Long-term investors can hold, others can exit KSK Energy stock

COMPANY: KSK ENERGY VENTURES

OFFER PRICE: Rs 240

LISTING PRICE: Rs 220

CURRENT PRICE: Rs 194

CURRENT P/E: 34*

*Based on FY08 results

KSK ENergy Ventures, which came out with its initial public offer (IPO) last month, was listed on the bourses last week.

The company’s IPO got a lukewarm response, considering its stretched valuations, and its retail portion was significantly under-subscribed .

The stock was listed at a discount of about 10% to the offer price and is trading at a discount of about 20% currently. Its current price-toearnings (P/E) multiple of about 34 is much higher than that of its peers. However, this is not a correct ratio for comparison for a growing company. A more correct approach will be to compare the market capitalisation per megawatt of capacity, which works out to Rs 2.4 crore per mw of expected capacity for ’12, for the company.

This is quite in line with the ratio for NTPC and Tata Power, the existing players in the power sector. However, this still does not discount the relative inexperience of the company.

In the existing scenario, investors who have a long-term view of at least two years can remain invested. Other investors can consider exiting the stock at an appropriate opportunity.

The company, which currently has a capacity of 144 mw, expects to commission a 135-mw plant towards the end of ’08. Another plant of 540 mw capacity is expected to be commissioned by December ’09. With these two plants, the company should be able to nearly double its profits by FY10, compared to FY08.

Further, KSK Energy plans to develop another five projects totalling more than 6,000 mw, to be commissioned during ’12-13 . However, these plants will require an investment of nearly Rs 25,000 crore, including Rs 6,000 crore of equity.

Considering a four-year gestation period, the company should start pumping funds into these projects in the next 12-18 months, else the projects may face delays. While there are no immediate pressures on equity needs, the company may not have much time to raise more equity, if it wishes to meet its deadlines.

KSK Energy generates better profits from its existing plants because of sale to industrial consumers, which provides better rates. However, while this advantage may hold for the next two plants, the company will have to sell in the open market later as it executes higher-capacity projects, and that may lower its margins. Hence, the company’s margin advantage will not be sustainable in the long run.