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The Big Picture: OPG a direct play on Indian power demand recovery?

Published: 10:00 29 May 2014 BST

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The landslide win by the BJP party in India brought with it hopes of an economic and business revival in the world's largest democracy.

Earlier this month the party Bharatiya Janata Party led by now prime minister Narendra Modi ousted the ruling Congress party in the biggest margin win for three decades, swept to victory by public desire for change.

Analysts now expect the new administration, which has pledged to be more business friendly, to focus on boosting infrastructure and manufacturing to put India back on a "materials intensive" growth after a blip of two years.

However, to achieve this, one thing the new government will need to solve is India's power shortages and problems of an infrequent and intermittent supply.  Three years ago, more than 300 million citizens had no access to frequent electricity out of an overall population of around 1.23 billion.

One of the major problems is the lack of capacity to generate electricity, despite India's position as the fourth largest consumer of energy.

And one of the best companies around to help the country achieve better power generation is AIM-quoted OPG Ventures (LON:OPG).

The firm operates power plants mainly in southern India, where the shortages are most acute, and says it has already witnessed this year a step change in scale and profitability in its operations.

It has three plants in Chennai in the state of Tamil Nadu, with a fourth in development. It also has two plants in development - one in Gujarat state, expected to be commissioned this year, and one in Bellary, expected in 2015.

Profits rose by 70% to almost £18mln in the year to March, with sales up by 76% at £98.8mln.

US heavyweight broker Jefferies, which has started covering OPG shares with a 'buy' rating, reckons the firm is a direct play on the recovery in power demand in India.

"OPG is a focused, niche power generator in India with a proven track record in execution versus planned capacity addition," said analyst Lavina Quadros.

Quandros noted that the firm has 234MW operational capacity in Chennai, which is expected to increase by three times to 694 MW in full year 2015 and 2016 estimates.

She added that South India has the highest power deficit in India, which is expected to continue and she highlighted that the firm's current growth portfolio is fully funded.

"OPG’s selling model is primarily linked to short- and medium-term power price movements in the context of persistent power shortfalls. Hence, pricing is not subject to regulatory approval, barring one Chennai capacity of 80 MW, said the analyst, who targets a price of 120p for the shares - an increase of 17p from where they are now at 103p.

Meanwhile, City firm Investec yesterday rated the shares a 'buy' and lifted its target by 20p to 140p.

"With the catalyst of significant capacity increases in 2014/15, we believe OPG’s share continues to have significant re-rating potential, especially given the result of recent general elections in India," said analyst Harold Hutchinson, citing additional capacity forthcoming of 180MW in Tamil Nadu and 300 MW at Gujarat.

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