>ORIENT GREEN POWER: IPO NOTE; Unexciting ‘Orient’ation

Orient Green Power (OGPL) is India’s leading renewable energy-based power generation company focused on developing, owning and operating a diversified portfolio of renewable energy power plants. OGPL, which currently has an installed capacity of 213.0MW, has another 836.5MW of prospective capacity expected to get operational by FY2013.

Huge potential for the development of renewable power: India’s renewable energy-based power capacities have increased their share of total power capacity from 2.0% in FY2003 to around 10.0% in 2010. Despite this, the renewable power sector still has huge potential, which remains untapped. The country’s wind power capacity stands at 10,890MW although the potential has been estimated at approximately 48,500MW. The government has announced a number of fiscal incentives and measures such as renewable power obligation and the renewable energy certificate mechanisms, which are expected to spur growth of this sector.

Leading player in the renewable energy segment and poised for rapid growth: OGPL plans to increase capacity by more than four-folds to 1,049MW by FY2013 and is well poised to capitalise on the untapped potential in the renewable energy space. OGPL currently has 405MW of wind power committed projects, and the infrastructure is in place for majority of the projects. Financial closure has also been achieved for most of the projects. It may be noted here that the execution risks and project commissioning time are lower for renewable energy projects due to the lower land requirement and lesser regulatory hassles. Hence, we believe that OGPL has good revenue visibility going ahead.

Lower PLFs to suppress IRRs: OGPL’s wind energy plants currently have a PLF of 20-21% (varies according to wind density), which is lower than the normative PLF of 25% set by the CERC. This would result in the company reporting lower IRRs than the achievable IRRs if CERC’s prescribed norms are achieved. Moreover, the company also does not have fuel supply contracts in place along with lower availability of fuel for the biomass plants, which would result in lower PLF than the normative standard set by CERC.

Outlook and Valuation
The renewable energy sector is set for healthy growth due to its vast unexplored potential and supportive government policies. Leader OGPL has also charted out aggressive expansion plans to capitalise on the emerging opportunities in this nascent but growing industry.

At the lower and upper price bands OGPL is available at implied P/BV of 1.7x – 1.9x on FY2012E financials, which we believe is fair considering higher RoE’s of its business and the risks associated with lower PLFs. The IPO is available at a premium to its private sector peer Indowind Energy (1.3x FY2012E P/BV), which has lesser operational assets at 44MW. For OGPL, the EV/MW works out to Rs6.3cr and Rs6cr on FY2012E capacity at both ends of the price band, which is at 10% and 7% premium to its replacement cost, which limits further upside
considering the return ratios. Hence, we recommend a Neutral view on the IPO.

To read the full report: ORIENT GREEN POWER