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Saturday, May 30, 2009

KSK Energy Ventures Ltd:-Future growth prospects and outlook

Scripscan:KSK Energy Ventures Ltd
Traded in:Nse-bse

Story:The company is currently running three power plants with a capacity of 144 mw and expects to commission two more, with capacity of 675 mw by December ''09. The third group of projects, with an aggregate capacity of 1,975 mw, is expected to be commissioned by ''12. Around 85% of its plants are coal-based and depend on the fuel supply agreement, making it vulnerable to fuel-supply risks.As per its business model, the largest consumer of a specific plant holds equity in the special purpose vehicle (SPV) that operates the particular plant. For instance, Lafarge holds a 49% stake in the plant from where it draws power. The arrangement eliminates certain risks associated with running the plant, and enables a better profit margin.However, going forward, the gain will become very small, as the company grows and sells power outside the existing mode of sale. The company has so far entered into power purchase agreements (PPAs) for approximately 637 mw of power only. PPA is a prerequisite for securing debt for the projects, as power plants are heavily debt funded. Setting up the Wardha plant needs around Rs 6,874 crore, including debt of Rs 5,150 crore. The company has approved debt of around Rs 4,400 crore and an in-principle approval for the rest. However, a firm fuel linkage is still not in place, and may delay the other stages of the company''s projects, such as financial closure and the award of contract for main equipment supply.The company recordedconsolidated sales of Rs 239 crore in FY08, more than triple the sales in the previous year. This is because two of its plants have been running for the full year even as a third plant has been commissioned. For similar reasons, its other income rose by almost seven times, whereas net profit is up 475%. While the numbers looks very impressive, they do not look sustainable. Further, operating margin has come down by about 3-percentage point year-on-year. While the financials look impressive, the company has a long way to go.As per the current plan, NTPC and Tata Power would have a capacity of about 50,000 mw and 10,000 mw respectively by ''12. At this rate, their current m-cap works out to be Rs 2.7 crore and 2.9 crore per mw of ''12 planned capacity. In comparison, at this present price, market cap of the company will be Rs 3.0-3.15 crore per mw of ''12 planned capacity. Even if we ignore the difference arising out of the past experience and relatively larger size of existing players, valuation looks on the higher front. Despite the potential of the sector and company''s better profitability ratios, the stock has limited appeal at this moment and investors should adopt a wait-and-watch approach. With the uncertainties associated with power projects and the current stage of KSK Energy''s development, investors should wait for concrete development in its planned projects before taking an exposure to the stock.

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