Dordi Khola Jalbidyut Company Limited to issue IPO worth Rs.54.96 Crore; ICRA assigns Grade 4 to the proposed issue

ICRA Nepal has assigned [ICRANP] IPO Grade 4 to the proposed initial public offering (IPO) of Dordi Khola Jalbidyut Company Limited (DJCL), indicating below-average fundamentals. DJCL has proposed to come out with an IPO of 5,496,696 equity shares with a face value NPR 100 each, at par. The proceeds from the proposed equity are proposed to be used in the development of 12MW Dordi-1 hydroelectric project (HEP).

The grading is constrained by the early stage of development and moderate return potential of the 12-MW Dordi-1 HEP being developed by DJCL; given the relatively higher estimated capital cost (~NPR 190 million per MW) on a fixed tariff regime and a low contract plant load factor (PLF) of ~62%. Evacuation also remains a concern since the Nepal Electricity Authority’s (NEA) transmission line from Udipur to Kirtipur- besi substation is in an early stage of development and the likelihood of a delay in the same is high. Also, based on the early stage of construction progress of the 12-MW project, the developer is unlikely to meet the project’s required commercial operation date (RCOD) in December 2019, which could expose the company to a delayed commissioning penalty as per the PPA terms. Grading concerns also emanate from hydrological risks in the absence of a deemed generation clause in the power purchase agreement (PPA). The grading are also constrained by the counterparty credit exposure to the NEA, which has a moderate financial profile; although partly mitigated by the sovereign support of the Government of Nepal (GoN) to the NEA and its past track record of timely payments to independent power producers (IPPs). Given the moderate return potential of the project, volatile interest rates on bank borrowings could also have an impact on the return to the equity holders; which has been factored into the grading assigned.

Nonetheless, the grading considers an adequate past experience of the developer in hydropower project development and operation with the first project under the group in operation since the early 2000s. With a firm PPA in place, pre-determined tariff rates and a positive demand outlook owing to a supply-demand gap in the power sector, the tariff and offtake risks for the project are minimal. Going forward, DJCL’s ability to commission the project within the current cost and timeline estimates and the project’s ability to achieve its design operating parameters will be the key drivers for the project returns.

The 12-MW Dordi-1 HEP (earlier 10.3 MW) is a run-of-the-river (RoR) project located in the Lamjung district of western Nepal. The project draws its hydrology from the Dordi River, a major tributary to the Marshyangdi River. The 12-MW project has a catchment area of ~218 sq. km which, along with the snow-fed nature of the river, is expected to support the design discharge of 11.36 cumecs at 40% exceedance flow with a gross head of ~132 meters. The power generated is to be evacuated through ~3.5 kilometers, 132-kV transmission line to the proposed Kirtipur Besi substation of the NEA in the Dordi corridor. The NEA is currently developing a connecting ~10 km, 132 KV transmission line between the Udipur Hub and the Kirtipur Besi substation. The line is in the early stages of development and its timely completion will be important to the project meeting the targeted commissioning deadline. The Dordi-1project has obtained the energy generation license from the Ministry of Energy in January 2013, which is valid for 35 years. The project is being developed on a build-own-operate-transfer (BOOT) basis.

The PPA was signed between DJCL and the NEA in November 2014 for an original capacity of 10.3MW, which provided for the base tariff of NPR 4.8 per kWh (wet season) and NPR 8.4 per kWh (dry season) with a 3% annual escalation on the base tariff for five times. For the additional 1.7-MW capacity, an addendum PPA was signed with the NEA in March 2019 with the same base tariff and a 3% annual escalation clause on the base tariff for eight times. The project’s RCOD under the PPA is in December 2019 for 10.3 MW capacity and July 2020 for an additional 1.7-MW capacity. Including the added capacity, the contract PLF of the project is ~62% with an annual contract energy of ~65 Gigawatt-hour (GWh).

The 12-MW project is estimated to be commissioned at a cost of NPR 2,292 million (~191 million per MW). The original debt-equity mix for the project was 71:29, which is likely to change to 48:52, assuming the utilization of IPO proceeds towards project development/loan repayment. This will lower the debt burden and associated financial risk for the project. However, given the relatively high capital cost for the project in a fixed tariff structure, the return prospect for the equity holders of the company is likely to remain modest. The funding risk for the project remains low as the entire debt component is tied up with the consortium of banks and almost the entire promoters’ equity has been raised till mid-March 2019. The equity raised till mid-March 2019 remains adequate vis-à-vis the original project equity requirement. As of mid-January 2019, the project has achieved ~25% financial progress.

Dordi Khola Jalbidyut Company Limited (DJCL), incorporated on February 26, 2010 as a public limited company, has been established with the objectives of production and distribution of electricity. The paid-up capital of the company as of March-end 2019 is ~NPR 759 million, which is 100% promoter held, which is expected to dilute to ~58% after the proposed IPO. The shares of the company are proposed to be listed in the stock exchange post the proposed IPO.

DJCL is a group company under CEDB Hydropower Development Company Limited. The fund along with its associated companies (Radhi Bidyut Co. Ltd., CEDB, LEDCO) hold ~27% stake in DJCL. As on mid-Jan 2019, the major promoters include M/s Radhi Bidyut Co. Ltd. (21.67%), M/s Lamjung Energy Development Co. Ltd. (4.86%), Mr. Arun Gautam (2.06%) and Mr. Pashupati Shamser Ja. Ba. Ra. (1.32%).

(Source: ICRA Nepal)