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Orient Green Power: Running out of power?

Orient Green Power (OGPL) has ambitious plans to grow in the renewable energy industry in India. With huge unmet power demand in the country and fiscal incentives in place, the scope to grow is immense. However, the company is suffering from losses and is overly dependent on its parent group companies. Also, wind and biomass power plants have their own risks.

Based on the available information, its IPO looks risky for retail shareholders. Its performance, going forward, should be carefully watched before considering it as an investment candidate.

The IPO values the company between `2,200 crore and `2,400 crore. Even if we assume the company can command a high valuation at 35 times its earnings, considering its ambitious growth plans and unique proposition, it will have to generate `65 crore of annual profit to justify its current valuation.

BUSINESS: OGPL, which was incorporated in December 2006, is one of India's leading renewable energy producers with 213 mw of installed capacity running. It currently operates four wind farms with aggregate installed capacity of 172.5 mw - 85% of which is in Tamil Nadu and the rest in Andhra... more [truncated due to possible copyright]  

Orient Green Power (OGPL) has ambitious plans to grow in the renewable energy industry in India. With huge unmet power demand in the country and fiscal incentives in place, the scope to grow is immense. However, the company is suffering from losses and is overly dependent on its parent group companies. Also, wind and biomass power plants have their own risks.

Based on the available information, its IPO looks risky for retail shareholders. Its performance, going forward, should be carefully watched before considering it as an investment candidate.

The IPO values the company between `2,200 crore and `2,400 crore. Even if we assume the company can command a high valuation at 35 times its earnings, considering its ambitious growth plans and unique proposition, it will have to generate `65 crore of annual profit to justify its current valuation.

BUSINESS: OGPL, which was incorporated in December 2006, is one of India's leading renewable energy producers with 213 mw of installed capacity running. It currently operates four wind farms with aggregate installed capacity of 172.5 mw - 85% of which is in Tamil Nadu and the rest in Andhra Pradesh. It also operates five biomass plants and one biogas plant with aggregate installed capacity of 40.5 mw in Tamil Nadu, Maharashtra and Rajasthan. All the wind farms and three biomass plants have been acquired from third parties.

It is also developing a 15-mw hydroelectric power plant in Orissa through a joint venture with a 51% stake.

OGPL is a 94.75% subsidiary of Singapore-based Orient Green Power Pte. Shriram EPC holds a 37.5% stake in this parent company with the rest held by two private equity investors.

IPO DETAILS: The company is raising `900 crore through its IPO priced between `47 and `55 per share, which will bring down the promoter holding to 56% to 59.5% depending on the allotment price. `530 crore of these funds will be spent on setting up five biomass power plants with combined capacity of 45.5 mw and a 300-mw wind power project. Of the rest, `148 crore will be used to repay debts and `220 crore for general corporate purposes.

The company aims to achieve generation capacity of 1,000 mw by the end of FY2013.

CONCERNS: There are several and serious concerns over the company's current state of affairs. The company has very small operating history and available financial numbers paint a gloomy picture. For FY09 and FY10, OGPL has run up losses and lost significant amount of cash at a consolidated level.

The company has been historically booking revenues from carbon credits on an estimated basis, without actually selling them or even before getting them certified by the UNFCCC. The company currently has 23 mw of biomass capacity and 30 mw of wind power capacity eligible for carbon credits and has booked revenues of `8.1 crore in FY10. The same reflects in higher debtors in its balance sheet.

The company is entirely dependent on its promoter group for technical as well as managerial support. The parent group companies are not only key suppliers to OGPL but may also turn key competitors in future. This raises concerns on the management's ability to take decisions that are in the best interest of OGPL.

OGPL routinely deals with the group companies, which has resulted in nearly half the fixed assets and 80% of creditors of OGPL as on March 31, 2010, representing related party transactions. Its subsidiary, Bharat Wind Farms (BWFL), which owns majority of its wind farm business, was a promoter group company till January 2010.


Source: http://economictimes.indiat...

SEP 20 2010
http://www.windaction.org/posts/28135-orient-green-power-running-out-of-power
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