction projects were halted, which delayed the construction works delaying the completion time.  However, the projects have gradually picked up the pace.

Being Run-of-River projects, their efficiency relies highly on the flow of water. And due to seasonality, the company would be highly efficient in the rainy season but less efficient in another season in terms of electricity generation.

The company has also been involved in other 5 more projects with a total installed capacity of 545 MW. These 5 projects are being studied by the CHCL’s own subsidiary named Chilime Engineering & services Co. Ltd.

Chilime might face delayed income from the subsidiaries due to various external uncertainties in the way of developmental works however, looking at the long-term horizon, it would be worth holding the stock for a fair amount of dividends.

Conclusion:

The past earnings and the growth trends have pretty much told us everything about how the company had managed the business. However, the investment return lies in what the future of the company holds. With the company’s investment data in hand and the company showing dedication in the current projects, there seems to be a much higher growth than it had in the past.

To fill the demand-supply gap, different hydropower is being developed, and with the completion of CHCL’s projects, they might be able to fill some gap. Keeping the fact in mind that there is a huge demand in the country with a total of 4,217,710 customers and to mention huge capacity but the full potential is yet to reach. The government is also trying to boost the energy generation and has set the generation target to 12000 MW till 2030. However, it depends on how efficient the strategies are carried out.