The Hindu Business Line : Suryachakra Power: Avoid

Investors can give the initial public offering of shares by Suryachakra Power Corporation (SPCL) the go-by. The risks of investing in this offer outweigh the potential returns, especially at the offer price of Rs 17-20 per share. Revenue and earnings potential from biomass-based power generation is not very attractive and the company has no experience in this business. Add to this the problems in the operations of the company's existing diesel-based 20 MW station in Andaman & Nicobar islands, and the picture is complete.

Diesel to biomass

SPCL's diesel power plant in Andaman was commissioned in 2003 with a cost overrun. The Andaman & Nicobar (A&N) Administration is yet to approve the higher cost and SPCL is being paid on a provisional basis based on the original estimate. The company is also liable to pay liquidated damages of Rs 3.15 crore to the A&N Administration for the delay.

The A&N Administration retains the right to deduct this from the payments due to SPCL for the power supplied by it. The cash flows could come under strain if the right is exercised.

The Plant Load Factor, or capacity utilisation, of the plant, which is designated a base-load plant, has been sub-optimal and touched a high of 62 per cent in 2006-07. It is in this backdrop that the company is now foraying into biomass-based power generation through three subsidiary companies — Lahari Power & Steel, South Asian Agro Industries and M.S.M. Energy. Lahari and South Asian Agro are implementing two biomass-based plants of 9.8 MW each in Chattisgarh while M.S.M. Energy is setting up two units of 10 MW each in Maharashtra.

While Lahari's and South Asian Agro's projects are expected to be commissioned in July and September 2007, respectively, that of M.S.M's is likely to go on stream by August/September 2008. The main fuel for the biomass plants will be agricultural waste such as rice husk and cotton stalks. The company is yet to tie up for regular supply of the fuel. The biggest disadvantage is that this is the maiden foray of the company into this business.

Power trading — non-starter

One of the subsidiaries has also secured a power trading licence from the Central Regulatory Authority and plans to enter this business. Though there is good scope in the power trading business, it may be difficult for a small player to break into the industry, which has such major players as PTC India and NTPC Vidyut Vyapar Nigam. The cap on margins in trading at 4 paise a unit imposed by the regulator has already made the business unattractive and the only way to make money will be to increase trading volumes. It is doubtful if SPCL will be able to do that.

Promoters' record

The promoters of SPCL were earlier in the aquaculture business and two of their listed companies — Suryachakra Sea Foods and Kalyan Sea Foods — fell into difficult times when the aquaculture projects were banned by the Supreme Court in 1996. These companies were subsequently delisted by the BSE, and the Securities and Exchange Board of India slapped penalties on them for non-compliance. Some cases are also pending in different courts against the promoters and some of the group companies for not repaying loans, including one filed by the Marine Products Export Development Authority (MPEDA).

Investors can avoid this offer, which is highly priced, carries disproportionately high risks, and offers no major promise for capital appreciation.

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