KPI Green- Turning Sunshine Into Cashflows

KPI Green Energy Ltd. (formerly KPI Global) is a Gujarat-based company engaged in the solar power infrastructure and generation business. They have two main verticals- Captive Power Producer (CPP) and Independent Power Producer (IPP).

Brief description of both verticals:

Captive Power Producer-

As a Captive Power Producer, KPI develops, transfers operates and maintains grid-connected solar power projects for CPP customers and generates revenue by selling these projects to CPP customers for their captive use requirements. The CPP Business is also carried out at plans located in Sudi, Bhimpura, Kurchan, Muler, Ochchan, Jhanor, Bhensali, Vagra and Vedcha villages of Bharuch district, Gujarat. KPI develops solar power projects on behalf of CPP customers by entering into a turnkey agreement enabling CPP customers to not only use a common pool of grid-connected land to establish and generate solar power, but also provide ready-made common infrastructures to evacuate power, using our transmission line from solar plants to the nearest GETCO Substation.

KPI also provides Operation & Maintenance Services (OMS) by entering into a separate OMS Agreement for 25 years with CPP clients ensuring a long-term annuity source of revenue.

Margins in this segment range from 40-45%

Independent Power Producer (IPP)-

Under IPP Segment, KPI develops and maintains grid-connected solar power projects as IPP and generates revenue by selling power units generated from our solar plants through Power Purchase Agreements (PPAs) with reputed business houses. The IPP Business is currently carried out from plants located at Sudi, Samiyala, Tanchha, Bhimpura, Kurchan, Muler and Vedcha villages of Bharuch district, Gujarat.

Margins in this segment are generally 70%+

IPP has been a major focus area for the company due to its margin accretive nature which can be seen in its growth over the past six years-

Source- FY22 Investor Presentation

While the CPP segment is majorly topline accretive, the IPP segment is bottomline accretive. The same can be seen here-

Even while IPP makes a <30% proportion of total revenue, it accounts for a significantly higher proportion of EBITDA.

The margin figures for specific segments have been taken from this TV interview as the company consolidates both segments in its reporting.

What I like-

  • Solar Power Generation as an industry has significant policy tailwinds in India. Aggregate capacity at the national level has gone up more than 20x in 6 years, with a target to further take it up to 300 GW (~6x that of current capacity). Budgetary allocations have been made for the same. The central government’s incentives can be found here. However, at the state level, the impact of policy may not be directly beneficial due to the introduction of banking charges of Rs. 1.5/unit, the overall policy thrust is towards encouraging captive use by industries.
  • As companies look to score better on ESG metrics and reduce costs, they will look to reduce dependence on thermal power plants and look at captive RE sources.
  • The promoter, Mr Faruk Patel has been working in the infrastructure and logistics space for almost 30 years.
  • The most important factor for any infrastructure company is execution, and execution has been top-notch for KPI. In FY22 alone, the company added 51MW+ capacity in IPP. To put that into context- in H1FY21, the company had a 43MW IPP Portfolio with another 43MW underway.
  • Robust order book- in the CPP segment, the company has an order book of 83MW+. To put that into context- since it has started operating, KPI Global has executed an aggregate capacity of ~65MW.
  • Strong client base with long-term Power Purchase Agreements (15-20+ years) for IPP with companies like L&T, UPL, Cadila, etc as clients.

When I first bought, the company traded at roughly 4x trailing EBITDA albeit with a smaller execution record. It currently trades at 10x FY22 EBITDA (and a ~15x EV/EBITDA). However, management guidance is for 1000 cr revenue by FY2025- which at FY2022 Margins means 400 crores in EBITDA, valuing the company currently at <3x FY2025 EBITDA.

While I don’t normally take management guidance at face value- I have reason to be confident here due to their past track record. The present valuation even after a significant run-up allows enough margin of safety.

Concerns/Risks-

  • Debt Levels- the company’s debt to equity is at 2. While cash accruals are expected to cover repayments and there have been interest savings on account of refinancing of loans, further expansion is expected to be met via internal accruals and borrowings.
  • Despite the large debt component, the company regularly pays dividends even though there may be better uses for the cash. However, one may find a little solace in the fact that the dividend money is used by the promoter to buy stock from the open market. (The company paid Rs.1.8cr as dividend in FY22 with an additional Rs.3.6cr of dividends announced in May)
  • IPP Margins from the new capacities are likely to take a hit due to an introduction of Banking charges at Rs. 1.5/unit. Average realisation per unit in IPP has too come down from Rs. 6.06 in FY21 to Rs. 5.03 in FY22.
  • The industry as a whole suffers from the possibility of lower production and thus lower realisations due to climatic conditions, which is amplified for KPI as the company’s client base, as well as production, is concentrated in Gujarat.
  • The company does not host conference calls and there is no analyst coverage and thus our ability to reasonably forecast earnings is constrained.

Disclosure: Invested from 120-130 levels.

My gratitude to @chins for encouraging me to write here and for recommending the thread title.

Looking forward to hearing everyone’s thoughts!

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Well summarised. Adding some random views/points

• Promoter has set an ambitious target and i have no reason to doubt his intentions but one needs to realise that industries in gujarat already meet a large part of their energy needs through captive produce(mostly coal). Even though going fwd incremental demand for CPP will be met by solar, a lot depends on industrial growth in Gujarat. There’s been a lot of capex across chemicals and recently textiles that has contributed to growth of solar based CPP in that state.
• Also one needs be aware of any policy changes. currently there are a few surcharges that are exempted and surplus energy is procured by discom at favourable rates. May not stay that way forever
• Have written to the IR twice with book keeping questions. No reply. One was on RPT (not a red flag but thought i should mention it)
• About the dividend- Most promoters are aware that investors look at good numbers from unknown small firms with a lot of scepticism. They also know that people place a lot more trust in dividend paying companies. Hiring an external IR team only exacerbates this problem.
Nice title by the way. Witty:)

Disc: invested

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I have been tracking this company since last 6 month’s. Some questions from my side although company has shown huge topline and bottom line growth. Most of their projects are funded by Debt and internal accruals are not such enough to cover entire cost of projects.
Secondly, You have mentioned that promoter is purchasing from Open market and he even mentioned in his interview regarding the same but my sense is that he is purchasing because in order to fund it’s project he needs more fund which may be come from long term loan(Bank will provide in exchange of Pledging the shares). More debt will create a high interest cost even in FY22 they have 37 crores of interest cost too high.
Thirdly, KPI is EPC contractor company and EPC companies always records their revenue after a product delivery or in proportion of ratio may be KPI are too aggressively recording revenue even before products delivered not sure but need to see FY22 annual report.

Thanks.

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Few data points I have captured from last few years ARs and below are the observations.

FY19 FY20 FY21 FY22
IPP MW 15 40.76 49.22 100
CPP MW 2.43 6.2 9.35 65
PLF Pecentage 19.01%
Units Generated in Cr 1.87 4.61 7.94 10.94
Revenue in Cr 34 59 102 230
Revenue from IPP in Cr 11 27.88 48.18 57.5
Sale of Plots in Cr 5.72 5.44 5.53
Sale of Plant(CPP) in Cr 17 25.95 49.78 172.5
Land Bank in acres 208 250 450 850
Borrowings in Cr 40 139 240 337
Interest in Cr 4 8 16 37
Audit Fees in lakhs 2.29 3.8 7.21

Observations
a. They are buying land bank to increase their capacity
b. Till FY21 CPP and IPP was growing at the same percentage but in FY22 they have got more orders for Captive plants which resulted in good revenue growth
c. There is something odd in the number of units generated for FY21 number it is not proportional to the numbers stated for other years. Was more sunny days during FY21 a reason behind the same
d. The company is funding the growth on debt but I think if they continue to generate cash at this pace they may have an option to pare the debt
e. PLF percentage is only given for FY19
f. Audit fees are increasing every year

From the latest presentation we can see that Management is focusing more on Captive Power projects.

It will be good if we can get some insights from people living in Surat or Bharuch on the Solarism project.

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Few reference videos to understand the Business Model

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As per the latest rating report the current order book in CPP segment as of May 22 has increased to 350Cr and these orders to be executed in next 6-9 months which will come in this financial year. This will double the revenue in the FY23.

Also, the company will be in a good shape to reduce the debt with the current cash accruals which will help in increasing bottomline.

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KPI Green energy has received single largest order of 26MW under CPP segment

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Insights from KPI group Testimonial (Client feedback)
4 client feedback on KPI Green EPC project
MS Synethetics: Incorporated in 2000 basically a yarn manufacturing company.

What leads them to swtich to Renewable Energy? Why they had chose KP group ?

They had installed wind mill in 2006 due to high power cost and after 10-12 years they had switch overed to solar power. MS Synethetics director father knew the KP group founder Farukh patel ji since 2007 so they had decided to give their EPC project to KPI green energy. Moreover Farukh patel ji had great experience in solar power industry since long time and KPI always commissioned their project on time.

One more insight from video that Textile company major cost is employee and power cost. Power cost can be reduced by commissioning of solar plant and payback period is less than or equal to 3 years.

Jaisal Silk mills: Established in 1987 and their operation is in Dying and printing of Polyester Fabrics.

What leads them to switch to Renewable Energy? Why they had chose KP group?

Director of Jiasal silk was in europe where he saw solar panel mass usage. Consumption of huge power is main reason for switching over to renewable energy. According to jaisal silk director there is no competitor which stand nearby KP group in solar plant and no negative review from existing clients so they had decided to give their project to KPI green energy.

Chougle Salt works: Incorporated in 2005 and from past 17 years they are in salt manufacturing

What leads them to switch to Renewable Energy? Why they had chose KP group?

Support from Gujarat government to shifts towards Renewable Energy. Positive feedback from existing client and to save power cost on their capex they had chose KPI green energy.

GandharFood Products: Established in 2017 and their operations are in salt manufacturing for edible and industrial usage.

What leads them to switch to Renewable Energy? Why they had chose KP group?

Same answer from Gandhar Food products support from Gujarat government and subsidies leads them to shift towards Renewable Energy.
Positive feedback from clients and more than 85% power generation from solar power had increased their faith on KPI Energy.
Some common answer in video is Saving of cost, environmental friendly and support from Gujarat government is main reason for switching over to Renewable Energy.

Source: MS Synthetics | Testimonial | KP Group | Renewable Energy Captive Solution - YouTube
Gandhar Food Products | Testimonial | KP Group | Renewable Energy Captive Solution - YouTube
Chougle Salt Works | Testimonial | KP Group | Renewable Energy Captive Solution - YouTube
Jaisal Silk Mills | Testimonial | KP Group | Renewable Energy Captive Solution - YouTube

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In the recent concall of “sterling & wilson” they said, Solar Module costs increased by 40%, Logistics cost has increased by 25% . Can anyone help me understand how company has hedged itself against this? Also as solar tariff is falling, will it affect company’s margin (for upcoming PPA’s in IPP segment)?
Thanks

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They typically hedge the module costs for a year (back to back arrangement once they sign a PPA). Post a year they need to decide their selling price incorporating market conditions as well as cost structure. Logistics cost isn’t that much for them.

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Q1 revenue from IPP division was 16% or 19.5 cr. if we divide that by the no of units 3.89 cr then we get per unit revenue of 5 rs. consider the long term picture. IPP is annuity revenue i.e. PPA are signed for 15 years. by 2025, the co. plans to energise 250MW of IPP and that will give 200 cr annual revenue. approval of this capacity is not an issue as cumulatively they have 320+MW approval already in hand. although the co. has not mentioned the CPP capacity energised in Q1FY23, but revenue wise it is 100 cr (122 cr ttl -20 cr from IPP).
Currently, per MW cost of setting up a solar project is 4-5 cr. If i take 4 cr then co energised close to 25 MW of CPP capacity in this quarter. the 4-5 cr figure is also confirmed by the recent credit rating report from ICRA. they state that 350 cr of CPP will be executed in 6-9 months and the orderbook as per latest Investor presentation is 84MW under CPP. 350/84 will give per MW cost at 4.2 cr (in the 4-5 cr range)

The cumulative capacity is 100 MW and by end of FY22 it will be close to200 MW (100+84). this would mean that co needs to execute 550 MW in next 2 years to reach the target of 750MW by 2025. If i just avg capacity of 350MW per year then it would mean revenue of 1400 cr (350*4) annually from CPP.

So the total revenue if all executed as per current targets would be in range of 1600 cr in FY2025. at 20% profit, it means NPM of 320 cr or EPS of 178. At that stage i am expecting significant rerating in the PE ratio but still using a PE of 25, the price should be 4450 or 5 times from current levels.

Another interesting thing which might have escaped notice is the fact that they have now ventured in wind power also. infact i know a co called pashupati cotspin which recently confirmed 2MW order under CPP which is a solar+wind hybrid model. gujarat is currently 2nd in terms of installed wind capacity across India after Tamil nadu and it has huge potential. If this segment takes off for KPI green, then we could be looking at another stream of revenue in next 2-3 years.

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Could anyone make sense of this quarter’s margin miss? Ideally, CPP does 40%+ and IPP 70%± so I’m not entirely sure how we get ~30% blended margins

In CPP they charge one time for setting up the plant and then there will only be operating and maintenance charges which they will charge to customers. The CPP segment will only have recurring revenue from O&M.

Promoters are already engaged in the wind energy business through their other listed entity

KP energy yes. But adding wind in portfolio of KPI green is also starting. They can leverage that strength to enhance KPI green more.

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No unit CPP unit energized in Q1FY23. Revenue booked might be basis the progress of construction. Also they might soon get RECs which they can sell on exchanges. This REC will only w.r.t. to the IPP segment.

My understanding is that CPP gives some 25%+ margins and not 40% plus.

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Although carbon credits market is not there in India but can kpi take advantage of carbon credits in the future in the IPP segment?

From 2:10

I think that’s not the case here. Revenue doubled, Receivables down by 25%.

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