Orient Green Power Company - Review + Recommendations

[sunil]

Unicon Wealth Research Analyst, Amish Pansuria has the following views on the IPO,

At the lower price band, Orient Green Power is valued at 3.3x its P/BV (pre-issue), and 3.9x (pre-issue) at the upper price band, which is in line with its peers. With a favourable policy framework laid down by the government and meeting energy requirements through alternate sources of energy, we believe companies
operating in the renewable energy space are in a good position to capitalise on the growth opportunities. As OGPL’s current portfolio of projects is small, investors need to hold on to the stock for a two-three year period to take advantage of the high earnings growth, therefore we advise investors with a high risk appetite and long term horizon to Subscribe to the issue.

[chetan]

Angel Broking Analysts Rupesh.S and V.Srinivasan have NEUTRAL View with the following note,

At the lower and upper price bands OGPL is available at implied P/BV of 1.7x – 1.9x on FY2012E financials, which we believe is fair considering higher
RoE’s of its business and the risks associated with lower PLFs. The IPO is available at a premium to its private sector peer Indowind Energy (1.3x FY2012E P/BV), which has lesser operational assets at 44MW. For OGPL, the EV/MW works out to Rs6.3cr and Rs6cr on FY2012E capacity at both ends of the price band, which is at 10% and 7% premium to its replacement cost, which limits further upside considering the return ratios. Hence, we recommend a Neutral view on the IPO.

[chetan]

View of K R Choksey analyst Rupesh Kumar and Harshad Shukla

We recommended this issue to the investors with an investment horizon of 2-3 years. Fundamentals of the sector are very strong given the fast growing energy demands of an economy growing at a rate of 8-9 per cent.

OGPL doesn’t have any direct comparable. Its returns are heavily dependent on government policy and regulations, thus, the company is more comparable to regulated power utilities. The company’s issue is priced at 1.6-1.7 times of its book value; while its peer regulated power utilities are priced at ~ 2 times of book value. Discount is justified for the company as it has limited operating history and might experience lower load factors than estimated.

[chetan]

HDFC Securities Recommendation on the IPO,

OGPL has the ability to leverage the opportunity present in the power market, which is expected to remain in deficit over the medium term. The management has shown focus and ability to acquire existing plants and improve OGPL’s operational efficiency as well as set up new capacities in a timely manner. OGPL has the backing of co-promoter Shriram EPC, which has experience in handling EPC contracts for renewable-based plants. The company has aggressive plans to expand capacity from 193.1 MW to more than 1,000 MW through greenfield projects. Most of OGPL’s committed projects are in an advanced stage of implementation. The concerns in the issue include the poor financial health of SEBs (State Electricity Boards) and the fact that the cost of generating renewable energy is higher compared to conventional sources, which increases the dependence on regulatory support, the fuel risk inherent in biomass plants (dependent on agricultural waste), technology challenges due to buying equipment from a group company and other related challenges. Prima facie the issue does not seem to be cheap. We think that the IPO is meant only for long-term investors who are willing to wait for 4-6 quarters for their investments to fructify.

[chetan]

IIFL's Recommendation for the IPO,

Orient Green Power Company Ltd (OGP) is a leading independent renewable energy-based power generation company focused on developing, owning and operating a diversified portfolio of power plants. Their current portfolio comprises of Biomass, Biogas and Wind Energy. OGP is a 94.75% (post issue 56%-59.5%) subsidiary of Singapore-based Orient Green Power Pte. Shriram EPC Ltd holds a 37.5% stake in this parent company, with the rest being held by two private equity investors. Through the IPO, OGP plans to raise Rs9bn, which will be used to fund capacity expansion and repayment of debt.
 
At the lower end of the price band, OGP is valued at 1.6x P/BV (post issue), and 1.8x P/BV at the upper end of the price band. With rising environmental concerns (greenhouse effect) and surging crude oil prices, sources of renewable energy will continue to attract investor attention over the longer term. We believe OGP provides a good investment opportunity for long term investors considering its strong capacity ramp-up plans over the next couple of years, translating into robust earnings profile. We recommend investors to subscribe to the issue.

[chetan]

Sharekhan's Views on the IPO are as follows,

We do not see any company directly comparable with OGPCL but given the company’s dependence on government policies and regulations its business could be aligned to that of the regulated power utilities. Based on the price-to-book value (P/BV) multiple, OGPCL’s valuation at the higher end of the price band (Rs55 per share) stand at 1.9x. OGPCL is trading at a discount to an average P/BV multiple of 2.6x (based on FY2010 book value) for the other regulated power utilities due to the lower plant load factor for renewable energy versus conventional sources of energy and feedstock risks.

On the back of favourable sector dynamics, huge capacity additions (over FY2011-13) and reasonable valuations, we see a favourable risk-reward ratio for the investors.

[sunil]

HSBC's Recommendation for the Orient Green IPO,

Government incentives, small-scale nature of the renewable energy business and huge demand-supply gap in the power sector offers opportunities of growth in the business. According to the EIA, renewable energy will be the fastest-growing source of electricity generation, increasing by about 2.9% annually to grow from 19.0% of the world‘s electricity generation in 2006 to 21.0% in 2030 (Source: RHP). The gestation period for establishing a wind power and biomass power (18 months; Source: RHP) project is far lower than thermal and hydro projects, thereby relatively lower risk of project delays and faster generation of returns to the shareholders. The company is embarking on expansion plan with capacity addition of 856.5MW over the next 3 years offering 75.7% CAGR over FY10-13E. At the price band of Rs 47-55 per share, the offer is available at 1.7x – 1.9x its FY10 book value per share post diluted equity capital. We recommend SUBSCRIBE to the issue for investors with long term horizon.