KSK Energy Ventures launches its initial public offering to the market on June 23. Having already raised Rs 415 crore from various foreign banks Macquarie, GE International and Axis Bank.

Promoters and issue objective

If the company’s growth fold-out is as per plan, then this is the first time that they will be dealing with large size power plants. KSK is trying to raise money through this public offering primarily to invest in their Wardha Power Company Pvt Ltd, which is a subsidiary of theirs. This money is being used to finance the equity component of the 1,800 MW coal-based thermal power plant at Wardha, Chattisgarh.

Concerns

While the company shows a good growth pattern, the main concern seems to be surrounding their coal availability. They essentially acquire coal by entering into private-public partnerships in collaboration with government enterprises, who supply coal for their projects undertaken. The primary concern in this case is that if these enterprises stop supplying coal to them for some reason, there is no alternative fuel source that the company has. The current Wardha Chattisgarh power plant was to receive coal from the Gujarat government-owned Gujarat Mineral Development Corp Ltd (GMDC).

It was expected that GMDC would supply coal and pick up a 26% stake in Wardha Power, keeping with the agreement signed in 2006 and subsequent amendments signed in 2007. But the change made in the final IPO filing says GMDC had informed KSK on May 30 that the coal supply and investment agreement is subject to government approval and that the relevant documents have been submitted to the government for this. GMDC and the government will be in talks to come to a final outcome. If this outcome does not favour KSK then they will have to find an alternate source of power.

Number talk

The company shows a typical growth story as far as sales, overall income, and profits are concerned. The fiscal year of 2008 shows a PAT of Rs 108.6 crore, which is a considerable jump from the previous year’s Rs 18.8 crore. However, while this figure looks impressive, investors should note that some of the incomes earned by KSK this year are one-time incomes only. These include Rs 99.3 crore as profit from the sale of some financial investments the company held previously. Also, they have received Rs 23 crore as power arrangement income and earned Rs 43 lakh as corporate support services, which have all contributed to the company’s income of the year, which is Rs 358 crore.

Nonetheless, the company is showing an upward trend. However, with this sudden boost in profits last fiscal, what the coming year and quarter holds cannot be ascertained, and where the company finally steadies is yet to be seen. Taking into consideration the shares distributed in this issue, the company shows an EPS of Rs 3.14 based on last years PAT. This gives us a P/E of 76.45 (x) and 81.23(y) at the lower and higher price band respectively. In comparison, the peer group within the industry shows us P/E’s of 49.1 times at the highest, 10.4 times at the lowest, and an industry average of 24.1 times as per information provided. All things considered, the company does seem to have a lot of backing from their current investors, book running lead managers, and their promoters, who seem fairly confident about the future.

However, KSK still remains an upcoming firm whose profits before 2007-08 ranged from Rs 6-18 crore and shares valued at Rs 35/share, they have been within the industry for 7 years, and their story from being a 144 MW producing company to hopefully a 8,993 MW producing one, shows promise, optimism, as well as seen and unforeseen risks.