Sanima Mai Hydropower Limited : Increase in project cost in Phase II

Sanima Mai Hydropower Limited issued its shares to public a little while back. As mandated by Securities Board of Nepal (SEBON), it had the public offering assessed by ICRA Nepal.

Image Source: http://theloanconsultant.com

The company had issued the offering to finance its two run-of-river hydropower projects with 22MW capacity project being built in Phase I and 7 MW capacity project being built in Phase II. The Phase II project will not require any Headworks as it is being built on cascade model, i.e. the water from tailrace of Phase I will be tapped to source the Phase II project. Cascade model have its inherent advantages in reducing environment impact as well as reducing capital investment required for the downstream project.

As per the rating by ICRA Nepal, the total project cost is estimated at NPR 4375.80 million. This converts to capital investment of NPR 150.89 million per MW. The rating further states that the project cost in Phase I (22 MW) is NPR 3119.53 million, i.e. 141.79 million per MW. The project cost for Phase II (7 MW) can be deduced from the above at NPR 1256.27 million. The per MW cost for Phase II comes out to be NPR 179.47 million, which is NPR 37.68 million additional cost per MW against the Phase I cost. The cost increment is of 26.57%. This is quite interesting, given the fact that cascade projects bring in cost advantages. The reverse is seen in the above case.

Stay away from the stock market

The meaning of investment has been corrupted for over a century now. Investing was like sowing seeds in the garden in the anticipation that one day a big plant will grow and give fruits. But, the continuous introduction of complex financial tools combined with the changing mentality of investors has redefined the notion of investment. 

Investors are more focused on the short-term gains. They are more interested in the information available in the market rather than scrutinizing financial statements of the companies. Rumor sways the market more than the actual information. Companies are made and burnt just based on the common perception. And, this perception rarely has anything to do with the financial or qualitative analysis of the company.

Stock market has been a place for betting. Majority of people participating in the stock market are speculators and not investors. Add to that, the availability of derivatives markets and complex financial tools, stock market has been a heaven for gamblers. Hedging has been very prominent in the recent times.  Many analysts believe that the scale of 2008 recession can very well be attributed to hedging. We had the case of hedging by J.P. Morgan Chase to bring down share prices of strong companies. Such unethical acts combined with irrational investors create huge signaling effect in the market. At times, shares of even strong companies are brought down. And at times, shares of even non-existent companies are purchased at huge prices. Unethical nature of companies and the irrational behavior of investors have made the stock market ever so vulnerable. 

Even shrewd knowledge of finance can’t help. The very assumption of almost all the financial theories that a market is composed of rational investors is wrong in the real market. The behavior of market and the participants is so diverse that no theory can sum it up. Many times, there are no relations between a company’s performance and its share prices.

Another aspect of the market is that, contrary to the mass belief, the market is not efficient. Even the advanced stock market of USA is not efficient. How do you explain the market crashes of 2007-2008 and 2001-2002? And the Asian crisis of 1997. What sort of efficient market needs such huge “corrections”? None.

So, if no one can understand the behavior of the market, how wise is it to invest in the market? You can spend hours analyzing the financial sheets, the corporate governance and the future growth prospects, but what if that information doesn’t really impact the share prices? What are your chances to succeed in the market when you are the only rational investors and all others speculate? Some may argue that on the long run, the market does value the shares correctly. But, what is the guarantee that you will live to see that? It may take years for the market to value shares as per its intrinsic value. It may never happen at all.

So, my advice is stay away from the stock market. Rather invest in small companies as a seed investor. Grow with the company. Be involved in the company. Nurture it, care for it, scrutinize the performance, evaluate the growth, and analyze the prospects….Invest for long term. It’s better to understand and participate in the growth of few companies rather than speculate wildly on numerous companies in the irrational market.

The Curious case of Buwal Power Company (BPC)

Although management gurus always start with the assumption that the market is full of rational investors, it is hardly the case in reality. Everyone is biased due to the company reputation, management reputation, information interpretation, etc. At the end its more about behavior of the investors rather than the performance of the company that decides if the company is going to sell like hot-cake or go down in the history books.

Examples to prove these seem to be omnipresent in Nepal. I did talk about few of them in previous posts.

I was going through the financial statements of  Butwal Power Company(BPC), regarded as one of the most stable investments in Nepal. I was shocked to see their Current Ratio(CR) just below 1. For any company, this is a warning signal. Although, BPC is quite stable in terms of its revenue sources, but playing with CR is not a serious thing to do.

BPC Financial Statement  [Source : http://sharesansar.com]

Current Ratio is the ratio of current assets to current liabilities. Plainly saying, CR is the ratio of how much you got/have in the given period in terms of cash or assets that can be en-cashed within a year to how much you have to give/pay in the given period in terms of liabilities/obligations.

So, if your CR is lower than 1, it means you owe more to others than others owe to you. In case, the people or companies that you owe the money, i.e. basically the suppliers and lenders ask for all the money, than you can't give them by just handing them the money you receive from the people who owe money to you. You will need to sell long term investments and/or fixed assets like land, equipment or take more loans.

This will implications on the performance of the company. Selling fixed assets is not a good sign. It will lead to decrease in productivity. Similarly, taking extra loan just to meet present obligations is not a sustainable act. Also, with extra loan, you get extra interest to pay. So, the current liabilities increase further.

Although a one quarter result doesn't give a full picture, investors do need to question the authority about this number.

Butwal Finance Ltd. : Usage of "provisions for losses" and "write-backs"

Provisions for losses are made by companies to smoothen out the huge and sudden impact bad debts, other unrecoverables ( default in accounts receivables) and unforeseen mishaps cause on the performance of the company. If the provisions are made for mishaps or unrecoverables assumed to take place in the next quarter, then they may be added back in the next quarter financial statement as write-backs. If the provisions are to smoothen out events of huge cash or property loss in the long run, the immediate write-backs are not done.

In my last post, I discussed about how Janata Bank was distributing the "provisions for losses" over several quarteers to give a perfect performance picture of the quarter just before the IPOs were offered. It had cleverly assigned maximum provisions for losses for the quarter previous to this.

I was going through the income statement of Butwal Finance Ltd. and saw a similar situation.

Statement Source : www.sharesansar.com

The interesting facts to notice in the income statement were the "provisions for losses" and their "write-back" segment. In the previous quarter, when the reported losses is huge, surprisingly a large "provisions for losses" - Rs.7,710,000 was accompanied by very small "write-back"-Rs.93,000. Compare this with a relatively small "provisions for losses" -Rs.5,982,000 accompanied by a large "write-back" -Rs.4,980,000.

The above action is raising the profits of the present quarter and decreasing the same for the previous quarter. Like the Janata Bank statements, Butwal Finance Ltd. too is leveraging the previous quarter to produce better results for the present quarter. This act ensured that the company had profits before tax and thus enabling employees to bonuses, although the company is literally under loss( if "provisions for losses" and "write-backs" for present quarter were similar to that for present quarter).

These two segments in the income statement of two quarters may be genuine, but the varied amount of these segments written for two consecutive quarters do signal the huge probability of mal-practices in income statement reporting. One of the benefits of such mis-reporting is the availability of bonuses for the employees. So, does anyone sense a conspiracy here?

Why I didn't buy Janata Bank IPO shares

Last week was big for Nepalese investors. After a long gap, the investors got the opportunity to gain from an IPO listing in the form of Janata Bank IPO shares. Going by the trend in Nepal, the IPO shares are expected to at least double once the shares get listed in the share market, i.e. in two months time. This was enough for most of the Nepalese investors. The IPO shares were subscribed 3 times the allocated shares of 60 million.

Even though my friends were busy filling the IPO share forms, I was stubborn on not participating in this IPO. The reasons were purely based on my financial analysis of the bank rather than anything else. The main reasons were:-

1) Too much of leverage:
 In its two year of existence, Janata Bank had used a huge level of leverage (87%) to gain rapid growth. But with rapid growth came risky approach. As per Janata Bank statements, they thought a significant number of employees would be appropriately used after the IPOs. This means these employees are currently either under-performing or not needed by the company. The 60 billion Janata Bank raised from IPOs will reduce the leverage to 80%. This is a ceiling for many banks in the world. So, seeing the future, it will be very hard for Janata Bank to gain quick extra money to continue its rapid growth. All it can do for few years is to consolidate its growth.

2) Uneven distribution of Provisions for Bad loans in the past two quarters:
If you compare the income statements of last two quarters just before Janata Bank opened the IPOs, there seems significantly uneven distribution of Provisions for Bad loans. In the quarter ending 30.09.2068, the provisions is in the amount of about 60 million and in the quarter ending 30.12.2068, i.e. just before the IPOs were opened, the provisions is just for 23 million. Not surprisingly, the quarter ending 30.09.2068 has net loss of about 6 million, while the next quarter has net income of about 43 million. This could be a strategy of the bank to set a large portion of bad loans in the previous quarter, so that the statement just before the IPOs are very attractive to the potential investors.

3) Increase in exposure to real estate loans:
As all other banks in the country are trying to reduce their exposure to real estate loans, Janata Bank has increased the real estate loans by more than 3 times.  This is a very scary thing to do in the current scenario when the real estate prices are sliding down.

Picture Source : http://sharesansar.com

Although the IPOs "may" give to 10-40% gain in 2 months time, Janata Bank shares may not be ideal for long term investments.

Well this is just my thought. You can post in yours.

Capital Markets in Nepal

Nepal seems to be moving towards the right direction with the introduction of CDS. It would be easier to trade shares of companies in the share market, thereby adding a huge number of investors to the stock market. This will in turn enable publicly traded companies to have pool of cash for future up-scaling of the company.

The infusion of huge amount of cash into the industries will also trigger the professional management movement in the numerous industries, till now many of these have been managed by family members - often less qualified than their employees. The sense of accountability along with installation of professional management will ensure better performance of the industries. This will in turn push the development to new heights.
Get ready to bull ahead with development.