Company Background

Maya Khola Hydropower Limited was founded in 2067 B.S. with the goal of harnessing Nepal's hydropower potential through private sector initiatives. With the objective of engaging the involvement of the local community and the general public in hydropower, the company underwent a  conversion to a public entity in 2073 B.S. The company is currently developing the 14.9 MW Maya Khola Hydropower Project in the Dharma Devi Municipality of Sankhuwasabha district. The project is accessible by a trunk metaled road from Dharan in east Nepal.

Overview of Maya Khola Hydropower Project 

Type of Project                                                  Run of river (utilizes the force of Maya Khola) 

Installed capacity                                              14.9 MW

Estimated Annual Productions                          81.57 GW 

Transmission Line                                             3.5 km to connect NEA Sub-station at Baneshwor, Sankhuwasabha

Total estimated cost of the project                     Rs.3 Arba

Cost per MW                                                      Rs.20.13 crores( relatively higher) 

Percentage of work completion                          96%   

Electricity Generation License Received            2071/02/26 B.S.

License validity up to                                          2106/02/25 B.S.( i.e. 35 years)  

Expected date of electricity generation              Mangsir 1st ,2079 B.S.*

The company's Required Commercial Operation Date (RCOD) had already passed on Ashad  16, 2079. Despite this, the company has submitted a request to the Nepal Electricity Authority (NEA) to revise the RCOD to Poush 15, 2079. The decision on this revised application is still pending. With 96% of the project work complete, the company is expected to start commercial production soon. 

The project relies on Maya River, which is un-gauged and consequently lacks the long-term flow data. This may affect the generation capacity. 

The project is being developed at 40% probability of exceedance( meaning it has a 40% chance of performing better than expected.)  The project is one of the Super-Six projects (projects which can be constructed on a fast track) initially surveyed by the Department of Electricity Development, Nepal (DoED). 

Power Purchase Agreement(PPA) with NEA 

The company has a 30-year PPA with the NEA at predetermined tariffs and escalations under the take-or-pay modality (meaning NEA has to pay a fixed amount regardless of energy purchase), which eliminates the tariff and offtake risks. The predefined base tariff rates are NPR 4.8 per kWh for the wet season and NPR 8.4 per kWh for the dry season with a 3% annual escalation on the base tariffs for five consecutive years (applicable after 12 months of the COD). 

However, the PPA lacks the deemed generational clause (clause that stipulates that a certain amount of energy will be considered as having been generated, even if it has not been physically produced) which  exposes the project to high hydrology risk in case of any adverse river flow scenarios without receiving any compensation for such losses.

The project’s economic life is until 25th Jestha 2106 i.e. the term of the generation license or 30 years from the COD as per the power purchase agreement (PPA), whichever comes first. After the aforementioned economic life, the project will be handed over to the Government of Nepal. 

Capital Structure of Company 

The estimated project cost of Rs.3 arba has been planned to be funded in a debt-to-equity ratio of 2:1. As of today,the debt-to-equity mix of the company is as follows:

Debt (approved Debt)        - Rs.2 Arba 

Equity (after public issue)  - Rs.1 arba  

Debt

A total of Rs. 2 arba long term loan has been approved by a consortium of 3 commercial banks (namely Civil, Century & Citizens Bank) to finance the project at the weighted average interest rate of 12.21%, which is relatively higher. As of 15th Bhadra 2079, the company had already utilized more than Rs.1.70 arba loan.The repayment period for the loan is 12 years from the date of commencement of commercial operations

Equity

The company will have equity share capital of Rs.1  arba after the public issue out of which 66% of the stake amounting to Rs.66 crores is being held by 162 promoters of the company. The remaining 34% stake i.e 34,00,000 shares worth Rs.34 crores has been/will be issued to the public in following manners. 

The financing of the project has been sorted out amid injection of the promoter’s equity, public issue along with the tying up of the required project debt with lender banks (including the financing for any possible cost overrun).

Profitability of the company    

The project is almost complete and the company expects to turn profitable from this financial year i.e. 2079/80 itself. The company had expected to earn Rs. 25 crores in revenue for the current year, however, as of the first quarter of 2079/80, no revenue was generated from the sale of electricity. It is highly unlikely that the company will meet the profitability target this year.

The company may expect to turn profitable only after the commercial operation date (COD). However, the elevated project expense leading to significant interest outlays could suppress the returns in future amid the fixed tariff regime.

Due to its status as a Super-Six project, the company faces a significantly increased risk of incurring a 28% penalty for delays in RCOD in comparison to the standard 5% penalty for other projects. 

In the event of delays in commercial operations, the company may also face the loss of tariff escalations and the possibility of additional cost overruns.

Promoters’ Profile 

The largest promoter of the company viz. Pashupati Venture Capital Pvt. Ltd. has prior involvement in multiple hydropower projects as a promoter/consultant. Moreover, the presence of other listed public institutions such as Prabhu Insurance Company Limited and promoters from Prabhu group make up for the strong promoter profile. 

Credit Rating

ICRA Nepal has assigned the rating of [ICRANP-IR] BB ( double B) to Maya Khola Hydropower Company Limited. Companies with this rating are considered to have a moderate risk of default regarding the timely servicing of financial obligations.

The rating takes comfort from some of the major factors like the experienced institutional promoters, the project is nearing completion, has already secured financing & also has a long-term PPA with NEA at predetermined tariffs and escalations. 

Nonetheless, the rating remains largely constrained by the high project cost, delays in the project’s completion which could lead towards comparatively high COD penalties as well as tariff escalation loss.

ICRA highlights that the crucial factor to settle the financial obligations for the company will be its ability to complete the project within the updated budget and schedule.

Payback Period

The payback period is a measure of the time it takes for an investment to recover its initial cost. The payback period is calculated by dividing the initial investment by the annual cash flow generated by the project. It is a simple and easy-to-understand method, but it does not take into account the time value of money.

Discounted payback period is the payback period calculated by discounting the cash flows of the investment or project to their present value. This method provides a more accurate picture of the true payback period, as it accounts for the fact that money received in the future is worth less than money received today. The payback period of company are as follows:

Payback Period                                                        7.38   years                    

Discounted Payback Period                                     17.17 years 

The expected payback period for this project is similar to the average 6-8 years seen in recent hydropower IPOs, however, the discounted payback period is higher due to the project's high cost of capital of 12% used for discounting the future cash flows. 

Company’s Past, Present & Future in Numbers

Conclusion

The company has a substantial amount of losses accumulated from the previous years with a hefty amount of debt to be paid. The future profits will all be allocated towards clearing this burden, leaving little room for dividends. It is unlikely that the company will offer dividends until the fiscal year 2081/82.

Therefore, pursuing short-term profits through investing in the company may not be a sound strategy. However, there is  potential for capital gains once the shares are listed on the stock exchange. The company has the potential to excel in the long term with its experienced group of promoters and a stable source of income through PPA.

Our recommendation: Neutral 

If you are applying, then apply by 17th Magh 2079 for the minimum number of shares i.e. 10 shares for Rs. 1000. 

Disclaimer: Please note that this is not an investment advice and you are requested to consult your investment advisers and read the company's prospectus including relevant documents carefully before applying.