Article by Samin Gurung, a media officer at Sharesansar. Disclaimer at the bottom of the article*
When is the best time for a company to issue an IPO?
When it is on verge of going default soon. When analysts are incredibly pessimistic about whether the company can sustain the business.
At least that is what the regulator thinks.
"Delays in the repayment of bank debt obligations, moderate financial risk profile marked by a lower generation of energy, lower tariff rate impacting revenue profile, and high collection period for posted rate leading to cash flow mismatches."
-CARE Ratings Nepal
This is what the rating agency CARE Ratings Nepal says about the IPO issue of Mailung Khola Jal Vidhdyut Company Limited, the IPO issue that the regulator gave a green light for yesterday. The Securities Board of Nepal has approved the IPO proposal of Mailung Khola Jal Vidhdyut Company Limited to issue a total of 7,36,286 units.
Another rating agency, ICRA Nepal Limited had previously assigned an IPO Grade 5 to the IPO of the company. Instruments with this grading are considered to have poor fundamentals. The agency assigns grading from 1 to 5, and the 5 grading is the most pessimistic grading it can assign for any company.
The regulatory board SEBON had itself barred companies who get this grading from issuing an IPO a few years ago. It simply is not worth it for the public to invest in such companies, the regulator thought. However, the board has now approved the IPO issue of this struggling hydropower company, a stark contradiction to its own mandate.
Sharesansar called Mr. Shailesh Subedi, Head of Rating Division at ICRA Nepal. Subedi thinks the regulator modified its own rule in order to allow struggling companies to get a breathing space and a fighting chance. Whether this fighting chance may come at a cost of the public's investment, Subedi is not sure. The company's past is not a rigid statement of its future, and the company may certainly solve its bottleneck issues with extra capital, Subedi says.
Extra money does solve a lot of problems. But the regulator and the company have to realize that the capital collected from an IPO is not free money. It can't be squandered into a business whose performance report is sobbing. Money does solve a lot of problems, but there are some problems that it can't solve, just like a bottle of water can't turn desert sand into an ocean.
Nonetheless, CARE Ratings Nepal states the rating derives strength from experienced directors and management team, presence of power purchase agreement with sufficient period coverage, and moderate counterparty risk. It clearly is in the hands of these experienced directors and the management team to honor the trust of the locals and the public towards the company and give the best they can to take the company forward.
Sharesansar then knocked on the doors of the regulator itself to enquire about this decision. After countless phone transfers, we were still unable to garner a satisfying set of answers. One representative told us that the company has already issued an IPO to the project-affected locals, and this is why it decided to issue an IPO also for the public.
Mailung Khola Jal Vidhdyut Company Limited has already issued 3,68,144 unit shares as part of its Initial Public Offering (IPO) for the locals of the project-affected area of Rasuwa district.
But how can you mask a situation you messed up by creating a bigger mess? The locals of the project have had their investment frozen up already. Is this IPO a way for the company to console them with the promise that they can cash out and exit after the shares are listed in NEPSE?
"The downward grading assignment . . . mainly factors in the poor operational performance of the 5-MW Mailung Khola hydro-electric project as reflected by a low plant load factor. This has resulted in a weak earnings profile for the company. Despite having diverted another stream (Nyam Nyam river) to increase available water discharge, the PLF has declined significantly over past generation levels. Low PLF mainly due to insufficient hydrology has resulted in significant loss of revenue, which coupled with fixed low tariff limits the overall return prospects from the project."
However, the fault is not only of the regulator. The Head of Rating Division at ICRA Nepal said the issue will have the rating at the top of the prospectus with bold font. This is intended to inform investors about the company's financial health, almost as a disclaimer. With this neat move, the regulator can get away with this and still appear accountable.
But a lot of investors do not read the prospectus at all. Investors who entered NEPSE in the bullish mania should realize that investing in an IPO isn't always a walk in the rose garden. Before the start of the bull run, some companies were trading at way less than Rs. 100 per share after issuing an IPO.
If this event were to be summarized in a concluding statement, it has become like the scenario of the cigarette manufacturing debate. The government can't ban production because the company pays heavily in tax. It rather sticks up an alarming picture of a collapsed lung of a smoker on the packet.
And some people still smoke.
Article by Samin Gurung. Disclaimer: This is an opinion piece backed in part by research and logical judgment. Sharesansar as an unbiased entity refrains from providing a market opinion.