ICRA Nepal has assigned Grade 4+ to the upcoming IPO of Balephi Hydropower; Rating indicates below-average fundamentals

ICRA Nepal has assigned a grading of [ICRANP] IPO Grade 4+ to the proposed initial public offering (IPO) of Balephi Hydropower Limited (BHL), indicating below-average fundamentals. BHL is proposing to come out with an IPO of 3,655,940 equity shares with a face value of NPR 100 each, at par. The proceeds would be utilised towards the development of the 36-MW Upper Balephi “A” hydroelectric project.

Strengths and opportunities

• Moderate return potential of the 36-MW Upper Balephi “A” hydroelectric project being developed by BHL.
• Relatively higher probability of exceedance (PoE) of ~42%, resulting in a better contract plant load factor (PLF) of ~67% and a relatively higher mix of dry energy (~18%).
• Relatively lower project cost (~NPR 169 million per MW), augurs well for the project’s return prospects.
• Low funding risk for the project as the entire long-term debt component (NPR 4,250 million) has been tied up and the entire promoters’ equity (~NPR 1,462 million) has already been injected. The remaining ~6% of the budgeted project cost would be funded from the proceeds of the proposed IPO issue, thus minimising the funding risk considerably.
• Low tariff risk and low offtake risk emanating from the firm power purchase agreement (PPA) with pre-determined tariff rates, and the positive demand outlook owing to the supply-demand gap in the power sector, respectively.

Weaknesses and threats

• High project execution and implementation risks associated with the project with only ~60% progress having been made so far.
• The execution risk would escalate with any geographical surprises that may arise during further excavation of the 4.4-km long tunnel (~60% completed so far).
• The timely completion of the project’s own 21-km long 132-kV transmission line would remain critical for the timely evacuation of energy.
• However, the operational 132VA Lamosanghu substation of Nepal Electricity Authority (NEA) and the involvement of reputed contractors in the electrotechnical and hydromechanical works (Toshiba Plant Systems and Services Corporation - TPSC India and CBM Engineering Works, respectively) moderate the overall evacuation and execution risk to some extent.
• Any unexpected delays in project execution could result in late commercial operation of the project against the required commercial operation date (RCOD). This would result in a tariff escalation loss and late COD penalties, thus impacting the overall project return metrics.
• Lack of a deemed generation clause in the PPA adds to the hydrological risks under adverse scenarios of hydrology.
• The project is also exposed to counterparty credit risks arising out of its exposure to the NEA, which has a weak financial profile. This is partly mitigated by the fact that the NEA is fully owned by the Government and has been making timely payments to independent power producers (IPPs) so far.