KSK Energy Ventures (KSKEV) is in the power generating business, which is subject to different government norms and regulations that could substantially influence its overall profitability.
The company will have to meet these government regulations to secure availability of land, tariff fixation and obtain environment and other clearances. Hence, any changes in the regulations would adversely impact the company’s operations.
It has no track record of developing and operating big projects of the scale and magnitude that it has planned for. Its proposed capacity addition of 8,993MW is 62.5 times its existing installed capacity.
Moreover, the power projects have long gestation periods, which make them susceptible to execution risks.
We believe that the issue is aggressively priced as KSKEV’s business prospects are expected to pan out and over the next several years, with an expected generation capacity of 819MW by FY2011 and 9,137MW by FY2014.
The IPO is expensive considering that KSKEV is yet to commission a major portion of its current total expected power generation capacity.
On relative valuations, KSKEV is priced at a considerable premium to its peer NTPC, which already has an installed capacity of 29,144MW along with good execution capabilities and proven track record. The company expects to have a total installed power generation capacity of 2,792MW by end FY2012.
As per our valuation, the stock would command a P/BV of 4.2x and 4.3x FY2010E at the lower and higher price band, respectively. Hence, we recommend AVOID on the issue.