Sky is the Limit” – said Mr. Faruk Patel when asked about the future of renewable energy and the company’s latest foray into solar energy market place. KPI Global Infrastructure a subsidiary of KPI Group is launching its IPO from January 8, 2019 – January 11, 2018. The Equity right team spoke to the management team of KPI Global Infrastructure Ltd. led by Mr. Faruk Patel (Chairman and Managing director), Mr Shaheedul Hasan(Chief Operating Officer) , Mr Salim Yahoo (Chief Financial Officer) who gave us their inputs about the upcoming IPO and the sector it hopes to lead.
Equity Right team: Can you elaborate on IPP business model?
Shaheedul Hasan: We are a solar power generating company focused on providing solar power, both as an Independent Power Producer (“IPP”) under the brand name of ‘Solarism’ and as a service provider to Captive Power Producer (“CPP”) customers. So under IPP we build, own, operate and maintain grid connected solar power projects as IPP and generate revenue by entering into Power Purchase Agreements (“PPA”) with third parties for selling power units generated through our solar projects.
Equity Right team: Can you also put some light on captive power producer segment and how it will give you a recurring revenue?
Shaheedul Hasan: Captive Power Producer are companies who own an industry where they can utilise their generated electricity. Since KPI does not have an industry at the backend where they can utilise the energy generated we cannot be a CPP. Rather we are CPP service providers. So our clients who are the CPP’s either purchase our land or take it on lease and then outsource the process of erecting a plant to us.
So we have a contractual agreement whereby we complete the entire erecting process and also own the Operations and Maintenance agreement. So the plant is registered in the clients name, has been approved in the clients name and there is a separate meter that runs for their plant. KPI will earn revenue on one-time sale, there also is a recurring income which comes from the Operations and Maintenance agreements that KPI has with their clients. Also if the land has been leased to them they pay money on annual basis. We are one of the few who have made use of this model and are benefitting from it.
Salim Yahoo: The Capex is invested by the client. It is a contract whereby the client will pay KPI in exchange for their services(erecting and installing the power plant). No funds are required from KPI’s end. The clients provide them with an advance to construct the power plant. KPI basically uses its land, expertise, ancillaries and transmission lines to execute the contract.
Equity Right team: Has unit 2 which is in the pipeline bagged any PPA’s?
Shaheedul Hasan: Yes the PPA’s are already signed for the entire Unit 2 (25MW). The PPA’s are for 15 years and the older PPA’s are 3 years and are renewable. The rates at which the PPA’s are signed are flexible . We have signed 3PPA’s with L&T for a total of 5.775MW, 3 PPA’s with UPL for 11 MW and 2 PPA’s with Colourtex Industries Private Limited for 10 MW.
Equity Right team: What thoughts are given on the tenure of the agreements?
Shaheedul Hasan: As far as the longevity of the PPA’s are concerned, longer duration PPA’s provide stability from business perspective. As far as the PPA terms are concerned the agreements states that the rates are signed at 7% discount of the landed rate. That’s the discount that I pass on to my clients. They are linked with the DISCOM’s unit rate. If you look at the historical data of Bloomberg, it states for the last 20 years the rate has been increasing at 6% on an average. But we have been slightly conservative while taking the escalation and have considered it to be at 3%. The Discount rate of 7% is non-negotiable. Whatever percentage I fix with my client it is connected the with net landed rate. The discount rate is not expected the fall below 7%.
Equity Right team: What is the infrastructure for the transmission line and how the operation will work?
Shaheedul Hasan: The transmission lines have been built by us and are being maintained by GETCO. KPI has to pay maintenance charges to GETCO for maintaining the transmission line. There is a contractual agreement between GETCO and KPI for 25 years.The GERC tariff regulation regulates the sale and purchase of power. If you are injecting 66KV and your withdrawal is 66KV anywhere in Gujarat, then there are certain criteria. Transmission charges, transmission losses, wheeling charges and wheeling losses are taken into consideration. The payment happens according to the GERC regulations based on them. So it is an airtight tri-partyer agreement. KPI, consumer and the third party DISCOM who happens to be the seller to the consumer and are bound by the tariff regulations. None of them can take independent decisions.
Equity Right team: How is the tariff decided for the region where we generate energy in a DISCOM?
Shaheedul Hasan: 90% of our customers are based in the same DISCOM. So we produce power at DGVCL (Dakshin Gujarat Vij Company Limited) and supply it at DGVCL. The rates according to the tariff are standardised. Only if the Kilowatt is different will the rates differ.
Shaheedul Hasan: Bharuch is in DGVCL. So having said this point, even if my customer is in UGVCL, PGVCL, MGVCL. These are the three sections apart from DGVCL. The tariff rate will remain identical if I’m injecting at 66KV and withdrawing at 66KV, though my plant and my customer are in two different DISCOM’s. So our market is bigger actually since I can sell to any part of Gujarat.
Equity Right team: Who are your current PPA clients?
Faruk Patel: Our existing PPAs are 1.25 MW with L&T, 6.625 MW with Mafatlal Group, 4.6 MW with Meghmani Organics Limited and 3.25 MW with Best Paper Mills Private Limited.
Equity Right Team: What is the average life of a solar panel, what kind of maintenance does it require to utilise the panels to their full life extent and do the existing solar power plants have access to those?
Shaheedul Hasan: The maintenance only needs general cleaning(once in a week) and the land in the vicinity is covered with black soil which is compact in nature and does not create dust. Also the surrounding area is an agricultural area which does not create much dust. As far as the panels are concerned the manufacturer/supplier gives the warranty for 25 years under which 10 years is replacement warranty and remaining 15 years is performance guarantee which is applicable if there is any reduction in the performance of the panels i.e of the output, other than the normal derating that they have mentioned they will compensate by providing with additional panels or additional voltage.
(Solar Panels at K.P.I Global Infrastructure Ltd. plant in Gujarat)
Equity Right team: Why the location of your power plants is conducive for the solar power generation?
Shaheedul Hasan: Ambient temperature plays a key role in higher output. Lower the temperature better the generation. In fact regions with the lowest temperature seem to have the highest output. Also our plant is located in the vicinity of black soil. Black soil does not create dust which reduces the efforts which we need to put in for maintenance. Also the neighbouring land is agricultural which serves the same purpose. For maintenance we need adequate water supply which was taken take care of while erecting the plant.
(K.P.I Global Infrastructure Ltd. plant located at Sudi & Tanchha village, Amod, Bharuch, Gujarat)
Equity Right Team: Amod Substation is being upgraded from 66KV to 220KV what are the benefits you seek from this upgradation? Also you already have a previous agreement with GETCO will this upgradation seek an extended agreement?
Shaheedul Hasan: It is an upgradation and will therefore not require to have an additional agreement. The upgradation will increase the reliability of the Amod Substation. The intake capacity of the Substation will increase making it a positive impact and reduce the losses too. Higher the voltage higher the availablity. When the upgradation is completed we may be able to increase our output.
Equity Right Team: You are planning on replacing the 250W panels with the 320W-330W panels in the unit 2, are these panels going to be imported and by what margin will it increase the Capex?
Shaheedul Hasan: The panels are not being replaced they are being added. Previously used panels consisted of 60 cells in a panel. The new ones that are being installed are 72 cells panel. The 250W panels have increased from 250W to 275W. Area remains same and the power output is more. Lesser land is used, lesser mounting of structure , lesser number of cables, in short the balance of system decreases.
(Solar Panels at K.P.I Global Infrastructure Ltd. plant in Gujarat)
Equity Right team: What is the gestation period for conversion of land from agricultural to commercial?
Faruk Patel: Gujarat has a lower TAT (Turnaround Time). According to which after 90 days of signing the sale deed the government is bound to convert the land from agricultural to commercial if it is applied for. Under 63AA clause under which you purchase any agricultural land it is deemed to be Non-Agricultural (NA) if used for certain purposes inclusive of agriculture. And since it is deemed to be NA we can start our project on the land immediately.
Equity Right Team: The government of Gujarat has waived off Rs 650 crores due of electricity bill of farmers and residential units. They have also been encouraged to get a new connection or renew their old ones at just Rs 500. IPP sales contribute 25.21% to the total revenue how do you think this is going to affect you?
Faruk Patel: As far as the ideology of the people is concerned that if the electricity bill due for farmers is waived off then the revenue of the solar power plants will be impacted, there is an provision in Gujarat that the first settlement goes to solar power producing company. If the industries have an agreement of being supplied with 1000 MW of power monthly but they only use 100 MW which is supplied by the solar power plant the payment will not be made on pro-rata basis. It is a compulsion that bill due of the solar power plants will be settled first. Solar power plant stands to be first priority.
Equity Right Team: Sunborne energy limited based out of Kutch has a 25 year agreement (2012-2037) with the Gujarat Urja Vikas Nigam limited with the tariff of Rs 15 per unit what expansion programme or strategy would you undertake to beat your competitor?
Shaheedul Hasan: Sunborne Energy sells to the government, we do not have our presence in that sector. The contract was signed under fit regime which has now been replaced by reverse bidding. Under reverse bidding the sellers bid for supplying power and the seller with the lowest bid bags the contract. They are also imposing ceilings above which they cannot bid. But this is a part of the company’s supplying power to government in which KPI does not engage. And currently the PPA’s being signed by the government are around Rs.2.44. At that time the cost incurred for generating power was relatively higher than the cost at present which allowed those companies to sign the contracts at those prices. That is not possible today.
Equity Right Team: Has KPI given any thought to energy storage technology, how far can solar energy go without affecting grid stability?
Shaheedul Hasan: The technology currently is in research and experimental implementation. Because it is a costly affair. The combination of renewable energy along with storage will be beneficial for them. If the technology becomes commercially viable for KPI they will certainly get involve in it. if it developed, KPI will be able to generate for the whole day store it and then keep transmitting it at a constant rate. So your transmission booking capacity will be lesser. In a situation where the transmission line is down, today the entire energy generated gets lost but with the storage facility it will be possible to avoid it altogether. Though as published by GETCO the transmission lines work 99% of the time.
Equity Right Team: How is financing scenario for solar sector? Are banks and NBFC’s willing to lend to you?
Faruk Patel: SBI has already lent 2 term loans to KPI. If we compare the equity with the debt that the company has taken, the Debt/Equity ratio is comfortable. PFC has lent KPI a loan of Rs. 86cr under open access this shows that they are willing to provide us with the credit.
Equity Right Team: If the government changes will it affect your business. Also the Niti Aayog wants the solar sector to be competitive will that ideology affect your rates?
Faruk Patel: Solar is essential to the country. So the government can say no to any industry but not solar projects. Also policy till 2022 has already been declared by the government. And even after that India has given certain commitments to the world which they are obliged to fulfil.
Shaheedul Hasan: We do not avail to any subsidy from the government, so any changes that they make, we are away from their grasp. Also the policies are decided by the state governments; they are overlooked by the central government but are mostly agreed upon as decided by the state. And the tariffs are regulated by independent commissions -CERC (Central Electricity Regulatory Commission) and GERC (Gujarat Electricity Regulatory Commission). They do not report to the government and they are the final deciders. Therefore the management should be influenced by the government at a minimum. We also believe that the developments that the government brings about have been beneficial to the market, sector, consumers. Competition opens up the market.
Equity Right Team: The panels are being imported from the China with the government imposes extra tariffs on Chinese imports? The alternative option that we have is European technology so what is the cost difference?
Shaheedul Hasan: Safeguard duty (SGD) was the tariff which was expected to be imposed by the government and which has already been imposed. And whatever projections and designs which have been released by them have already taken this aspect into consideration. The cells are imported from China but are integrated into a panel in India. The tier 1 manufacturers in China are as good as the European manufacturers. Europe comparatively has a high cost of production but the qualities of the cells do not have huge differences.
Faruk Patel: Also why do we only pay attention to European manufacturers. We have other options like Taiwan, Japan and Vietnam. If there are constraints we will find a way but currently this issue is irrelevant for us.
Equity Right Team: What is the net capacity of the panels dependent upon?
Shaheedul Hasan: The output of solar plants is decided by the Plant Load Factor (PLF). PLF is dependent on factors such as radiation of sun, ambient temperature, your design and your execution, inter-road distance, cable selection, transformer, generator, etc. Selection of equipment is an important factor for higher output. Maintenance is as important as the rest of the procedures. And as we mentioned cleaning is simple in case of solar plants. Our current CUF is around 20%.
Equity Right Team: What is the outlook on the renewable energy space with possibilities of unfavourable policy decisions and overall sector?
Shaheedul Hasan:The management is quite optimistic for solar sector for the coming years. India is a power deficit nation so you do require power. Government is laying emphasis on renewable sources of energy. The current policy for 2022 has estimated the output to be 100 GW from solar. And we have just completed 25 GW and are yet to complete the next 75 GW. Also India as a country has made certain commitments to the United Nations, under which a certain % of electricity will be from renewable resources and we have to fulfil that commitment.
Faruk Patel: Renewable energy is the only fixed alternative for power being produced through non-renewable sources. The policies are also conducive for the solar energy producing companies. Suppose we are unable to obtain coal from the foreign nations due to some problem like deficits or falling foreign exchange reserves. At that point of time there is a high possibility that we may face blackout. Renewable energy is the only permanent solution to this.
Shaheedul Hasan: The potential of India has an estimated capacity of 750 GW, out of which the government has given a conservative target of 100 GW. Out of the 100 GW the target for Gujarat is 8 GW. The potential of Gujarat at present is around 30-32 GW. This is because Gujarat and Rajasthan are god-gifted states which have maximum radiation. At policy level there is maximum positive thrust from the government but at execution level there are some ground issues.
Shaheedul Hasan while closing the informative interaction said,
“In a nutshell as far as this project is concerned or our idea is concerned, our endeavours are concerned, it is unique from several perspectives. One is the advantage that we have from location perspective and the unique model of PPA that we have devised in which both the consumer and the seller get the benefit since it is not fixed for either of the parties. The team that we have at the ground level the dedicated and knowledgeable team. So because of these factors I think that this IPO will be a great success and we seek co-operation from your end also.”
Salim Yahoo added a few words saying,
“Leveraging on the power of nature for the benefit of humanity as well as the businesses.”
Equity Right Team thanks the KPI Global team for their valuable insights.