Investment Idea - KSK Energy Ventures Ltd - "HOLD"
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. 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. 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. 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. 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