Nepal’s Dream Project; Upper Tamakoshi finally opens its doors for Investors

Synopsis of the issue

One of the most controversial IPOs in the stock market i.e. Upper Tamakoshi’s IPO is all set to be issued from today (Shrawan 16, 2075) for the locals of the project affected area. The issue will last until Bhadra 14, 2075. The hydropower company is issuing 1,05,90,000 unit shares for the locals of Dolakha district which is 10% of the capital. The hydropower company will be issuing 15% of the total capital i.e. 1,58,85,000 unit shares to the general public as well.

The hydropower company will collect Rs 1.05 arba from its public offering to the locals of the project affected area. Similarly, the company will collect Rs 1.58 arba from the issue to the general public. The minimum applications can be placed for 30 units and maximum for 300 units for the locals while others will be able to apply for a minimum 50 units and the maximum number they can apply for is 1000 units. ICRA Nepal has assigned Grade 4 rating to the IPO issuance indicating below average fundamentals.

Unlike the locals, the applicants from general public can apply from the banking institutions providing ASBA services. D-mat account is not required for the initial issuance but it will be required for trading after the completion of locking period. Similarly, bank account of all the applicants is also not required, but one family member needs to have a bank account.

Citizens Investment Trust and Sunrise Capital have been appointed as the issue managers for the IPO issue. The application forms are available for download on the website of Sunrise Capital Limited.

Capital Structure of Upper Tamakoshi Hydropower Company

After the issuance of IPO, Nepal Electricity Authority will be holding 41% shares of the hydropower company. Similarly, Nepal Telecom will hold 6% shares while Rastriya Beema Sansthan and Citizen Investment Trust will hold 2% shares each.

Capital Plan

Upper Tamakoshi being the biggest hydropower project of the country has huge plans for its expansion. The expansion of a company is directly related with the capital of the company. The company has the following capital plan:

The company has current paid up capital of Rs 7.94 arba which will rise to Rs 10.59 arba after the issuance of its IPO. After the capital is increased to Rs 10.59 arba, the company has discarded plans for further increment of capital till FY 2078/79. In the current situation, the reserve of the company stands at negative of Rs 1.99 arba. The company has plans of making the reserve positive in the upcoming fiscal years.

Net Profit of the company

The financial reports of the company for the past few years have been reporting net loss of the company. In the FY 2071/72 and FY 2072/73, the hydropower company witnessed net loss of Rs 1.68 arba and Rs 1.81 arba respectively. However, this is due to the fact that the project will only be generating electricity from December 2018. The company has plans for improvement in its performance and has projected rise in the profit in the projected balance sheet in the following manner:

Strength-Weakness-Opportunities-Threats (SWOT) analysis

Strengths:

1. Being the largest hydropower project of the country, it is considered to have strategic importance, as funding risks are considered minimal for financing gap created by cost escalation.
2. Nepal Electricity Authority, being the main promoter of the company (it will hold 41% even after the issuance of IPO), brings significant experience in development and operation of hydropower projects.
3. Evacuation risks for the projects are also low as the project would itself be constructing the required substation for evacuation of the generated power.
4. The hydropower company has the ability to commission the project within the budgeted time and cost estimates.

Weakness:

1. Significant delay in the project (mainly due to earthquake and blockade) has resulted in high cost escalations of the project.
2. The Power Purchase Agreement (PPA) lacks deemed generation clause which means that any loss of generation due to shortage of water or silting can negatively impact the project earnings and return indicators.
3. There is a high interest rate volatility in the market and counterparty credit risks arising out of the exposure to loss making NEA for the energy supplies (this is reduced by the fact that the NEA is the largest promoter of the project).

Opportunities:

1. The hydropower supposedly will have the largest output of electricity till date, which makes its earning to be higher than the other competitors in the market.
2. The direct involvement of Nepal Electricity Authority will provide the project with new opportunities.

Threats:

1. Increasing number of hydropower projects will increase in the supply of the electricity in the country that will not be a pleasant news for the largest hydropower project of the country.
2. The project has always been an issue of political conflict among the locals of the project affected area of Dolakha district.
3. In case there is any kind of delay in the project due to any cause, the cost of the project is estimated to rise heavily.

Composition of Directors

After the issuance of the IPO, the Board of Directors will consist eleven members. The composition of the same is as follows:

 Allotment Procedure

For the purpose of allotment of shares, the locals will be divided into three categories namely, Highly Affected locals, Moderately Affected locals and Other locals. In case all applications are placed for minimum 30 units or maximum 300 units, the allotment will be done in the ratio of 3:1.4:1 respectively. That means 55.55% of the oversubscribed shares will be allotted to highly affected local. Similarly, 25.92% will be allotted to moderately affected locals and 18.51% will be allotted to other locals.

What if there is not enough demand from a particular category for the allotment? In such case the under subscribed amount will be available for the subsequent category of locals. Moreover, if the issue to locals’ remains undersubscribed, the remaining shares will be added to offered amount of shares to the general public.

The locals of Highly Affected category can place their applications through Green form, locals of Moderately Affected category can place their applications through Blue form and other locals can place their applications through Black form.

Collection Centers

The collection centers for Dolakha district are:

• Upper Tamakoshi Project area
• Agriculture Development Bank Limited, Charikot
• Century Commercial Bank Limited, Charikot, Singati and Jiri
• Citizens Bank International Limited, Charikot
• Laxmi Bank Limited, Charikot
• Mega Bank Nepal Limited, Charikot, Mainapokhari and Baghkhor
• Nabil Bank Limited, Charikot
• Nepal Investment Bank Limited, Singati
• Rastriya Banijya Bank Limited, Charikot
• Prime Commercial Bank Limited, Mainapokhari
• Prabhu Bank Limited, Charikot
• Siddhartha Bank Limited, Charikot
• NMB Bank Limited, Kirnetar
• Mahalaxmi Bikas Bank Limited, Charikot
• NIC Asia Bank Limited, Charikot
• Nepal Credit and Commerce Bank Limited, Charikot
• Himalayan Bank Limited, Gaurishankar rural municipality
• Sanima Bank Limited, Mailung
• Nepal Bank Limited, Charikot

Similarly, the collection centers for Kathmandu district are:

• Sunrise Capital Limited, Kamalpokhari
• Sunrise Bank Limited, Newroad, Bhaktapur, Kalimati, Gabahal, Chabahil, Gothatar, Tinkune, Sankhamul, Baudha and Kalanki.

Conclusion

This project is one of Nepal’s most anticipated projects. It is also the project to issue the most amount of shares as IPO in the history of Nepal’s stock market. Surrounded by a number of controversies, this is Nepal’s dream project turning into reality. Out of three power plants, the first one will start from December this year and the project will be fully functional within a year from now. The prolonged rainy season will also act in favor of the project.

This project is on top priority for the government and backed by strong promoters who would not have been a part of the project if returns were not assured. Even though the financial reports give a foul picture about the project over the next 2-3 years, the same is not expected in the future, as the project will generate profit after that period. It is a question of patience for an investor who wishes to apply for a stake in the project, as this project does not have the ability to provide short-term gains but guarantees good returns in the long term.