About the Company
Orient Green Power is a Shriram Group company based in Chennai. They own and operate wind farms and biomass power plants. Total wind capacity is around 450 MW and biomass capacity is about 100 MW.
Most of their wind assets are in Tamil Nadu. Rest are in Andhra Pradesh, Kerala and Gujarat. There is also a 11 MW wind farm in joint venture in Croatia. The biomass plants are 2- 20 MW units concentrated in Tamil Nadu and Rajasthan, with some units in Maharashtra, Madhya Pradesh and Telangana.
The company is in a process of transitioning to a pure wind power company. The company has divested its interest in a few biomass plants in the past year and is in process of doing it for a few more. The rest of the plants would be listed as a separate entity called Biobijlee Green Power. They are also looking to get out of the Croatia joint venture. In the past, they had plans to invest in small hydro projects and expand in other countries including Sri Lanka. They have either shelved those plans or have exited existing businesses.
About the Business
What's New
I believe the company was facing teething issues related to wind energy business. These issues such as transmission capacity, uptake of wind power and financing issues are not there any more. Tamil Nadu has mandated that the wind power has a must-run status. They have also scheduled annual maintenance of state-owned thermal power plants during maximum wind months. There is a also a new north-south transmission line for evacuating wind power.
I believe with these issues behind them, the management is now focusing on judicious growth with geographic diversification. Listing biomass business as a separate entity is a great idea since it is an unrelated business (at least in practice).
The company has raised significant capital in the past year from promoters and private placement. This should bring down the interest cost. Also, the expected rate cuts and lower interest rates for green bonds enable further cuts in cost of capital. Capital being one of the primary raw materials, this should help company increase margins in the future.
This year has been great for wind energy with strong winds in Tamil Nadu. The company has posted excellent results for the first quarter and the second quarter is expected to be even better.
About the Stock
The stock price has taken quite a hit over the years. The IPO price was Rs 47 in 2010 and the current market price is less than Rs 9 in November 2016. In fact, the stock has never closed at IPO price or higher. The stock trades below book value at under 0.9 time book value. The company has been posting losses lately, so PE ratio is not available.
I believe it is a great opportunity to own a great business and (potentially) a great company at a cheap price.
Disclaimer
This is not a stock recommendation. I and my family have long positions in the stock. I reserve the right to close or change them at any time without any notice.
p.s. As expected, the company has posted excellent Q2 results.
Orient Green Power is a Shriram Group company based in Chennai. They own and operate wind farms and biomass power plants. Total wind capacity is around 450 MW and biomass capacity is about 100 MW.
Most of their wind assets are in Tamil Nadu. Rest are in Andhra Pradesh, Kerala and Gujarat. There is also a 11 MW wind farm in joint venture in Croatia. The biomass plants are 2- 20 MW units concentrated in Tamil Nadu and Rajasthan, with some units in Maharashtra, Madhya Pradesh and Telangana.
The company is in a process of transitioning to a pure wind power company. The company has divested its interest in a few biomass plants in the past year and is in process of doing it for a few more. The rest of the plants would be listed as a separate entity called Biobijlee Green Power. They are also looking to get out of the Croatia joint venture. In the past, they had plans to invest in small hydro projects and expand in other countries including Sri Lanka. They have either shelved those plans or have exited existing businesses.
About the Business
Owning and operating wind farms can be an excellent business. Wind energy is a proven technology with long-term reliability and performance data. The basic premise is that the return on capital is greater than the cost of capital (even in India). Hence, in principal, with same equity one can raise progressively higher debts, use them to own and operate wind farms and pocket the difference between the returns from the wind farms and the interest outgo on the debts. Since there is plenty of demand of end product (clean electricity) and supply of raw material (wind energy sites and capital), this arbitrage can be had for a while.
However, there can be many operational issues in wind farms. The operational issues in initial set-up can arise in locating good wind sites, getting land at reasonable prices, transportation and logistics cost of installing wind mills (since good wind sites are typically at remote locations) and getting transmission capacity.
Transmission capacity can be an ongoing issue as well. This issue is more pertinent to Tamil Nadu because majority of good wind sites are in the south of the state and most of the consumption sites are in the north. Other issues which have come up in India in the past are non take-up of wind power by the utilities. This is either due to higher cost of wind power than the fossil fuel based power or the intermittent nature.
Biomass power plants have some operational issues as well, which mostly arise from seasonality of raw material and the need for working capital to accumulate it.
About the Promoters and the Managers
Shriram group is a well-respected group with primary focus on NBFCs. Group companies, Shriram City Union Finance and Shriram Transport Finance, have done very well over the years and their stock prices have reflected that. However, their foray in non-financial businesses has not been that successful thus far. Both Orient Green Power and Shiram EPC have been languishing much below their IPO prices. However, the group seems to be committed to these businesses and, as far as I can tell, they have good management teams.
One sign of promoters' commitment is a low(er) interest loan from a promoter group company to Orient Green. This is the company's lowest interest loan.
Shriram group is a well-respected group with primary focus on NBFCs. Group companies, Shriram City Union Finance and Shriram Transport Finance, have done very well over the years and their stock prices have reflected that. However, their foray in non-financial businesses has not been that successful thus far. Both Orient Green Power and Shiram EPC have been languishing much below their IPO prices. However, the group seems to be committed to these businesses and, as far as I can tell, they have good management teams.
One sign of promoters' commitment is a low(er) interest loan from a promoter group company to Orient Green. This is the company's lowest interest loan.
What's New
I believe the company was facing teething issues related to wind energy business. These issues such as transmission capacity, uptake of wind power and financing issues are not there any more. Tamil Nadu has mandated that the wind power has a must-run status. They have also scheduled annual maintenance of state-owned thermal power plants during maximum wind months. There is a also a new north-south transmission line for evacuating wind power.
I believe with these issues behind them, the management is now focusing on judicious growth with geographic diversification. Listing biomass business as a separate entity is a great idea since it is an unrelated business (at least in practice).
The company has raised significant capital in the past year from promoters and private placement. This should bring down the interest cost. Also, the expected rate cuts and lower interest rates for green bonds enable further cuts in cost of capital. Capital being one of the primary raw materials, this should help company increase margins in the future.
This year has been great for wind energy with strong winds in Tamil Nadu. The company has posted excellent results for the first quarter and the second quarter is expected to be even better.
About the Stock
The stock price has taken quite a hit over the years. The IPO price was Rs 47 in 2010 and the current market price is less than Rs 9 in November 2016. In fact, the stock has never closed at IPO price or higher. The stock trades below book value at under 0.9 time book value. The company has been posting losses lately, so PE ratio is not available.
I believe it is a great opportunity to own a great business and (potentially) a great company at a cheap price.
Disclaimer
This is not a stock recommendation. I and my family have long positions in the stock. I reserve the right to close or change them at any time without any notice.
p.s. As expected, the company has posted excellent Q2 results.
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