100% right shares of Hydroelectricity Investment & Development Company receives below average grade from ICRA; right shares worth Rs.11 Arba to be issued at par

ICRA Nepal has assigned a grade of [ICRANP] IPO Grade 4+, indicating below average fundamentals, to the proposed rights issue (equity shares) of Hydroelectricity Investment & Development Company Limited (HIDCL). HIDCL proposes to come up with a 100% rights issue of 110,000,000 equity shares, with a face value of NPR 100, to be issued at par to the existing shareholders.

The grading factors in the HIDCL’s strong ownership profile (entire promoter share held by the Government either directly or indirectly), its strategically important role as an implementing agency for the power sector development agendas of the Government of Nepal (GoN) and its commitment towards development of the hydroelectricity sector, as demonstrated by providing subsidies, grants etc. for the hydropower units. Further, the grading also factors in the robust energy demand outlook within the country, limited use of the potential hydropower resources of Nepal (installed capacity close to only 10211 MW) and the possibility of power export to neighboring countries, given the power trading agreement signed between the Governments of Nepal and India in October 2014, which is expected to provide adequate growth opportunities to the company.

Nonetheless, the grading remains constrained by HIDCL’s limited track record (established in July 2011), sluggish growth in approval and disbursement of fund and moderate financial performance so far despite high importance given in the power financing sector by the GoN. The grading is further constrained by lack of clarity in the source of lending funds apart from equity, resulting in a limited return potential to equity holders. Going forward, HIDCL’s ability to build a balanced and diversified portfolio, raise funds at competitive rates, manage the liquidity mismatch inherent in infrastructure financing (lending for relatively longer tenure while limited availability of long-term funds), further strengthen its project appraising and monitoring capabilities. Its ability to manage collections from the borrowers would have a bearing on HIDCL’s operational and financial risk profile.

Added to which is the lack of regulatory framework (HIDCL being the first company of its kind in Nepal), concentrated portfolio towards the greenfield power generation projects, inherent risks in the hydropower and related infrastructure financing, including execution risks and evacuation risks. Their limited experience in commissioning power projects results in the possibility of time and cost overruns thus impairing the projects’ ability to service their debt obligations within time.

Source: ICRA Ratings Nepal