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Highlights of Q2FY11 results
Consolidated Q2FY11 results
• Revenues grew +135% yoy to Rs2.8bn, as capacity addition of 270MW over past three quarters led to jump in power
generation revenues. However, Q2FY11 revenues were below estimates of Rs2.9bn, led by lower development
revenues.
• Led by commissioning of 135MW VS Lignite plant (end-March 2010) and first unit of 135MW at Wardha Warora plant
in May 2010, power generation revenues jumped 4.23x yoy to Rs2.8bn. Sale of wind power generation from 52MW
wind power capacity acquired in 1QFY11 also contributed to yoy growth in generation revenues.
• However, development division revenues fell sharply by 76.8% yoy to Rs95mn, as no new milestones were achieved
in power projects under implementation.
• Led by lower revenues from higher margin project development segment, as well as rise in fuel costs, margins fell to
53% in Q2FY11 from 63% in Q2FY10, and were lower than our estimates of 60%. EBITDA for Q2FY11 at Rs1.51bn
(+97% yoy) was also lower our estimates of Rs1.74bn. Fuel costs for Wardha Warora plant during the quarter were
higher due to larger proportion of requirement met through higher cost spot purchases/e-auction route (lower linkage
coal received). The company expects to shortly start receiving higher proportion of linkage coal from designated block
on ‘cost plus’ basis, thereby reducing fuel costs.
• Depreciation jumped 4.5x yoy to Rs286mn, due to commissioning of new generation capacities and additional
depreciation from wind power assets. Similarly interest costs grew 73%yoy to Rs554mn, and were above estimates of
Rs539mn.
• Due to steep initial depreciation of wind power assets acquired during 1QFY11, and availing of MAT credit, KSK paid
tax at effective rate of 6% during the quarter, in line with estimates.
• Consequently, PAT (pre-minorities) grew by 67% yoy to Rs689mn, sharply below estimate of Rs999mn.
• Adjusting for share of minorities, PAT grew 47%yoy to Rs547mn and below our estimate of Rs801mn. While share of
minorities has been adjusted in accordance with accounting principles, KSK continues to hold 100% economic interest
in all operating as well as under construction plants.
Standalone Q2FY11 results
• KSK’s standalone revenues for Q2FY11 fell sharply by 71.4% yoy to Rs117mn (vs our estimate of Rs245mn) on account
of achievement of fewer milestones for development of power projects, leading to receipt of lower developmental fees
from power SPVs.
• Led by lower revenues, EBITDA fell sharply by 85%yoy to Rs55mn, and also sharply lower than our estimate of
Rs157mn.
• Other income fell 76% yoy to Rs62mn, as KSK deployed surplus cash towards investment in its subsidiaries.
• Interest costs fell 8.5% yoy to Rs225mn, higher than our estimates of Rs211mn.
• Due to higher depreciation rates for wind power assets (52MW) acquired by KSK during Q1FY11, depreciation
jumped 8.4x yoy during Q2FY11 to Rs21mn vs our estimate of Rs25mn.
• Overall, due to lower income and higher depreciation, KSK reported loss of Rs134mn at standalone basis vs our
estimate of PAT of Rs47mn for Q2FY11.
Highlights/ Project Updates
• KSK has achieved the boiler light up for 2nd 135MW unit of Wardha Warora and expects to commission the unit over
the next few weeks. The 3rd and 4th units of 135MW are expected to be commissioned by December 2010 and March
2011 respectively.
• KSK also expects to commission the 43MW Arasmeta expansion plant by December 2010.
• The company has acquired 52MW wind power assets during Q2FY11 for Rs2.1bn. With higher depreciation available
on the wind power assets, KSK’s effective tax rate is expected to be significantly low going forward.
• Construction of the 3,600MW Wardha Chattisgarh power project is continuing as per schedule.
Valuations & View
We have downgraded our FY11 earnings estimates by 13% to Rs9.4/share, due to lower development fees from SPVs
during the quarter caused by fewer milestones achieved for development of power projects, and lower other income due
to reduction in cash surplus, which has been invested in subsidiaries. While quarterly revenues and earnings may remain
inconsistent based on progress in development of power SPVs and hence booking of development revenues, we believe
sharp jump in operating capacity to 862MW by FY11 end will improve revenues and earnings over next two years. KSK
has replicated its outsourced captive power model in several projects, and also implemented smart financial structuring
methods of securing equity investments from captive consumers of power without yielding any economic interest in the
project. Moreover the sharp 2x increase in total generating capacity to 862MW by March 2011 and strong profitability
driven by medium term PPAs at attractive tariffs will act as strong near term triggers for the stock. We maintain our
Outperformer rating on the stock, with a 12-month target price of Rs214/share.
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