‘Sanima Mai Hydropower Limited's IPO likely to be oversubscribed by at least ten times’  

Sanima Mai Hydropower Limited (SMHL) issued its IPO on September 20.  SMHL is the first hydropower to be listed in the stock market after a hiatus of around four years, and it will be the fifth company listed under the hydropower sub-group at Nepal Stock Exchange.

Coinciding with the first day of the release of its IPO, ShareSansar.com talked to its Chief Executive Officer Mr. Tuk Prasad Paudel about the various aspects of the project, including what kinds of returns a share investor can expect from SMHL.

An excerpt of the interview:

ICRA Nepal has assigned IPO Grade 3 to the IPO you have released today. Are you happy with the grading in that it hints at an average performance of the shares?

Generally speaking, yes the IPO Grade 3 hints at an average performance. But we need to understand that IRCA Nepal has assigned IPO Grade 3 to a hydropower company, which is still under construction in a country like Nepal. And also the grading indicates rating of IPO only.  If we look at it in the correct perspective then we understand that it is a good indication, and we are satisfied with the ICRA Nepal’s decision.

Why did SMHL, with an array of high-profile NRNs and other investors behind it, opt for an average Run-of-the-River model when we need more of a reservoir-based hydropower projects to address the power crisis in the country, especially during the dry seasons?

It’s not that we are not concerned or oblivious of the energy need of the country. Reservoir should cover around 30 percent of the system. And, we have not been able to add a single reservoir type project in the system after constructing the one and only Khule Khani project of 92 (60+30) MW, though the demand has peaked to around 1,100 Megawatt.   

Nonetheless, it is not ‘practical’ for a private developer to construct a large reservoir-based project as it entails many additional costs like resettling a large number of people affected by the project besides a huge investment required for the project construction.  Moreover, such a project is designed in such a way that they are connected to other types of projects such as the RORs and Picking Run of the river (PRORs). Moreover NEA has not come up till date with strategic and clear policy regarding PPA for reservoir-based hydropower.  Until NEA brings such policy, reservoir based hydropower will not be viable for private sector. That’s why the national power utility, which controls the national grid, should construct reservoir-based project. Private sectors are willing to invest in such a project if the government develops a Public Private Partnership (PPP) model and take a lead role.

Your first project needs to be completed by July next year. The second project of additional 7 MW has to be commissioned by July 2015. How confident are you about meeting these crucial targets.

We will commission the first project of 22 MW on time. We have solid evidences to prove that. We have already completed around 80% construction of our project. The progress of a hydropower project should be calculated in terms of the time and cost of its construction. We are well within the targeted time, so the project cost has not surged due to the time factor.

The project cost could have surged due to inflation. The price of construction materials and other related things have sharply risen since we did the PPA back in 2008 largely due to the fuel and dollar crises.  But we did not let the project cost surge. How? We injected all the promoter's equity.  This way we averted a high interest rate on loan in the first year, which helped compensating  the inflation. Now the project is nearing in the completion phase.

To sum it up, we have efficiently planned our project in such a way that we have a very low estimated interest cost during construction. Many projects have failed largely due to this estimated interest cost during construction.  

Hence, our first project is not just within the time but also within the cost.

As far as the second project of 7 MW is concerned, we will commission it by July 2015 — if there is no unprecedented crisis in the country.

What are the challenges you have faced with regards to the development of the project?

Now that the project is going on smoothly, let’s not go into the details. But the major challenges we faced pertain to harmonization of interest with the local residents, and the level of cooperation from the different governmental agencies.

However, we didn’t let the project suffer since the same team has been retained and has been handling it from day one. We carefully conducted the feasibility study, the environmental impact assessment (EIA), and the study of the local surrounding and issues to be addressed. We completed these studies in a transparent manner, keeping all the promises we had made. As the team involved from the beginning is supervising the project work now, it is moving very smoothly.

Another major challenge we faced was that related to the transmission line. The transmission line was supposed to be completed by February 2014, but we all know that the work did not progress as desired. According to new schedule the whole stretch of transmission line is supposed to be completed by December, 2014. The stretch up to Godak Sub Station (1st Section) is supposed to complete in parallel with our project. To meet the target now the ministry, Nepal Electricity Authority (NEA), two contractors assigned by the NEA, and we are meeting every 15 days to address the issue, and we have already made a significant progress in that front.

Though it will take some more time before the entire transmission line is completed, it is already possible for us to evacuate power from our project to the transmission line. The laying of the transmission line up to Lakanpur sub-station in Damak is nearing completion. The station we are supposed to link is Godak sub-station, and the length of the transmission line between these two sub-stations is just 34 kilometers.  The extension of the transmission line is taking place from both the ends. Hence, there is virtually no risk related to the transmission line. The government also has an incentive to expedite the transmission line because the electricity we generate will be two times cheaper than the electricity the government of Nepal might have to buy from India. All in all, we have received good cooperation from the government side as it also stands to benefit from the project.

The hydropower sub-group shares only 6 percent of the total market capitalization in the share market. What is your take on it?

One of the reasons behind it is that the investors are yet to realize the benefit of investing in the shares of hydropower.  Unlike the commercial banks and other sub groups, hydropower commands long-term investment. While the other groups can provide dividends from the first year of operation, the shareholders have to wait for a few years till a hydropower company starts offering such dividends. But in the long run hydropower will pay more than most other groups as they will inevitably go on profit considering the ever growing demand for energy in the country.

The stake of the hydropower sub group in the share market will continue to grow as more and more projects are in the pipeline. If you look ten years back, a very few people thought that private parties will invest billions of rupees in the sector. Today we will be among one of five listed hydropower companies.  

The stake of the hydropower will grow in days ahead also because the SEBON has now amended the provision, which allowed the hydropower company to issue IPOs only after two years of its operation.  According to new provision now projects under construction can issue the IPO. A hydropower project needs capital only during the construction phase. We are the first hydropower company to benefit from the new provision and would like to share the opportunity with public. We think more hydropower companies will float their IPOs shortly, which will inevitably increase our share price in the share market.

It’s been many years since any hydro power has listed its shares for trading. You must be confident that your IPOs will be oversubscribed by September 24?

Given the transparency, trust and progress of our project and prevailing liquidity in the capital market, and looking at the over subscription of shares of other groups by up to 20 times, we are sure that our shares will be oversubscribed many folds. We believe it will be oversubscribed by at least ten times before the mandatory book closure. We are confident about it because even the shares we had allotted to the locals in Ilam district was oversubscribed by 40 percent.

What are the benefits a share investor can expect from your company?

As we have mentioned in the IPO offer letter, we will start offering 5 percent dividend in the second year, 15 percent in the third year and up to 20 percent during the loan re-payment period. It will go beyond 40 percent by the end of the ten-year loan repayment period. Besides, the investors are likely to get immediate benefit from the IPOs as the share market will govern their price. Long-term investors and even passive investors should go for the shares of hydropower companies as they will keep on getting good returns in the long run. Actually people can use it as a retirement management scheme. Moreover the share will be listed and traded in stock market immediately after the allocation from where people can get immediate benefit.