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.

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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.

Venture Capitalists: Value addition through synergies

As an investment banker, I have had the opportunity to get the insights of two institutions that were seeking venture funding from investors. Although one of the institution was delivering service while the other was manufacturing product, there seemed to be quite a similarity in terms of their approach towards business, the way they see the market and their organization structure. Both of them were run by enthusiasts rather than professionals. Both of them had invested heavily on infrastructure but seriously lacked organizational structure to run the business profitably.

So, when they came seeking for funds, it was really hard for me at first to understand how to value these firms. What do we present to the potential investors to make them interested?

It seems venture funding has a lot to do with creating a ecosystem and getting value addition from synergies between several businesses within the portfolio of the venture capitalists. The investors are rarely interested in the company solely for the value of the company in isolation. The ventures are more appealing if the investors find a good fit in their portfolio of other investee companies. For example, a venture capitalist having IT college in its portfolio will be more interested in a IT company than someone not having IT college in its portfolio.Investor with investment in spirit manufacturing will be interested in soda manufacturing business. The reasons for these is the synergies between the businesses (in hand and in the offering). Synergies come with creating an ecosystem for a whole product/service and leveraging this ecosystem for wider product/service range. In case of the spirit manufacturing, the same distribution channel could be used for distributing soda, thereby reducing cost while increasing speed of distribution for the new products. In case of IT college case, interest alignment among the college and the company lead to value addition.