Shuvam Power Limited (SPL), formerly known as Baneshwor Hydro Private Limited, was established as a private company in 2061 B.S. and was subsequently converted to a public limited company in 2072 B.S. to facilitate  public investment in the hydropower sector. The name change occurred after Mr. Shailendra Guragain and his associates acquired the majority ownership of the company in 2072 B.S.

SPL owns and operates a  small 990KW Lower Piluwa Khola Hydroelectric Project  located in Sankhuwasabha district of eastern Nepal. The project began commercial operation from 1st Shrawan, 2068 B.S. i.e. 30 months after the Required Commercial Operation Date (RCOD).

Overview of Lower Piluwa Khola HydroelectricProject 

The Lower Piluwa Khola Project, being a hydropower project with an installed capacity below 1 MW, has an indefinite lifespan and thus will not be handed over to the GoN at any time in future. 

Power Purchase Agreement(PPA) with NEA 

The company has a 25-year PPA from the RCOD with the NEA at predetermined tariffs with no escalation clause.

As per the PPA, NEA will purchase 6.842GWH energy produced by the project at NPR 3.90 for wet season and NPR 5.52 for the dry seasons (as against NPR 4.80 for wet season and NPR 8.40 for wet season for hydro projects below 25 MW). 

For any excess energy produced, NEA will  only provide  50% of the predetermined tariffs. 

The company however will not face any penalties for any shortfall in production as the small hydropower plants with a capacity of less than 10 megawatts are exempt from penalties for not meeting their production projections according to Power Purchase Bylaws issued by the Electricity Regulatory Commission . 

Capital Structure of Company 

The company’s debt-to-equity ratio as at the end of FY 2079/80 stands at 0.76:1( compared to 0.81:1 at the end of previous FY).

Debt

The company secured a substantial loan of 11.50 crores from a consortium of Everest Bank Ltd., Nepal SBI Bank Ltd., and Prabhu Bank Ltd. to advance the project. With a favorable interest rate of 9.27%, the loan provides a cost-effective solution for financing.

Due to the company's weakened revenue stream, the loan repayment period was extended from 8.5 years to 20 years. With 12 years remaining to repay the debt, only a fraction of 1.84 crores has been settled thus far, leaving a substantial outstanding balance of 9.67 crores yet to be repaid.

The company has stated that the proceeds from the initial public offering will primarily be used to downsize the outstanding project loans.

Equity   

The company will have equity share capital of Rs. 20 crores  after the public issue out of which 70% of the stake amounting to Rs. 14 crores is being held by 40 promoters of the company. The remaining 30% stake i.e 6,00,000 shares worth Rs.6 crores was/will be issued to the general public in following manners. 

In 2075 B.S.,the company issued  2,00,000 shares to the local residents of the project-affected area. However, the shares so offered were not fully subscribed, and only 19,420 shares were allotted to the locals. 

Now, the company has proposed to issue 5,80,580 units of shares of face value NPR 100 each at par to the general public.(including Nepalese citizens working abroad, Mutual Funds & the company employees). The issue size is made of 400,000-unit shares originally earmarked for the general public and 180,580-unit shares unsubscribed by the project affected population.

The company has stated that the cause for delay in the IPO was due to the establishment of the Electricity Regulatory Commission(ERC) in 2076 B.S. Following this development, the pre-approval from ERC was mandatory prior to the public issue . Unfortunately, there was a setback in obtaining the pre-approval from the ERC (reasons for the delay in obtaining pre-approval undisclosed by the company in prospectus).

Profitability of the company

The company has already started its commercial operations and has been generating profits since the fiscal year 2077/78, however, its net worth still remains negative due to a significant amount of accumulated losses from previous years. At the end of FY 2077/78, the company had revenue of  Rs.2.67 crores , net profit ~20 lakhs but a huge amount of accumulated loss of 1.81 crores. 

Due to the small scale operations & relatively lower tariff rates, the company in future may suffer on account of lack of economies of scale. The company has been generating much less energy than the contracted energy sales ( only at around 70%-80%), mainly due to evacuation related issues as the company was facing tripping problems in the transmission line from Tirtire Substation to Dhankuta Substation.

Going forward, the ability of the project to minimize the gap between actual generation and contractual energy & the company’s ability to downsize the project loan will be the most important driver for the profitability of the company. According to the company's projection report, it will attain positive net worth only in the fiscal year 2080/81 and will commence paying dividends thereafter.  

Promoters’ Profile 

The promoter group of the company comprises of the family members/relatives of the renowned hydropower sector entrepreneur, Mr. Sailendra Guragain. The company also benefits from a strong and competent team of directors who support its operations.

Credit Rating

CARE Ratings Nepal Limited (CRNL) has assigned the rating of [ICRANP-IR] BB ( double B) to Shuvam Power 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 team of directors, the project already generating electricity, long-term PPA with NEA at predetermined tariffs & favorable government policies towards hydropower sectors. Nonetheless, the rating remains largely constrained by the small scale operations, the vulnerability of run-of-river power generation to water-related hazards &  the company's struggle to meet energy production agreements.

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                                                        9.09   years                    

Discounted Payback Period                                     29.86 years 

The payback period of the project is relatively higher than the hydropower with recent IPOs due to the relatively small cash flows generated from the small-scale operations.

Company’s Past, Present & Future in Numbers

Conclusion

It is indeed surprising to see such a small-scale IPO in Nepal to raise around Rs. 6 crore and that too primarily to pay off the bank loan to minimize the finance cost that forms the major part of its current operational cost. Given the size of the project and also the PPA rates, the project will not offer any exceptional returns and it seems to be a smart move from the promoters to trade off higher cost of debt with a flexible and may be a lower cost of equity. For example, once the debt that carries a fixed cost of  9.27% is paid off, it will not have such a burden and can pay a lower dividend thus lowering the cost of capital.  

Our recommendation: Negative

The IPO does not seem very attractive in terms of long term returns and one could possibly yield better returns from putting the money in fixed deposits. But it would not be surprising if the IPO is oversubscribed given the ongoing trend of assuming that investing in IPO always means positive and higher returns or simply due to FOMO!

Disclaimer: Please note that this information is for general information purpose only and should not be treated as an investment advice.