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“Diversification adds further to the robustness of the entire business”, said India focused generator OPG Power Ventures (LON:OPG), which has unveiled a change in its sales mix from its Chennai plants.
The company has agreed a series of three-year volume contracts with industrial customers.
They will take 337 megawatts of electricity from units II and IV of the firm’s 414 megawatt operation. Investors should note that sales are linked directly to the regulated industrial customer tariffs in Tamil Nadu state, which, as OPG pointed out, “remain considerably higher than long term national average power tariffs”.
“Based on the prevailing average regulated tariff, the previously estimated average tariff expectation across both the group's Chennai and Gujarat plants for the current year remains at around five rupees per kilowatt hour following the execution of these contracts,” the company said.
An additional 74 megawatts from the Chennai III plant is already signed up to a 15-year variable tariff agreement.
The balance of the group's output from Chennai I will be available for sale directly to the state and other customers on short term contracts.
“The board believes this diversification adds further to the robustness of the entire business,” OPG said.
In a separate stock exchange announcement, the company told shareholders that output from its 300 megawatt plant in Gujarat should begin next January following the construction of a transmission line to feed electricity into the grid.
The broker Cenkos described the update as “encouraging”, but believes the market is yet to recognise the full potential of the company.
Changing hands for 95p, shares have marked time over the past year, valuing the business at £335mln.
Yet this is a business that is predicted to generate underlying earnings (EBITDA) of £80mln. That means it trades on a fairly modest enterprise multiple (EV/EBITDA) of 9.6 times.
“With free cash flow of £40m-plus, OPG will quickly reach an inflexion point whereby it can finance further earnings enhancing growth opportunities and/or pay out an attractive income stream to shareholders (we forecast a token maiden dividend next financial year),” said analyst Andrew Blain, repeating its ‘buy’ recommendation.