"Orient Green Power" IPO Analysis- Focused Renewable Energy Utility with Fast Growth Plans however Execution is the Question

Orient Green Power Ltd (OGPL) is India’s Largest Green Utility and is one of the areas that is a good way to invest in India’s Green Energy Sector.The company is owned by the Shriram Group and a couple of PE Players will issue around Rs 900 crores (~$180mm) which will result in a market cap of $450mm.OGPL is a relatively new company setting up and acquiring most of its 200 MW capacity in the last year which comprised of 152 MW of Wind Energy and the rest is Biomass Energy.The company plans to increase this capacity 4 fold to around 1000 MW in the next couple of years with Power Plants in  India,Europe and Sri Lanka.The centerpiece of this expansion will be a 300 MW Wind Energy Plant in Tamil Nadu for which $10 million has been already been spent.The company’s past profits and cash flow have been negative which is not exactly a concern given that most of the capacity was set up in the last year or so.I like the company’s growth plans and the sector in which it operates.India suffers from a huge power deficit and Renewable Energy is being heavily promoted through Government Subsides and Renewable Energy Mandates by the CERC.Trading of Renewable Energy Certificates (RECs) should start in a year or so giving additional revenue streams to Green Energy Producers.Here are the pros and cons of the issue

Pros

1) Renewable Energy Sector is a great one right now – India needs to almost double and triple its Renewable Energy Capacity to meet the 10% Renewable Energy Target by 2015 mandated by CERC.There is ample scope for growth of multiple players in this area.Blackstone recently invested a big sum into Moser Baer Projects which currently does not have any capacity.India’s MNRE has been criticized for missing Renewable Energy Targets which implies their is previous backlog.

2) Good Well Defined Expansion Plans – The company has well defined expansion with projects already securing financing and ordering Wind Turbines.The Plant Factors are good and so is the Tariffs received by the plants.

3) Valuation looks decent – The P/B post IPO will be around 2x which is not high compared to other Indian  power companies like Tata Power,Reliance Power etc.

4) Management seems Focused – OGPL is one of the few companies to focus purely on Green Energy.Note when every Tom,Dick and Harry is running after Coal Plants,this shows focus.Note the returns,execution and costs are much lower in building Coal Power Plants.Also the management will only make money if they perform as most of the money raised will be spent on capex.

Disadvantages

a) Lietwind Wind Turbines – The company is using Wind  Turbines made by LSML which is a  49% Shriram Group owned company.OGPL will buy all its Turbines from this company which is relatively new and uses technology from an Italian Group Lietner which does not have a long history in the Wind Energy Space.If the Turbines fail or perform poorly,OGPL will be in big trouble

b) Limited Management Experience – The company has  started recently and there is little in terms of track record in running wind or biomass plants.Executing on these big projects might be tough.

c) Complex Group  Holdings – The company has a lot of transactions with the Shriram Group companies.IT is using the Shriram EPC sister concern for doing most of its EPC work and LSCL for the turnkey installations of its Wind Farms.Some of this may lead to a conflict of interest by the promoters.

Summary

The main risk for this IPO is the execution risk ,however the rewards are significant.While there are many concerns about the experience and ability of management,the pluses in my opinion outweigh the minuses.In my view this looks like a good Green plan  into India’s burgeoning economy.Comments and Criticism are welcome from readers