KSK Energy bets on new units for fresh triggers

SK Energy Ventures (KEL) has risen by about 10% over the past three weeks against a decline of nearly 2% by the Sensex. The stock also recorded a near doubling of volumes. This is in contrast with its performance of the past 12 months, when it generated a negative return of 6% against over 80% for the Sensex.

The trigger for the brief run-up was the company’s announcement about commissioning of its 135-mw power project in Rajasthan. Prior to this, the company had a total of 144-mw capacity and the expansion will add significantly to its revenue and profits. The power project is lignite based, for which the company has a captive source of fuel and has started a trial run with its own fuel source. The plant will primarily cater to the power requirements of industrial consumers and hence would generate higher profits with lower credit risk.

KEL is a subsidiary of KSK Power Venture, listed on the London Stock Exchange (LSE). KSK Power Venture holds a 51.3% stake in KEL, through its wholly-owned subsidiary KSK Energy, Mauritius.

KEL is developing most of its power projects through various SPVs, where the consumer also holds equity, leading to a sharing of risks for both parties. The company had entered the market with its public offer in July ‘08 to raise Rs 830 crore. It raised Rs 515 crore more through a QIB issue in November ’09. However, the stock has failed to perform and has been trading below its offer price for the most part after listing. The company’s financial performance has also been lacklustre so far this year, with profits falling by about 9% despite a growth of 29% in sales for the nine-month period in FY10. The profit decline is largely because of other income declining by almost half.

Even though the stock and the financial performance of the company have been below market expectations, the company is making a significant investment in the new capacity addition. It spent Rs 1,400 crore in FY09 and the capital employed has further increased by more than Rs 2,500 crore during the nine-month period ended December ’09. The company expects to commission a 540-mw project located in Maharashtra in FY11. Besides, it is also constructing a 3,600-mw project in Chhattisgarh, scheduled to be commissioned in ’12-13. This unit can provide a significant upside to the company’s profits in the longer run. However, the stock looks highly priced currently with a consolidated P/E of 56 times and it may take 3-4 quarters for the company’s financials to get a significant boost.