I recently came across some excellent blog posts on the quality of earnings. See https://misprice.blogspot.in/2016/04/earnings-quality-vs-quantum.html and http://forum.valuepickr.com/t/the-art-of-valuation/505/13 . I had been thinking about sustainability of earnings for a while, and these posts provided a nice framework for that.
Quality of Earnings
How steady are the earning?
In geographic areas, where Orient Green Power operates, wind season is during Q1 and Q2 of financial year. Earnings are substantially more in these 2 quarters. However, on an annual basis earnings are expected to be comparable YoY.
The variation could come from a) quantum of wind in a season, (b) grid availability (though this factor is becoming less significant), (c) potential changes to government policies towards the sector (such as requiring minimum percentage of renewable power in energy mix), (d) PPAs, and (e) cost of capital (through changes in interest rate).
Quantum of wind is the main variable here. Other factors are either becoming less uncertain or are expected to lead to positive surprises.
Growth of earnings?
Other than the factors mentioned above (signing of PPAs, decrease in cost of capital and favorable government policies), earnings growth would come through expansion i.e., by installing and operating more wind mills. There seems to be sufficient demand for the end product (power) and sufficient supply of raw material (capital) to believe that expansion could continue for a while (though the company has been in a consolidation mode of late).
Competition?
Other wind power companies operating in India are growing at a significantly higher rate than Orient Green Power. Most of these are either PE backed or have raised funds outside India and therefore have much lower cost of capital. This group includes ReNew Power, Mytrah Energy, Greenko and Continuum Wind Energy. The differential in cost of local capital and external capital is getting smaller with the recent strength of $, and should continue on that path with expected interest rate increase from Federal Reserve and decrease from RBI.
Update on Stock Price
With recent M&A activity in the renewable energy sector (e.g. Tata Power and Welspun, Brookfield and Continuum (still in works)) and proposed Indian IPOs of other wind and solar power companies, Orient Green Power would get a fresh look from investors. That should correct at least some of the mispricing in the stock price.
Quality of Earnings
How steady are the earning?
In geographic areas, where Orient Green Power operates, wind season is during Q1 and Q2 of financial year. Earnings are substantially more in these 2 quarters. However, on an annual basis earnings are expected to be comparable YoY.
The variation could come from a) quantum of wind in a season, (b) grid availability (though this factor is becoming less significant), (c) potential changes to government policies towards the sector (such as requiring minimum percentage of renewable power in energy mix), (d) PPAs, and (e) cost of capital (through changes in interest rate).
Quantum of wind is the main variable here. Other factors are either becoming less uncertain or are expected to lead to positive surprises.
Growth of earnings?
Other than the factors mentioned above (signing of PPAs, decrease in cost of capital and favorable government policies), earnings growth would come through expansion i.e., by installing and operating more wind mills. There seems to be sufficient demand for the end product (power) and sufficient supply of raw material (capital) to believe that expansion could continue for a while (though the company has been in a consolidation mode of late).
Competition?
Other wind power companies operating in India are growing at a significantly higher rate than Orient Green Power. Most of these are either PE backed or have raised funds outside India and therefore have much lower cost of capital. This group includes ReNew Power, Mytrah Energy, Greenko and Continuum Wind Energy. The differential in cost of local capital and external capital is getting smaller with the recent strength of $, and should continue on that path with expected interest rate increase from Federal Reserve and decrease from RBI.
Update on Stock Price
With recent M&A activity in the renewable energy sector (e.g. Tata Power and Welspun, Brookfield and Continuum (still in works)) and proposed Indian IPOs of other wind and solar power companies, Orient Green Power would get a fresh look from investors. That should correct at least some of the mispricing in the stock price.
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