Orient Green Power Company IPO Analysis

Orient Green Power Company (OGPL) develops and operates renewable energy based power plants. The company, which began its operation in April 2008 by acquisition and operation of the 8-MW Kotputli biomass power plant in Rajasthan, has now grown to become one of the largest independent operator and developer of renewable energy based power plants in India on installed capacity with an aggregate generation capacity of 213.03 MW.



The company is a subsidiary of Singapore-based Orient Green Power Pte (OGPL- Singapore), which is owned by Shriram EPC (37.7%), Bessemer India Capital OGPL (37.7%) and AEP Green Power (24.6%).

The company's growth so far has come mainly by inorganic route through acquisition, operation and development of renewable energy assets from third parties. On January 25, 2010, it acquired a 50.25% stake in BWFL, a promoter group company, which owns three wind farms. On January 29, 2010, the Promoter OGPP-Singapore gifted OGPL the remaining 49.75% of the shares of Bharat Wind Farm (BWFL) to bring all of wind energy assets under the umbrella of OGPL. During Q1 FY 2011, the company through its subsidiary Gamma Green Power acquired 117 wind energy generators (WEG), with an aggregate gross installed capacity of 42.4 MW, from third parties for an aggregate purchase price of Rs 184.84 crore.

The portfolio of operating and development project end July 31, 2010 was approximately 1,049.53 MW of generation capacity comprising operational capacity of 213.03 MW and 836.5 MW of committed and development projects. Of the operational power projects, there are 489 wind energy generators aggregating 172.53 MW, while the biomass capacity is 40.5 MW. Of the committed and development project of 836.5 MW, approximately 643.5 MW will be of wind based and 178.5 MW will be of biomass and 15.0 MW small hydroelectric capacity. Total estimated cost of this expansion in generation capacity by 836.5 MW will be Rs 5263.38.

Currently, majority of the company's wind generation capacity, aggregating to 146.28 MW, is in Tamil Nadu, spread over three wind farms, with balance 26.25 MW in one farm in Andhra Pradesh. In addition, the company is developing wind energy projects in Tamil Nadu and expanding its presence to other locations in India (i.e., Gujarat & Maharashtra) and other countries such as Sri Lanka, Croatia, the Czech Republic and Hungary.

In the biomass segment, the company operates five biomass plants and one biogas plant, with an aggregate installed capacity of 40.5 MW, which are located in Tamil Nadu, Maharashtra and Rajasthan. It also has biomass power projects in the committed and development stages in Andhra Pradesh, Gujarat, Madhya Pradesh, Punjab and West Bengal in addition to expanding its presence in Tamil Nadu and Rajasthan.

The proceeds from the issue will be used (a) to finance the construction and development of four biomass projects aggregating to a capacity of 37.5 MW at Narasingpur (10 MW), Amritsar (10 MW), Vellore (7.5MW), and Patiala (10 MW); (b) to fund the subsidiaries of the company, i.e., Orient Green Power Company (Rajasthan) (OGP Rajasthan) for undertaking 8-MW biomass power project in Kishanganj, Rajasthan, and Beta Wind Farms Pvt Ltd (BWFPL), for undertaking 300-MW wind project in Tamil Nadu; (c) to fund subsidiaries, i.e., BWFPL, PSR Green Power Projects and Shriram Non-Conventional Energy for repayment of existing debt availed from Indusind Bank, and prepayment of existing debt availed from Yes Bank; and (d) general corporate purposes.

Strengths

Operational power generation capacity is 213.03 MW along with mature projects in the pipeline. Lower execution risks due to relatively short gestation period compared with thermal and hydel power plants. Ultimate parent's strong renewable project execution capability as well as short gestation for setting up a renewable power project give edge in addition of about 836.5 MW of new renewable generation capacity by FY 2013. Moreover, of the planned power generation capacity addition of 836.5 MW by end of FY2013, about 132.5 MW will come in FY 2011, 477 MW in FY 2012 and 227.5 MW in FY2013. Normally the project execution cycle of wind power project is 15-18 months with major portion being spent on assessment of wind, thus, having even a shorter erecting and commissioning period. For the 300-MW TN wind project, the company has already acquired about 600 acres of land as well as completed site development as of now. The project is to be fully completed by December 2011. Similarly, the project cycle for the biomass power project is just 18 months. So far the company has got sanction letters from lenders in respect of 300-MW TN Wind farm and 9 biomass power projects, aggregating 101 MW.

The cost of generation of electricity from wind power project varies from Rs 2.75 to Rs 3.50 per unit, depending on site, capital cost etc. This is comparatively lower than other renewable sources such as solar etc. Policy initiatives such as renewable purchase obligations, must run status, generation based incentive (for IPPs) make wind energy attractive with opportunity to cash in on higher tariff from merchant sales/ third party sales apart from SEBs. Currently, majority of the power generated from the company's wind farms are sold to private players, who are ready to pay a higher price given the power shortage in the country. In India, tariffs for sales of electricity from the company's wind farms range from Rs. 2.70 to Rs. 5.00/kWh under long and short-term PPAs (Power Purchase Agreements). With Central Electricity Regulatory Commission (CERC) leveling tariff to 4.17 to 5.63 per unit for major wind zones, the State Electricity Regulatory Commission (SERC) is also expected to adopt and notify it giving higher unit realization for the company. Similarly, tariffs for sales of electricity from the company's biomass/biogas power plants pursuant to long-term PPAs and its co-generation BOOT (Build Own Operate Transfer) agreement range from Rs. 3.50 to Rs. 4.94/kWh. The company also sells electricity from its biomass plants in the open access market for up to Rs. 6.50/kWh.

Three of the operating biomass projects (representing approximately 23.0 MW in aggregate installed capacity) of the company are registered as CDM (Clean Development Mechanism) projects. It has submitted applications to register nine projects with 91.0 MW of aggregate installed capacity as CDM projects. Portions of two of the operating wind projects (representing approximately 30.0 MW of aggregate installed capacity) are registered for CDM. It also intends to register all of its green-field projects for CDM benefits. As of July 2010 end, the company had recognized 187,438 CERs (Certified Emission Reductions) from its biomass projects and 108,329 CERs from its wind projects.

Weaknesses

Wind is not predictable and is seasonal, with peak generation only between May to September. This result in lower PLF for WEGs compared to fossil fuel power plants. Moreover, financial results are also volatile and fluctuate from quarter to quarter.

Availability, price and quality of biomass varies significantly with climate change, monsoon, availability of labor, alternative use and is also seasonal.

Majority of the company's WEG orders, numbering 256 numbers (of 1.5 MW), has been placed with LSML (Shriram EPC has 50% stake in LSML and 37.5% stake in OGPL Singapore, which is the promoter of OGPL), with another 30 numbers (of 850kW) placed with Gamesa Wind Turbines. The 80 meter rotor diameter 1.5-MW WEG of LSML, which the company intends to deploy, is with limited operating history and did not have C-WET certification as of August 24, 2010, which is required for installation in the Indian market even though it has TUV Sud certification. Moreover, given LSML's current limited capacity, timely delivery has to be seen and depends on its ability to ramp up manufacturing capacity.

The company recognizes CER income on an accrual basis, while CERs can be sold after verifying by an audit firm, approved by UNFCCC. Out of the CER income of Rs 1.67 crore in FY2009 and Rs 8.13 crore in FY2010, only about Rs 0.78 crore have been realized on the back of certification and subsequent sale of CER. Moreover, given the volatile price of CER and forex fluctuations, there might be difference in actual recognition and realization. Further, with the expected expiry of Kyoto Protocol in 2012, there is no certainty of its continuity due to absence of firm agreement among international community. This might affect the CER price as well as the market itself.

Debtor turnover days in FY 2010 stood at 160 days compared to 42 days in FY 2009. This is largely on account of TNEB taking longer to settle outstanding invoices. In fact, the company started supplying electricity to TNEB from 2009. Given the weak financial positions of SEBs, collection will be tricky issue and lead to longer debtors turnover ratio affecting the cash flows of the company.

Valuation

Since the company acquired all the equity interest in BWFL in January 2010, the consolidated results of OGPL for FY 2010 include only the results of operation of BWFL since the date of acquisition to March 31, 2010 and do not include the full fiscal year's results of BWFL. Hence, the financials of FY2010 are not true representative of the performance of the company. For FY 2010, the company clocked sales of Rs 56.22 crore (a rise of 364%) and a net loss of Rs 12.24 crore.

At the upper price band of Rs 55, the market capitalization of the company works out to Rs 2421.24 crore. Currently there is no listed company with focus on renewable energy like OGPL. However, the market cap of Jaiprakash Power Ventrues was Rs 13653.36 crore. The per MW market cap of OGPL works out to Rs 2.3 crore compared to Rs 2.8 crore of Jaiprakash Power Ventures. Jaiprakash Power Ventures is typically into hydel power projects.

via CM