October 29, 2010
www.fullertonsecurities.co.in Page | 1
KSK Energy Ventures Ltd HOLD
KSK Energy Ventures Ltd. (KSKEVL) is ...
October 29, 2010
www.fullertonsecurities.co.in Page | 2
KSK Energy Ventures Limited (KSKEVL) is a power generation company...
October 29, 2010
www.fullertonsecurities.co.in Page | 3
Quarterly Performance…
For the quarter ended June 10, KSK Energy V...
October 29, 2010
www.fullertonsecurities.co.in Page | 4
Financial Analysis and Projections
Particulars (Rs Mn) FY08A FY09A...
October 29, 2010
www.fullertonsecurities.co.in Page | 5
Director Name Current Position Description
Shankar Thiruvengadam
N...
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Investment Idea - KSK Energy Ventures Ltd - "HOLD"

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Investment Idea - KSK Energy Ventures Ltd - "HOLD"

  1. 1. October 29, 2010 www.fullertonsecurities.co.in Page | 1 KSK Energy Ventures Ltd HOLD KSK Energy Ventures Ltd. (KSKEVL) is a power project development company that caters primarily to the requirements of captive consumers. The promoter company is KSK Energy Ltd, which in turn is a wholly‐owned subsidiary of KSK Power Venture plc. The company was established in 2001, to focus on developing, operating and maintaining power projects. KSKEVL supplies power through a combination of long term and short term Power Purchase Agreements (PPAs). • It has an operational capacity of 601 MW and has 313 MW in advanced stages of construction and 3730 MW in advance stages of implementation. • KSKEVL has ensured fuel security in the form of long term fuel supply agreements and has tied up most of its off-take on a long term basis which provide higher predictability to its business model. It has also set up power plants on captive basis where in it receives partial equity contributions from its equity partners. • The single large 3.6GW project at Chhattisgarh will be KSK's first IPP as the company moves away from its traditional model. • KSK earns consultation fees for setting up power plants which is shown as project development fees (PDF). In FY10, PDF comprised 35% of the revenues. However, going forward the revenues from this segment is estimated to taper down. As all the power projects are near to their completion revenue accretion from this segment is likely to come down. Based on a consolidated FY12 P/E multiple of 18, the fair value for the company works out to Rs. 194. STOCK DATA BSE / NSE Code Bloomberg Code No. of Shares (Mn) Sensex / Nifty PRICE DATA CMP Rs (27th Oct' 10) Beta Market Cap (Rs mn) 52 Week High-low Average Daily Volume STOCK RETURN (%) 30D 3M 6M 1Y KSK Energy -3% 5% -14% -8% Sensex -1% 11% 13% 22% Nifty 0% 11% 13% 24% SHARE HOLDING PATTERN (%) Promoter Institutional Non Institutional Total 1 Year Price Performance (Rel. to Sensex) 20 27 100.0 0.58 63,086 221.6/153.3 36,673 53 169 532997 / KSK - EQ KSK IN EQUITY 373 20,005/6,013 -20 -15 -10 -5 0 5 10 15 20 25 30 Sensex KSK Energy Financial Snapshot Projections (Rs Mn) FY08A FY09A FY10A FY11E FY12E Revenue 2,389 3,496 4,534 13,879 21,717 Y-o-Y Growth % 46% 30% 206% 56% EBIDTA 2,158 3,365 3,695 8,050 11,382 Y-o-Y Growth % 56% 10% 118% 41% PAT 1,086 1,454 1,913 2,910 4,009 Y-o-Y Growth % 34% 32% 52% 38% EPS Rs 6 4 5 8 11 BVPS Rs 22 57 71 109 190 EBIDTA % 90% 96% 81% 58% 52% NPM % 45% 42% 42% 21% 18% ROE % 17% 7% 7% 7% 6% PER x 21.7 15.7 P/B Ratio 1.6 0.9 Recommendations <= 1 year 1 - 2 yrs 2 - 5 yrs Strong Buy Buy Hold Reduce Sell Strong Buy – Expected Returns > 20% p.a. Buy – Expected Returns from 10 to 20% p.a. Hold – Expected Returns from 0 % to 10% p.a. Reduce – Expected Returns from 0 % to 10% p.a. with possible downside risk Sell – Returns < 0 %
  2. 2. October 29, 2010 www.fullertonsecurities.co.in Page | 2 KSK Energy Ventures Limited (KSKEVL) is a power generation company and has an operational capacity of 601 MW and plans to add 313 MW to reach 914 MW by FY11. It also plans to launch the 1st unit of 600 MW of Mahanadi project by FY13, taking the total operational capacity to 1514 MW. It has announced plans of developing 10000 MW by FY2020. It has pioneered the group captive business model in India wherein it ties up >50% of the generation directly with industrial consumers on a long term basis. KSK sets up project specific SPV's where both KSK and the industrial customer contribute towards the equity, thus reducing KSK's equity investment. Besides the contribution of industrial customers is typically through Class A shares or preference shares which have a dividend cap (0.01%‐0.1% of face value). KSK retains 100% economic interest. Because of this unique business model KSKEVL earns returns higher than its peers, besides assured off take and better creditworthiness of industrial customers. KSK Mahanadi Project: The 3600MW power plant at Chhattisgarh will be KSKEVL's first IPP. KSK has ability to source low cost fuel on a sustained basis. It has signed a definitive agreement with Gujarat Mineral Development Corporation (Morga‐II) and GIDC (Goa Industrial Development Corporation, Gare Palma‐III). As per the agreement, these two coal mines, would supply coal to the project on a cost plus basis, and in return buy part of the power generation at a predetermined price. Total cost of this project is Rs161bn, and is proposed to be financed through a D/E mix of 75:25. The Wardha Chhattisgarh ‐ the project SPV (100% owned by KSK) has achieved financial closure. The fuel agreement gives right to both GMDC and GIDC to invest up to 26% equity in the power plant. If exercised, it would lower KSK's equity contribution in the project. KSK has awarded the EPC contract of entire plant to SEPCO, the largest Chinese EPC contractor. Expected capacity of 914 MW by FY11 and 1514 MW by FY13 KSK enjoys higher financial leverage than its peers on its own equity contribution due to the lower dependence on merchant sales and imported coal Risk and Concern… KSKEVL proposes to sell around 23% of its generated power on merchant basis. Lower than expected merchant tariffs can affect the profitability of the company. Besides this higher fuel cost, fall in PLF rates and poor quality of fuel will affect the margins. Power projects in India face delays of at least 6-8 months due to problems related to land, fuel and other clearances. We have factored in delay of 6 months for all upcoming projects. BUSINESS PROFILE SrNo ProjectName Capacity (MW) Land Acquisition Water Fuel Govt Approvals EPC Awarded Financial Closure Construction ProjectCost (mnRs) Expected Dateof Commossioni1 WardhaWaroraUnit3 135 √ × √ √ √ √ √ 6,040 Dec‐10 2 WardhaWaroraUnit4 135 √ × √ √ √ √ √ 6,040 Mar‐11 3 KSKMahanadiUnit1 600 √ √ √ √ √ √ √ 29,682 Nov‐12 4 KSKMahanadiUnit2 600 √ √ √ √ √ √ √ 29,682 Mar-13 5 KSKMahanadiUnit3 600 √ √ × √ √ √ √ 29,682 Jul‐13 6 KSKMahanadiUnit4 600 √ √ × √ √ √ × 29,682 Nov‐13 7 KSKMahanadiUnit5 600 √ √ × √ √ √ × 29,682 Mar‐14 8 KSKMahanadiUnit6 600 √ √ × √ √ √ × 29,682 Jul‐14 9 Dibbin 130 × × √ × × × × 6,920 Mar‐15 Total 4,000 197,092 StatusofFuturePowerProjects
  3. 3. October 29, 2010 www.fullertonsecurities.co.in Page | 3 Quarterly Performance… For the quarter ended June 10, KSK Energy Ventures has reported 115% growth in the total Income from Operations at Rs 2429 mn owing to 168% jump in revenues from Power generation segment at Rs 1911 mn. PAT has increased by 87% to Rs. 966 mn. On the other hand, Project Development segment reported 34% rise in revenues at Rs 564 mn in the quarter under review. Both, Power generation and Project Development segments constituted 77% and 23% of the total revenues respectively. OPM expanded by whooping 810 bps to 65.9% owing to 1100 bps and 760 bps expansion in margins from power generation and Project development segments respectively. On the other hand, Expenditure heads as % of sales has declined by 810 bps to 34.1% and boosted Operating Profit up by 145% to Rs 1602 mn. At segment level, profits from power generation business spiraled up by 249% to Rs 911 mn while that of Project development improved by 47% to Rs 487 mn. The powerful performance of KSKEVL in Q12011 was basically driven by power generation segment which grew by 168% 77% of the energy produced is sold through LTA and rest as merchant power Peer Comparison KSK will trade at a premium as compared to its competitors/ peers because of its stable long term off take arrangements, less dependent on imported coal and merchant power play, focus on fuel security reflecting in high sourcing from linkage and higher financial leverage than its peers. BUSINESS PERFORMANCE Peer Group Comparison Companies Revenue (Rs. mn) EBIDTA Margin (%) PAT Margin (%) ROE % P/E (x) P/B (x) CMP (Rs.) FV (Rs.) KSK Energy 4,534 81% 42% 6.9% 34.4 2.4 169 10 Torrent Power 58,245 32% 14% 20.5% 17.8 3.6 306 10 Gujarat Industrial Power 9,391 25% 11% 8.1% 17.2 1.4 114 10 * FY10 Consolidated figures 0% 20% 40% 60% 80% 100% 120% ‐ 5,000 10,000 15,000 20,000 25,000 FY09A FY10A FY11E FY12E Revenue, Operating & PAT Margin Revenue (Rs Mn) EBIDTA Margin PATMargin 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0 500 1,000 1,500 2,000 2,500 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Quarterly Performance Revenue (Rs mn) EBITDA Margins
  4. 4. October 29, 2010 www.fullertonsecurities.co.in Page | 4 Financial Analysis and Projections Particulars (Rs Mn) FY08A FY09A FY10A FY11E FY12E Net Revenue 2,389 3,496 4,534 13,879 21,717 Other Income 1,188 1,488 1,126 654 1,136 Total Income 3,577 4,984 5,661 14,533 22,854 Operating Expenditure 1,419 1,620 1,966 6,483 11,472 Depreciation 224 246 260 451 1,077 EBIT 1,934 3,118 3,435 7,599 10,305 EBIT Margin (%) 81% 89% 76% 55% 47% Interest Expenses 627 1,221 1,246 4,067 5,439 Profit Before Tax 1,307 1,897 2,189 3,532 4,866 Less: Tax 221 443 276 622 857 Profit After Tax 1,086 1,454 1,913 2,910 4,009 PAT Margin (%) 45% 42% 42% 21% 18% ROE (%) 17% 7% 7% 7% 6% EPS (Rs) 6 4 5 8 11 BVPS (Rs) 22 57 71 109 190 Valuation Ratios (x) FY11E FY12E PER x 21.7 15.7 P/B Ratio 1.6 0.9 Based on a consolidated FY12 P/E multiple of 18, the fair value for the company works out to Rs 194. VALUATION We estimate KSKEVL’s revenues to grow at a CAGR of 101% over FY2010-12 to Rs 22.85bn by FY2012. We further estimate that PAT would grow at a CAGR of 45% over FY2010-12 to Rs 4bn in FY2012 from Rs 1.91bn in FY2010. Based on a consolidated FY12 P/E multiple of 18, the fair value for the company works out to Rs. 194 We recommend a ‘HOLD’ rating on the stock.
  5. 5. October 29, 2010 www.fullertonsecurities.co.in Page | 5 Director Name Current Position Description Shankar Thiruvengadam Non-Executive Chairman of the Board, Independent Director Mr. Sankar is Non-Executive Chairman of the Board, Independent Director of KSK Energy Ventures Ltd. He has a Master of Science degree in Physical Chemistry and a Master of Arts degree in Developmental Economics. He has approximately four decades of experience in the energy sector. In 2004, he was awarded the Padma Bhushan, one of the highest civilian awards given by the Government of India. He has worked as the Secretary of the Fuel Policy Committee (1970-75), the Principal Secretary of the Working Group on Energy Policy (1978-79), a member of the Advisory Board on Energy, Government of India and a member of the Integrated Energy Policy Committee formed by the Planning Commission, Government of India. He was also the EnergySecretary to the Government of Andhra Pradesh and the Chairman of Andhra Pradesh State Electricity Board. He is the founder and Chairman of the Andhra Pradesh Gas Power Corporation Limited and headed the Gas Price Revision Committee of the Government ofIndia in 1996. In addition, he has worked with the United Nations as an advisor on energy issues to the Governments of Sri Lanka, Tanzania, Jamaica, North Korea and Bangladesh and has headed the Asian Development Bank’s Asian Energy Survey. Kishore Sethuraman Whole Time Director Mr. Kishore is Whole Time Director of KSK Energy Ventures Ltd. He is one of the Promoters of the Company. Mr. Kishore is a Chartered Accountant. He heads business development and capital formation group. He has co-chaired the Energy Committee of Federation of Andhra Pradesh Chambers of Commerce and Industry. Mr. Kishore has advised and provided consulting services to a number of power projects in the country. His areas of specialization are handling investments for power equity funds in small-to-medium sized power projects, regulatory reform and restructuring of power sector, distributed generation, and advising on project finance for the infrastructure sector. Kolluri Sastry Whole Time Director Mr. Sastry is Whole Time Director of KSK Energy Ventures Ltd. He is one of the Promoters of the Company. Mr. Sastry is a Chartered Accountant. He heads execution and operations divisions and is also responsible for financial accounting and records. His areas of specialization are financial accounting, contracting, commercial implications, taxation, legal/regulatory affairs and company law. He has extensive experience in system design and implementation for corporate and evaluation of corporate business models and its accounting. Mr. Sastry has advised many companies on matters relating to company law, taxation and foreign investment and foreign exchange regulations. Tanmay Das Whole Time Director Mr. Das is Whole-Time Director of KSK Energy Ventures Ltd. He has a Bachelor’s degree in Electrical Engineering and a Postgraduate Diploma in Management from the Xavier’s Institute of Management. He has worked in the Industrial Finance Corporation of India Limited as a manager of project finance. Mr. Das is the head of the Hydro Group and his responsibilities include investigation and hedging risks, capital structuring, evaluating projects and vetting agreements/documents such as the power purchase agreement, the fuel supply agreement, the equipment procurement contact and the operations and maintenance contract. He has been involved in structuring and setting up an Energy Equity Fund - “Small is Beautiful Fund”, including raising its corpus of Rs. 231 crore. This fund was sold by us to a Promoter Group Company pursuant to the Restructuring. K Bapiraju Whole Time Director Mr. K. Bapiraju is Wholetime Director of KSK Energy Ventures Ltd. He is an engineer with a degree in Electronics & Communications with more than two decades of experience in the IT industry. He is positioned in Delhi and leads the Corporate Affairs group and is also actively involved in formulating corporate strategy. Henry Klein Non-Executive Director Mr. Klein is Non-Executive Director of KSK Energy Ventures Ltd. He has a Bachelor of Science and Electrical Engineering (Honors) degree and a Master of Science and Electrical Engineering (Honors) degree from the University of Cape Town, South Africa. Mr. Klein also has an MBA (Finance) from the Columbia Business School, Columbia University. . In 1996, Mr. Klein co-founded TDA Capital Partners, Inc., an investment firm dedicated to private investments in India, Central Europe and Israel. TDA Capital Partners is the manager of the India Technology Fund, a private equity fund focused on India. Mr. Klein is a Managing Director in the Principal Investing Division of Lehman Brothers in New York, where he has worked since 2003. Mr. Klein has 18 years of experience as a financial professional, initially as an investment banker at Lehman Brothers and later as a public and private equity investor in developing countries, with a focus on India. Anil Kutty Non-Executive Director Mr. Anil Kumar Kutty, Non-Executive Director of KSK Energy Ventures Ltd. He has a Masters degree in Physics from the Delhi University. He has over three decades of experience in various fields including banking, administrative service and power sector. Mr. Kutty belongs to the 1978 cadre of the IAS and has handled several key assignments in the power sector, both for the State Government of Andhra Pradesh and the Government of India. As Member (Secretary) of APSEB, he was in charge of power sector reforms in Andhra Pradesh and was also the first CMD of APTRANSCO and chairman of the distribution companies. He worked as Joint Secretary, Ministry of Power, Government of India until 2007. Subramaniam Iyer Non-Executive Independent Director Mr. Iyer is Non-Executive Independent Director of KSK Energy Ventures Ltd. He has a Bachelor’s degree in Science and is a Certified Associate of the Indian Institute of Bankers. He joined the State Bank of India as a probationary officer in 1962 and after holding various positions with the bank in India and abroad, retired as its Managing Director in 2000. Since then, he has been a part of various banking industry working groups in India and was the Executive Chairman of the Credit Information Bureau (India) Limited from February 2001 to February 2004. Abhay Nalavade Non-Executive Independent Director Mr. Nalawade is Non-Executive Independent Director of KSK Energy Ventures Ltd. He is a graduate in Physics has a Masters in Business Administration (MBA) degree from Pune University. He alsocompleted a program in Management Development from the Harvard Business School. Mr. Nalawade has been associated with Thermax Limited for approximately 25 years, including as a Director and the Chief Executive Officer and Managing Director from February 1996 until July 2000. He is currently the Managing Director of EcoAxis Systems Private Limited, a venture promoted by him. Girish Kulkarni Non-Executive Independent Director Mr. Kulkarni is Non-Executive Independent Director of KSK Energy Ventures Ltd. He has a Bachelors Degree in Engineering from the Indian Institute of Technology, Mumbai and a Post Graduate Diploma in Business Administration from the Indian Institute of Management, Ahmedabad. Mr. Kulkarni has approximately 20 years of operating and investment experience in different aspects of the Indian capital markets. He started his professional career as a project finance officer with ICICI, after which he became the head of equity sales, trading and research at ICICI Securities Limited. Mr. Kulkarni has been involved in numerous IPOs in the Indian capital markets and several mergers and acquisition assignments. Mr. Kulkarni is the advisor to the India Technology Fund, an early stage venture fund invested in Technology companies. He is also the Founder and Managing Director of Suyash Advisors, the India advisor to Monsoon Capital, an India dedicated alternative asset fund managing about USD 500 million for investment in public and private equities and real estate projects in India. Board Of Directors

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