FREE

KSK Energy Ventures' Q1FY19 results (Dropping coverage) - Loses control of Mahanadi power plant

Q1FY19 result highlights

• Post the RBI Circular of February 2018, lenders have invoked pledge on the shares of SPV operating KSK Mahanadi power plant. Inability of the power plant’s to service debt had led to default in servicing loans. The asset has been put on sale by lenders. High fuel prices owing to lack of domestic coal allocation has led to financial stress for the power plant.
• The linked coal block to the power plant was de allocated pursuant to Supreme Court order in 2014. The power plant, eventually, tied up coal under the auction of coal linkage of 6.8mtpa by quoting a minimal discount in 2018.  This quantity is sufficient for meeting 70% of the fuel requirement. We estimate a significant reduction in fuel cost going forward of upto Rs0.5-Rs0.6/unit. However, it’s too late in the day for the turnaround of the power plant.
• Besides, KSK was failing to meet its debt obligations for VS Lignite and Sai Wardha power plants, under subsidiaries due to lack of long term PPA.  Lenders of the power plants, operating under subsidiaries have converted debt into equity and the lenders own major shareholding of these operating companies. As a result, these companies are now associates companies. KSK holds 33% and 28% stake respectively.
• As a result, KSK reported loss of Rs472m in Q1FY19 and Rs16.5bn in FY18.

Key negatives: Invoke of the pledge in the Mahanadi, the largest operating power plant of the company

Impact on financials:  Given the uncertainty in the resolution of the operating power plants and lower stakes in SPV’s, we have downgraded   our earnings estimates for FY19E/FY20E

Valuations & view

After invocation of pledge by the lenders, KSK has lost control of the Mahanadi power plant, the largest operating power plant ( 86% PPA tied up and 70% coal tie up). Similarly, KSK has also lost control of its other operating subsidiaries.  As a result, we are dropping coverage. KSK residual stake in the operating power plants are unlikely to create any value for minority shareholders.