OPG Power Ventures – gradually powering back its recovery

The general reaction at the moment whenever one mentions investing in any business operating in India, is “don’t touch it”. People cite massive Covid-19 problems, rising prices and the rest – all factors to turn your attention away.

India, which has a growing population, is progressing along the path to its target of 100% household electrification.

However, it remains a power deficit country.

Amongst the leading emerging economies of the world, currently India’s per capita consumption is half that of Brazil, a quarter that of China, and under a fifth of that in Russia.

The country is developing on several fronts – through its ‘smart cities’ programme; its 24×7 ‘Power for All’ initiative industrial push; through its ‘Make in India’ infrastructure requirements; as well as the Government’s push on electric mobility; and through the strong economic growth increasing urbanisation and its ‘Housing for All’ scheme.

It is worth noting that the World Bank has projected India’s economy to grow at 8.3% in 2022, while the IMF forecasts the growth next year at 9.5%.

Whichever estimate you take, it still shows the opportunity for the Indian power sector is one of overall growth in the long term.

Today’s profile is about one company, which is engaged in a near vital sector, despite shutdowns and lower demand due to the pandemic, that still appeals to me as an interesting recovery play.

What does it do

The AIM-quoted OPG Power Ventures (LON:OPG) owns, manages and develops power generation plants in India.

The Isle of Man incorporated group, founded in 2008, considers that its mission is to build and maximise shareholder value through the provision of reliable, uninterrupted supply of power to the industrial sectors of India at competitive prices.

Together with its subsidiaries, the Chennai-based group develops, owns, operates and maintains private sector power projects in India. It operates both thermal and solar power plants.

Since its establishment the company has grown from 20 MW of generating capacity to 476 MW.

The independent power producer has a 414MW coal-fired thermal power plant in Chennai. It also has a 31% interest in 62MW of solar assets in Kamataka, but this stake is due to be sold off in due course.

The business objective of the group is to focus on the power generation business within India and thereby provide reliable, cost-effective power to the industrial consumers and other users under the ‘open access’ provisions mandated by the Government of India.

To whom does it sell its power

It primarily sells electric power to public sector undertakings and heavy industrial companies. OPG also sells into the ‘short-term’ market.

The firm has a diverse base of over 200 industrial customers, operating on multi-year sales contracts. The group operates on robust tariffs with the majority of generation being sold directly to industries.

It is one of the largest group captive players in India, whose consumers are from different sectors like paper, textile, chemical/petrochemical, automotive, foundry and steel.

Latest results

Last Friday saw the dealing volume in its shares multiply by some five times of its daily average, as 1.11m were traded against 217,529 as the average.

That dealing activity reflected the results announcement the previous day, showing the year’s revenues to the end of March down from £154m to just £93.8m, while its pre-tax profits were up significantly from £14.5m to £21.6m. Earnings per share for the 2021 year were 3.5p against 2.1p previously. There was no dividend.

But impressively the group’s net debt fell substantially from £53.4m to only £16.2m at the year end.

Prospects going forward

Recent increases in the cost of thermal coal and freight prices are something of a stumbling block for the management, so the company has given no guidance for the current year.

However, what we do know is the fact that India is now slowly, but surely, on its way to recovery from its second wave of Covid-19.

In due course currently sluggish consumer spending will regain its previous momentum and power demand will pick up by leaps and bounds.

Very tight equity

There are 400.76m shares in issue of which the Chairman Arvind Gupta and his interests own 206.43m, representing 51.51% of the OPG equity.

M&G Investment Management holds 13.0%, while the British Steel Pension Scheme holds another 3.6% of the shares.

Broker’s View

Cenkos Securities, which is the broker to the company, despite the company’s current hassles of higher coal and freight prices, together with the lack of profit guidance, maintains its ‘buy’ rating on the shares because it is trading at a material discount to its peers, while its long-term prospects remain robust.

My View

Although it currently has operational pressures, I reckon that this company has an important role in the Indian power supply sector.

Way back in May 2014 the group’s shares were trading at over 107p. Within the last year they have been as low as 9p and in late April this year they touched 22p.

Now at 12.75p, they trade on a miniscule 3.65 times historic price earnings ratio.

Of course, it may be hit massively for six in this current year due to higher prices, but I would bet that the company will pull itself up to meet its challenges.

Capitalised at only £51m, this group’s shares have to be well worth taking a ‘recovery view’ because it is such a necessary player in its marketplace.

I now set a 16p Target Price over the coming year.