BULL POINTS:
• Indian power demand booming
• Strong pipeline with financing in place for first 2GW
• Increasing renewable production will bring additional revenues from carbon credits
• Trading on a discount to sum-of-the-parts valuations
BEAR POINTS:
• Execution risk of projects
• Shares highly rated on earnings multiples
India's booming economic growth is creating its own problems, not least a significant strain on its power generation capacity. But this has created a significant opportunity for private sector power generators to fill the gap, and this is where KSK Power Ventur is beginning to build a significant presence.
India's economy has grown at an average of 8 per cent a year for the past few years and demand for power is predicted to grow at 10-12 per cent a year for the foreseeable future. The Indian government's five-year plans regularly set ambitious targets for increasing energy generation which have been routinely missed. In the five years to 2007 the target of adding 41,110MW of generation capacity was undershot by 49 per cent, which makes the aim of adding 78,577MW between 2007-2012 unrealistic, especially as the 2007-2008 period saw a shortfall.
But this has created a huge opportunity for the likes of KSK which is rapidly developing a portfolio of power generation capacity, typically agreeing specific deals direct with industrial customers to build power generation close to their operations in return for guaranteed offtake agreements.
Since joining Aim in 2006, KSK has restructured its business into an 'asset-light and capital light' model whereby it owns a 55 per cent shareholding in KSK Energy Ventures (KSKEV), the operating business in which US investment bank Lehman Brothers has a significant stake. KSKEV raised $300m (£156m) in new equity in India earlier this year and has a market capitalisation around £730m. This values KSK Power Ventur's stake at £403m, or 313p a share. On top of this KSK floated the KSK Emerging India Fund on Aim this year, raising £101m to invest in Indian power opportunities.
KSK has bulked up its operations in India and filled out its pipeline to the point where management believes it will have 5GW of power production by 2012, placing it in the top two or three private sector players in India. Its 'visible pipeline' stretches to 9GW and finance is in place for $2bn of investment which should take production to 2GW.
To mitigate risk in its project pipeline KSK secures fuel supply before it commits to its power projects. For instance, through partnerships or joint investments it has secured access to 1bn tonnes of coal at low fixed prices and is now even seeking agreements outside India, in particular in Indonesia, for further coal supplies. It is also looking for further opportunities in hydro electric power generation where fuel is not an issue. By 2012 management expects the mix of power production between thermal, or coal, power and hydro to be split roughly 65:35.
| ORD PRICE: | 390p | MARKET VALUE: | £502m | |
| TOUCH: | 389-390p | 12-MONTH HIGH/LOW: | 636.5p | 235p |
| DIVIDEND YIELD: | nil | PE RATIO: | 45 | |
| NET ASSET VALUE: | $1.53** | NET DEBT: | 36% | |
| Year to 31 Mar | Operating Revenues (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share ($) |
|---|---|---|---|---|
| 2007 | 6.2 | 3.0 | 3.0 | nil |
| 2008 | 16.4 | 26.1 | 13.3 | nil |
| 2009* | 31.6 | 8.1 | 3.3 | nil |
| 2010* | 74.5 | 21.9 | 8.7 | nil |
| % change | +136 | +170 | +163 | - |
Normal market size: 250 Market makers: 4 Beta: 0.25 *Arden Partners estimates **NAV 80p at £1:$1.92 | ||||
Click here for a guide to terms used in IC tables
KSK is also looking to break further into the renewable energy space by setting up a solar power manufacturing capability. Increased production from renewable sources could, in time, bring another revenue stream from carbon credits.
At present KSK has 184MW of generation for industrial customers and has a stream of projects in its near-term pipeline including a 540MW project at Warora, 1,800MW at Chattisgarh and three other 1,800MW coal-fired projects as well as several hydro sites. Such a rapid increase in capacity brings with it execution risk but KSK has already built up the central capacity sufficient for a much bigger operation to prepare for this.
