OPG Power Venture (LON:OPG) is a small energy player in the growing Indian market. It sits in an area of the world where there is an increasing demand for power, including clean energy. Readers may recall we recently profiled Pakistan coal explorer Oracle Power (LON:ORCP), another company that is working to provide energy for South Asia’s growing industrial base.
Like in Pakistan, the growth of the industrial sector in India is inextricably linked to the provision of energy. India has a population of 1.3 bn but a staggering 250m people still do not have inadequate access to power. India has a per capita electricity consumption of 1010kWh, which is rated as one of the lowest among leading emerging economies in the world.
Availability and reliability of power supply is going to be key to India’s ongoing economic growth. The country is looking to install more than 250 GW of power by 2030.
India is becoming increasingly power hungry
India’s government has set out some strategic power goals for 2030, some of which are sadly not compatible with the ever more stringent climate-related targets we expect international sovereign lenders to impose over the next few years. Coal is still seen as a cheap and readily accessible source of energy for Indian power stations, but the focus on coal is contributing to already horrendous levels of pollution in Indian cities.
However, India is also looking to bring 100 GW of renewable power capacity online by 2030 plus improve its power transmission infrastructure via its Green Corridor project.
OPG Power is developing power plants in the Indian states of Karnataka and Tamil Nadu. Following its IPO in 2008, it reached a summit of 714 MW in FY 2016/17. It has put forward a 2020 estimate of 476 MW. Currently the bulk of its existing power generation capacity is thermal (414 MW) while only 62 MW is solar. This could prove an obstacle for some institutional investors.
Dividends and debt reduction
OPG Power has a track record of paying out dividends the last three years with increased EBITDA and profitability. It has also been decreasing growth debt, and estimates that its Chennai plant will be debt free by 2023. It retains one of the lowest gearing ratios in the Indian power industry.
OPG Power is obviously hostage to the fortunes of the Indian economy. This was in slowdown even before it hit the COVID pandemic, and the impact of the coronavirus in South Asia is going to be far-reaching. OPG Power had already noted the slowdown in generation as a result of demand slacking off since the end of FY 2019. Investors will have to take this into consideration, as we expect a protracted slump in the Indian economy which will have a knock on effect on power stocks with high exposure.
Having said that, OPG Power has a product that is going to remain in demand regardless. It posted a profit of £8.2m in H1 FY 2020, and has significantly cut debt over the period. Cash flow from operations has more than doubled.
Projected Indian power demand is going to be large if you look out over the next decade. OPG Power shares have been sold off since their peak in 2014 when they could be obtained for for over £1. Right now they are trading at around the 9p mark, although have been as high as 24p.
The Armchair Trader says:
- Power company operating in India’s south-west
- Good exposure to medium term power consumption growth dynamics
- Still heavily exposed to thermal power which will become an issue for India in the very near term
- Ongoing fallout from COVID in India is hitting economic and industrial growth
- Good debt reduction story with increasing exposure to solar power