Aggressive plans

IPO REVIEW

While KSK Energy Venture's prospects look good, there are concerns pertaining to timely execution besides stiff IPO pricing.

Stocks of most power generation companies have been de-rated on account of the mounting concerns over the availability of fuel and equipment for future expansions planned, besides uncertainty over timely execution of projects.

But, that hasn't stopped power companies to tap the primary market for funds. KSK Energy Ventures (KSKEV) plans to issue 3.46 crore equity shares at Rs 240-255 to raise Rs 830-883 crore through its IPO.

Business model
KSKEV, which is into the business of power generation, is relatively a different story, having a different business model allowing it to de-risk some of these issues. The company develops, owns and operates power plants for the state owned and industrial customers.

Under the model, KSKEV earns higher return on equity (RoE) of over 20 per cent as against the regulated RoE of 14 per cent, while the customers have the advantage of getting uninterrupted power supply at a cheaper rate and without taking the hassles of developing and operating the plant (about 70 per cent of the project cost, which is debt, comes on the balance sheet of KSKEV).

So, some of its existing clients such as Lafarge and Zuari Cement, enjoy power at about Rs 2.80-3.03 per unit, which is almost similar to the cost of captive power generation of about Rs 2.60-2.75 per unit and far less then the tariff charged by the SEBs (Rs 4-6 per unit).

Expansion plans
KSKEV plans to aggressively expanding its business. From the current operational capacity of 144 mw, the company is aiming to increase it to 9,137 mw (over 62 times) by the end of FY13.

Of this, 2,792 mw is expected to get commissioned by end of 2012"� five projects are at advance stage of development, which thus, provides better visibility.

Most of these projects have been tied up for the critical aspects such as finance, fuel linkages and the power off-take. However, for the balance 6,200 mw worth of projects, such arrangements are yet to be made.

Firm linkages
Its major 1,800 mw Wardha (Chhattisgarh) project, which is expected to be complete by September 2011, KSKEV has tied up for the fuel and power off-take.

The company has entered into an agreement with GMDC for supplying coal at an attractive rate of Rs 700-750 per tonne as against the market price of Rs 1,200 per tonne. KSKEV in turn will supply power to the Gujarat Urja Vikas Nigam at Rs 1.92 per unit (costing Rs 1.5 per unit).

Additionally, the government of Chhattisgarh has the right to purchase 7.5 per cent of total capacity at a price equal to the fuel cost (about Rs 0.50 per unit) as it provides incentives.

The surplus power about 600 mw would be sold to captive industrial consumers on a merchant basis at a price which could range between Rs 2.8-2.9 per unit.

For the other projects, the power off-take agreements are signed with industrial groups like Viraj Profiles and Lafarge and other industrial houses like Mahindra Ugine, Graphite India and so on.

For the company, it will benefit from the access to large coal reserves and at cheaper rate.

The company's current coal reserves stand at about 1.1 billion tonnes, including 210 million tonne from GMDC, which is considered to be enough for the 25-30 years of the thermal-based capacity equivalent to 7,869 mw. Access to low-cost fuel is among key reasons for the company earning higher RoE of 20-22 per cent. 
 

REVENUE FLOW
Capacity	Year	Capacity  break up	Availability No. months	Revenue (Rs crore)		Net profit (Rs crore)		@ 20% ROE
				60% PLF	70% PLF	60% PLF	70% PLF
279	FY09E	144	12	262.00	306.00	37.99	44.37	43.45
		135	5
819	FY10E	279	12	541.00	632.00	81.15	94.80	127.57
		540	3
992*	FY11E	819	12	1118.00	1304.00	167.70	195.60	134.27
		43	9
5192*	FY12E	992	12	2470.00	2881.00	370.50	432.15	434.90
		1800	6
9137	FY13E	5192	12	9962.00	11622.00	1494.30	1743.30	1423.27
		1800	6
		1800	9
		345	6
Note: Revenue based on capacity multiplied by the number of days available and selling price of Rs 2.5 per unit, net profit assumed at 15 per cent of the revenue. * The benefits 130 mw and 2,400 mw to be commissioned in FY11 and FY12, respectively will be operational in next fiscal

Some challenges
While the company's business model comprising of long-term availability of low-cost fuel, confirmed buyer for power produced and relatively higher earnings looks good, there are challenges as well. These projects (2,642mw till 2012) will require equity funding to the tune of Rs 2,500 crore.

Also, for the remaining power projects of 6,200 mw planned to be executed by FY14 will require an additional equity contribution of about Rs 3,800-5,800 crore (assuming equity contribution 20-30 per cent of total project cost, and considering that 26 per cent of the equity is contributed by the power consumers).

A part of this requirement has been met from funds raised (about Rs 415 crore) through a pre-IPO placement, while Rs 882 crore is planned to be raised through the current IPO.

However, considering the ongoing and future power projects, the company may require significant equity investment to the tune of Rs 6,700 crore, which can be partly funded with the internal accruals of about Rs 2,000 crore; for the remaining, the company will need to dilute its equity.

Execution of the projects is another big risk. A large part of the projects about 98 per cent is in the execution stage and the company is not having experience of commissioning large-scale power projects.

"Though the business model is good, however there are risks with regards to the execution of the projects. Any delay in the projects will severely affect the RoE, which is in normal case is about 20 per cent for the company," says Avinash Nahata, analyst, IL&FS Investsmart.

According to estimates, in case of any delay in projects, the RoE could drop to 15-16 per cent. The delays in the planned projects (especially for projects with planned capacity of 6,200 mw) could be caused due to factors pertaining to acquisition of land, procuring environmental approvals, financial closure and obtaining detailed project reports for planned projects. 
 

HOW IT COMPARES
	GIPCL	NTPC	Tata Power	KSKEV
Current capacity	555.0	29394.0	2368.0	144.0
Capacity by FY12	1305.0	50000.0	10131.0	2792.0
M-cap	1339.0	136174.0	25257.0	8825.0
M-cap/ capacity*	1.0	2.7	2.5	3.2
Net sales	935.6	38635.0	6477.2	239.1
Net profit	102.3	7470.0	759.1	108.6
M-cap/Sales	1.4	3.5	3.9	36.9
ROE (%)	18.2	14.5	12.0	17.1
PE (x)	12.7	17.9	37.3	76-80
All financial figures are for FY08 and RoE is based on FY07 profits (except for Tata Power financial for FY07) KSKEV PE is based on the post issue equity and profits of FY08, GIPCL is Gujarat Industries Power Company* by 2012

Should you invest?
On the basis of capacity of 2,792 mw, the company's value (market capitalisation divided by capacity) works out to Rs 3.1 crore per mw, which is marginally higher compared to the Rs 2.72 crore for NTPC and 2.5 for Tata Power, both of whom are well established with a proven track record.

The higher valuations though are also partly due to better RoE of 20 per cent (against 14-16 per cent for regulated plants) and access to coal reserves.

Rating agency, Fitch, has assigned a grade of three on the scale of five. Despite various positives, "considering that the markets have shed 1,000 points over the past three trading session, the valuations have corrected significantly. Thus, in this light, the valuation of KSK Energy is marginally expensive, although the business model is good," says Arun Kejriwal, Director, Kejriwal Research & Investment Services.

To sum up, while there are risks associated besides the IPO being stiffly priced, considering the other positives such as strong pipeline of the power projects, only those investors with patience and high risk appetite may apply.

Issue opens: June 23
Issue closes: June 25