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CEB pays Rs. 80 mn in penalties in 2008
IPO to raise more than
Rs. 600 mn for renewable energy projects

Hemas Power, a subsidiary of Hemas Holdings PLC, announced an Initial Public Offering for 31.3 million ordinary shares which will be listed in the Colombo Stock Exchange hoping to raise between Rs. 532 million and Rs. 626 million to fund projects in non-conventional renewable energy generation.

The IPO is expected to raise capital for Hemas Power’s 1.18 MW Magal Ganga Small Hydro Plant, currently under construction, intending to expand its capacity to 2.4 MW. The IPO is also expected to fund the acquisition and development of other power generation projects, especially in non-conventional renewable energy generation from wind and bio-mass.

"In Sri Lanka, the real growth story will come from the non-conventional renewable energy sector; this is true for the whole world. We already have one power plant and in the process of building another. We are in discussions to go for more," Chairman Hemas Power, Hussein Esufally said.

"We definitely have an appetite to take on wind-power and bio-mass energy generation projects but we are cautious at the moment and do not want to take on everything that comes our way. We have already looked at a few wind projects," Managing Director, Hemas Power, Kishan Nanayakkara said, adding the company would consider thermal power generation if the government invited them to do so.

The National Energy Policy also envisages to have 10 percent of the country’s power generation from non-conventional renewable energy sources. At present, it is around 4.5 percent.

The company said it would have about Rs. 2 billion set a side once the IPO is through for future projects in the non-conventional renewable energy sector.

The share offer price will be determined through a book building process (see Island Financial Review of September 4) and the price range would be Rs. 17, Rs. 18, Rs. 19 and Rs. 20. The official opening of the IPO is September 17. The earliest closing date is also September 17 and the latest is October 7.

The financial advisor and managers of the offering is NDB Investment Bank. Legal advisors and lawyers to the offering is Nithya Partners. Ernst and Young are the auditors while Bank of Ceylon is the bankers to the offering.

Growth potential...

CEO NDB Investment Bank Vajira Kulatillaka said the energy sector had a lot of growth potential in post-war Sri Lanka and would be a proxy for future growth.

"One sector that would have a major take-off in post-war Sri Lanka would be the power sector because without energy there can be no development," Kulatillaka said.

Demand for electricity is expected to increase by 8.5 percent by 2022 but Kulatillaka said this forecast was before the war ended. "Growth in demand could be exponential now that the war is over and economic development kicks in."

He said Sri Lanka’s economy is expected to grow by seven or eight percent by 2011. "If at all we can expect growth to be higher than this," Kulatillaka said.

"Interest rates and the rate of inflation have began to come down and foreign reserves have also increased. A lot of people can talk about the past and where we have gone wrong but now things look much different after the war," he said.

"Even the stock exchange could not gather momentum and had short cycles due to terrorism. There was a problem of sentiments with bombs and rumours affecting trade at the stock exchange. But now without the cloud (of terrorism) the stock exchange will be oriented towards proper business cycles and will be able to develop," Kulatillaka said.

Apart from the high growth potential, Kulatillaka pointed out that Hemas Power has a strong balance sheet with a potential to pay high dividends.

State guarantees...

Hemas Power operates two power plants at present, a 100 MW thermal power plant in Puttalam and a 2 MW small hydro power plant.

Nanayakkara said these power plants are governed by various contracts and agreements with the Ceylon Electricity Board and the government.

In fact, the government has guaranteed to meet undisputed payments from CEB when purchasing electricity from the thermal power plant. There are also penal interest payments when CEB delays payments.

"Last year the CEB paid us Rs. 80 million in penal interest for delayed payments," Nanayakkara said.

Kulatillaka pointed out the nature of electricity generation projects in Sri Lanka was such that projects were relatively risk free given the guarantees and agreements private sector power generators enter with the state sector.

Financials...

The company’s revenue for 31 March 2009 was Rs. 4.8 billion, averaging more than Rs. 3.5 billion for the past five years. Net profit after tax in 2009 amounted to Rs. 230 million (averaging Rs. 238 million since 2005).

Hemas Holdings IPO...

Exactly six years ago, in September 8, 2003, conglomerate Hemas made an IPO raising more than Rs. 6 million to become listed company Hemas Holdings PLC. This IPO was primarily used to fund the conglomerates foray into the power generation sector.

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