Orient Green Power Company Ltd.

Transcription

1 21 st Sep, 2010 Orient Green Power Company Ltd. ANS Research Desk (Research Wing of ANS Pvt Ltd) Research Team, Bhaskar Patel Pranav Mehta Anand Kakkad ARHAM Financial Centre Harihar Chowk, RAJKOT (Guj) Speak to: Drop a line to: research@anspl.net

2 Issue Details Sector Port Issue Size ` 900 Crores QIBs * 81,818,181 Non-Institutional* 24,545,454 Retail* 57,272,727 Face Value ` 10 Price Band `47 - `55 JM Financial Consultants Pvt. Ltd. Goldman Sachs (India) BRLMs Securities Pvt. Ltd. UBS Securities India Private Ltd. Axis Bank Limited Registrar Link Intime India Private Limited Company Address: Registered Office : 3 rd Floor, Egmore Benefit Society Building, 25 Flowers Road, Chennai Tamilnadu. Phone: Fax: Website: * Minimum allotment RATINGS: CRISIL has given an IPO rating of GRADE 4 to the issue suggesting above average fundamentals for the company. Orient Green Power Company Limited (OGPCL) is the largest independent operator and developer of renewable energy power plants in India based on aggregate installed capacity (Source CRISIL Report March 2010). Company s operating portfolio includes biomass, biogas, wind energy and small hydroelectric projects. As of July 31 st 2010, company had an aggregated installed capacity of 213 MW of which 172 MW consists of Wind Energy while 40 MW of Biomass projects. The company has mainly grown its business by acquiring and developing renewable assets from third parties and by developing green-field projects. The company is promoted by Shriram EPC Limited (SEPC), Shriram EPC (Singapore) Pte Limited (SEPC Singapore) and Orient Green Power Pte Limited, Singapore (OGPP). Moreover there are 2 PE investors Bessemer Ventures Partners and Olympus Capital Holdings Asia. Company s portfolio of committed and development projects included approximately MW of prospective capacity comprising of an estimated MW of wind energy projects, MW of biomass projects and a 15.0 MW small hydroelectric project. Particulars Operating (MW) Committed (MW) Development (MW) Total Gross Capacity (MW) Total Attributable Capacity (MW) Wind Biomass Mini Hydro Total Gross Capacity Total Attributable Capacity Research Done by: Pranav Mehta

3 Company s Businesses: Wind Energy Business OGPCL is one of the top two independent operators and developers of wind farming in India on aggregate installed capacity as per the CRISIL Report of March The company currently has operational wind farms located in the States of Tamilnadu and Andhra Pradesh and it is planning to expand its geographical presence elsewhere in India including the states of Gujarat and Maharashtra as well as in International Markets like Sri Lanka, Croatia, Czech Republic and Hungary. OGPCL s wind energy business is housed in its subsidiaries BWFPL and GGPL. Orient currently operates 4 wind farms with an aggregate capacity of 172 MW with 3 farms located in Tamil Nadu and 1 farm located in Andhra Pradesh. The company sells power to private power consumers(such as Hotels and Manufacturers) seeking to supplement state power supplies for captive purposes pursuant to short-term PPAs in states where such sales are permitted, such as Tamil Nadu. It has also entered into long term PPAs (20 years) with SEBs (State Electricity Boards) for selling of its power. Biomass Power Business OGPCL s biomass power business focuses on development and operation of multi-fuel biomassbased power plants that generate electricity from Agri-residues and waste from agriculture crops, forestry and related industries, such as rice, mustard and soya bean husks, straw, cotton and maize stalks, coconut and ground nut shells, wood chips, poultry litter, and bagasse. The company currently operates 5 biomass plants and 1 biogas plant with an aggregate installed capacity of 40.5 MW in Tamil Nadu, Maharashtra and Rajasthan. It is also having committed and development stage projects coming up in states of Andhra Pradesh, Gujarat, Madhya Pradesh, Punjab etc. OGPCL sells its generated biomass power to varied businesses which includes a mixture of private industrial and commercial consumers, distribution companies, power trading companies and SEBs. The company generally enters into 20 year PPAs with SEBs while PPAs for their other customers are generally shorter in length. Source: Company RHP

4 Objectives of the Issue: The net issue proceeds will be used for following objectives: The following table summarizes the intended use of the proceeds of the Issue: Expenditure Items To finance the construction & development of 4 biomass projects being undertaken by the company To fund its Subsidiaries (OGP Rajasthan & Beta Wind Farms Pvt. Ltd.) for undertaking biomass project in Rajasthan and a wind project in Tamilnadu For funding its subsidiaries BWFPL,PSR Green Power Projects and Shriram Non-Conventional Energy Limited General Corporate Purpose Amt. to be utilized (` In Millions) Not Quoted Source: Company RHP

5 Why to Invest in Microsec Strong background of the promoter company OGPCL is being promoted by the Shriram group which has proved itself to be very competent and has proved its project execution capabilities on a consistent basis. Shriram EPC (SEPC) was an early entrant into the business of designing and constructing biomass power plants in India and has completed a lot of biomass projects in the country so it has loads of experience in this field. Moreover Shriram EPC has been involved in Engineering, Procurement and Construction activities which help it in carrying out power generation projects with relative ease compared to other players. In addition most of the members of company s senior management team have over several years of experience in the Indian renewable energy sector. The relation with SEPC also provides the company with increased access to a broader network of vendors, suppliers and customers. Unique Play in the Renewable Energy Field in India OGPCL basically generates power through wind farms and biomass/biogas generating plants. It is one of the largest players in renewable energy segment on an integrated capacity basis in India. The Indian Government has also recently made it compulsory for power producers that atleast 10% of the energy produced by them should gradually come from Renewable Energy sources. Going forward the power generation through renewable sources is going to play an important role in providing non interrupting power to the customers without causing too much pollution. Governments world over are trying to reduce the pollution caused by Thermal based power plants which still form a majority part of the total power produced in many of the countries. Kyoto protocol has also stressed the importance of going green while producing power. OCPCL exposes an investor to take advantage of this very important and fast growing industry within the power generation space. Deficit in Power Generation India continues to face power shortages even after so many power plants have become operational in last 5-10 years. Merchant power gives a unique opportunity to the independent power producers since the amount of power generated is always less than the amount required

6 by the manufacturing and other industrial sector. Due to this the power producers have some pricing power with them and they can pass on the increase in input costs to the customers. If OCPCL is able to complete its projects in time without facing too much cost over run then it will be able to provide some part of its total power generated to the power starved private industries and will be able to improve its profit margins. There is always going to be increasing demand for power and the current capacities will not be able to satisfy this anytime soon. Major Risks/Concerns associated with the company Dependence of the Company on its Parent/Subsidiaries OGPCL depends on its parent company Shriram EPC (SEPC) for all its biomass/biogas technology since SEPC has been operating in this segment for quite some time. Company s Vice Executive Chairman Mr. Shivaraman is the managing director and CEO of SEPC. Moreover Shriram EPC itself is involved in activities due to which it can be considered as a competitor of OGPCL. So there is some conflict of interest on this front. One of the company s subsidiaries LSML is the main supplier of equipments to OGPCL. LSML has very limited operating experience and it is having a very limited capital base. Though OGPCL is under no completion to source from its subsidiaries it is possible that the company may continue to order its major equipments from LSML only. Until now Orient has not established any strong relationship with other experienced suppliers which may expose it to some risks related to critical equipment supply. Valuations not very cheap OGPCL s valuations do not appear cheap even at lower price band. Both the PE investors invested in the company in December 2009 and their average cost of acquisition was Rs. 30 per share after the 2 bonus issues. On per MW basis also OGPCL seems expensive compared to SJVNL or NHPC though these stocks cannot be compared in true sense since the latter are involved in Hydro electricity generation while OGPCL is involved in wind and biomass power generation. The upfront cost in Wind farm and Biomass/Biogas plant erection is not that much as compared to hydropower but still the company has been experiencing losses for last 3 years. Book value per share is Rs. 14 so on P/B.V. basis also the offering looks expensive.

7 Company s auditors have given a qualified opinion on the restated financial statement OGPCL s auditors have given a qualified opinion on the restated consolidated financial statements for the fiscal years ended March 2009 and This qualified statement was given in relation to the income arising from carbon credits in certain of its subsidiaries amounting to Rs million and Rs million for the said years respectively which have been accrued based on management estimates. This was due to non availability of carbon credit certificates as a result of which ultimate realization of income from these certificates cannot be ascertained with accuracy by the auditors. Income from such Carbon credits form nearly 7-8% of company s total revenues but if there is any shortfall in the realization may result in company s losses becoming higher. Volatility in Raw material prices related to Biomass/Biogas plant OGPCL uses Sugarcane trash (Bagasse), Coconut Shells, Wood chips and Mustard husk etc. as raw materials in its Biomass/Biogas plants. All these materials are not easily available all year round and so the company has to keep a lot of inventory so that they do not run out of critical resources. Some of these materials are also cyclical in nature which exposes the company to higher volatile prices. Due to higher equipment costs and volatile raw material prices the average cost of production per KW also comes out to be higher for a Biomass/Biogas plant compared to a thermal power plant. Source: Company RHP, ANS Research

8 FINANCIAL HIGHLIGHTS Balance Sheet (Consolidated Results) (` In Millions) Particulars Mar 2010 Mar 2009 Mar 2008 Share Capital Net Worth Total Debts Cash & Bank Bal Total Assets Book Value Contingent Liability Profit & Loss (Consolidated Results) ( ` In Millions) Particulars Mar 2010 Mar 2009 Mar 2008 Income Other Income Total Expenditure Dep. & Amortization Interest Tax PAT Basic & Diluted EPS Balance Sheet (Consolidated Results) (` In Millions) PARTICULARS Mar 2010 Mar 2009 Mar 2008 Cash generated from Operations Cash generated from Investments Cash generated from Financing Change in Cash & Cash Equivalent Cash & Cash Equivalent Opening Cash & Cash Equivalent Closing Source: RHP

9 RECOMMENDATIONS Valuations Price Band EPS BV P/E* P/B.V N.A N.A *since EPS is negative Orient Green Power Company Limited has an EPS of ` for year ended March 31 st 2010 while its book value is Rs. 14 per share for the same period. At the given price band of Rs. 47 to Rs. 55 the pricing of the stock looks expensive. So there would not be too much room left for the stock to move higher once it gets listed on the stock exchanges. Although the company is operating in a growing sector and industry the pricing of the IPO appears stiff. Moreover the company has been experiencing losses for past 3 years and most of its reserves have been capitalized to equity capital due to the 2 bonus issues carried out in December Keeping all these things In mind we would recommend an Avoid on this IPO from a short term perspective particularly for the conservative investor. Investors should wait for some quarters before investing in this company since by then the company would have finished its expansion and would have hopefully become profitable by then. Only High risk investors can take the chance of Subscribing to this issue.

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