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OPG Power Ventures Plc.: THE INVESTMENT CASE

OPG Power has solid base and many options

Tackling the country’s chronic shortage of power is a major plank of the Indian government’s industrial strategy
OPG Power has solid base and many options
INVESTMENT OVERVIEW: OPG The Big Picture
Wind is one possibility for OPG, suggets broker

Indian power utility OPG Power Ventures (LON:OPG) now has 750 megawatts (Mw) of electricity generating capacity available after completion recently of a five year development programme.

Output from its power plants rose to 600Mw in the quarter ended 30 September, compared with 270Mw in the comparable period, but with the Gujarat plant now ramping up to full operation this capacity has risen to 750Mw.

Gujarat has 300Mw capacity with four plants at Chennai providing the remainder.

Chennai’s output is sold to industrial consumers (257Mw) tied into three year contracts, 80 Mw supplied to the Tamil Nadu Generation and Distribution Company for 15 years and 77Mw on short-term supply.

Tackling the country’s chronic shortage of power is a major plank of the Indian government’s industrial strategy, though new stations have been hampered by a very slow re-distribution of coal licences.

In Tamil Nadu state, where OPG is based, the projected power deficit compared to target was 5.4% in 2015.

In Gujarat, the supply demand balance was in surplus in 2015 but well below the 5% ‘spinning reserve’ required by India’s national plan to secure reliability of supply.

All of OPG’s stations are coal-fired and this remains the major variable cost for the company.

Opportunities

Opportunities for OPG lie both in new thermal stations and also in the burgeoning renewable market in India, according to house broker Cantor Fitzgerald.

“OPG has built up a strong competitive advantage through relationships and experience,” it said.

“We see OPG as a leader in captive supply and its existing relationships with a customer base represents a potentially strong and reliable source of demand.”

OPG has an advantage in that it can bundle renewable supply with its conventional supply to meet customers’ expectations, added the broker, which sees solar and wind as possible new avenues for the company.

In thermal (coal), Cantor points out there is a site next door in Chennai that could house a 700Mw station, while land surrounding the plant in Gujarat might be able to house a similar-sized unit.

Value

Now, with Gujarat in commercial operation, there are plenty of other options open, Cantor suggested.

Renewable energy aside, OPG may seek equity capital at a project level for new developments.

“While this would reduce OPG’s stake in any project, it would increase the opportunity set and allow it to participate in potentially higher return projects.”

The broker believes that with the right projects, optimally structured, OPG could add a possible 87p to its existing 130p target price, “creating a total value of over £2 through reinvestment in the period to 2020”.

The next year or so is likely to see new project announcements driving positive news flow.

With Gujarat now up and running, OPG can also now move towards setting a dividend policy, said Cantor.

It estimates that even with a dividend of 1.56p, free cash flow from 2017 onward will be around £45mln annually to be used either for new projects or to pay down debts of at £254mln at end 2015.

Cantor’s target price in February 2016 was 130p. 

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