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Could OPG Power Ventures be a cheap way to play India’s growth story?


We have discussed the potential of the Indian economy at The Armchair Trader since the start of the year, tipping the world’s largest economy to have a strong 2024. Direct investment into India is not easy. You could set up an account through an Indian brokerage firm, but this may come with more paperwork, currency concerns and potentially higher fees than you are used to. Alternatively you could invest through a managed fund like the India Capital Growth Fund [LON:IGC] manged by Ocean Dial Asset Management. However one UK-listed stock with direct Indian exposure is OPG Power Ventures LON:OPG.

OPG Power, listed on AIM is headquartered in the Isle of Man, but operates from Chennai, formerly known as Madras, the capital of Tamil Nadu state in southern India. The company operates in Tamil Nadu and Karnataka. In Tamil Nadu, OPG Power owns and operates a four-unit, 414MW coal fired thermal plant between the cities of Chennai and Ennore and supplies the city and the industrial belt that has sprung up with electricity and has a Power Purchase Agreement (PPA) with Tamil Nadu state running to 2029.

In neighbouring Karnataka, previously known as Mysore State with the capital Bangalore, OPG Power is rolling out solar power facilities, a new venture for the company. OPG commissioned its first solar plant in 2018, and now operates and manages 62MW of solar power assets in the state, backed by a 25-year PPA with the state’s government.

OPG originally listed on AIM in 2008, and its shares have performed respectably over the last 12-months, returning nearly 12% over the period ranging from 7p to 14.5p over a 52-week period and opening the day (12th March) at 10.7p.

Price per unit of solar panels has fallen dramatically

Over the longer-term, the share price is at a bit of a low. Ten years ago, OPG stock was trading at nearly GBP1.00, and even five year ago, the stock was changing hands at twice what it is today. Although coal power is where it gets its big earnings from – given that it has six-times as much assets from coal as it does from renewables, the company itself sees its future growth being in solar.

Previously, solar developers were fairly dependent on government subsidies, especially in the initial construction and procurement stage of developing solar assets, with many projects in developing nations heavily-reliant on parastatal joint ventures and development finance initiatives. This affected the yield of solar projects, as a large part of the earnings generated after commissioning were swallowed-up by repayments to lenders. Moreover, the price per kilowatt hour (kWh) a developer charged was set by its parastatal partner, and was often below the commercial kWh charge, as the parastatal was looking at making its own margin when it distributed to retail. Additionally, in the past the parastatal partner had the whip hand in PPA negotiations, which were often unfavourable commercially to the developer.

However, in the past four or five years the price per unit of solar panels has fallen dramatically, allowing developers to be choosier and having a stronger hand in negotiations, as they are not as reliant on external financing, and in India solar has started to become a much more viable opportunity without subsidies.

Although India is still industrialising, it now has global economic power, and even the Narendra Modi government is facing up to its environmental responsibilities. Indian politicians will always tell you India has some of the best environmental laws in the world. Whether those laws and regulations are adhered to is a moot point, but regardless, Modi’s government committed India to a target of 500GW of renewable energy by 2030 (it currently has installed capacity of around 180GW with 73GW of this being solar) with 50 solar parks with an aggregate capacity of 37.49 GW already green-lighted by the government.

Compelling opportunity for OPG Power

This creates a compelling opportunity for OPG Power. India is already the third-largest consumer of power globally, with average annual consumption growing at 3.5% per year between 2010 and 2022. However, the last few years of that time capsule saw the greatest growth (raising the average annual figure over the period) with an 8% increase in consumption in 2021 and 6.5% in 2022. Subsequently demand has remained at the higher end of the curve.

India is very energy hungry, and the government is falling behind its own targets. By mid-2022 the country was supposed to have 40GW of solar rooftop power installed. By the end of that year the country had only managed 8.8GW.

The field is open to OPG, and given its already successful private development model, where it builds, owns and operates its own facilities, solar is an attractive opportunity for the Chennai-based company, and whilst the shares are trading cheaply, now might be a good time to buy-in for the longer-haul.

In its last results for the six-months ending 30th September 2023, published in December, OPG reported a year-on-year increase in revenues of 158% for the half-year, to GBP69.9m on the back of increased operations. The company increased generation capacity from its thermal plants in Chennai by 139% y-o-y and benefitted in a reduction of global coal prices.

Higher revenues expected for the second half

The power company also used the period to pay down some of its existing debt, paying back GBP19.6m of non-convertible debentures, leaving it with a net cash position of GBP14.4m against a net debt account of GBP16.2m. The company is expecting higher revenues from the second half of the year.

India is one of the fastest growing economies in the world with over 7% GDP growth and that growth is power hungry. The growth of the power sector is a key area for the government which has recently introduced reforms and policies to improve trading conditions. This is providing an exciting backdrop for continued growth and getting into the energy sector is one way that you can get exposure to the Indian economic story.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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