SYMBIOSIS CENTRE FOR MANAGEMENT STUDIES (UNDERGRADUATE)

FINANCIAL MANAGEMENT PROJECT ON GREEN ORIENT POWER LIMITED

SUBMITTED BY KUBER AGRAWAL - 2140 RITU SHRIVASTAVA-2159 SHASHANK JAIN 2165

WHAT IS AN IPO..??
An initial public offering, or IPO, is the first sale of stock by a company to the public. A company can raise money by issuing either debt or equity. If the company has never issued equity to the public, it's known as an IPO.

COMPANY BACKGROUND
OGPL promoted by Shriram EPC is Indias leading renewable energy-based power generation company focused on developing, owning and operating a diversified portfolio of renewable energy power plants. With a total aggregate installed capacity of 213.0MW, the company is the largest independent operator and developer of renewable energy power plants in India. OGPLs operations can be classified under three business verticals namely, wind energy business, biomass power and other businesses such as small hydro electric plant, mini hydro electric plant, solar and other renewable sources of power. Orient Green Power (OGPL) is Indias 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: Indias 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 countrys 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.

COMPANY PRODUCTS
The companys operational projects comprise 172.5MW of wind energy projects and 40.5MW of biomass projects. OGPLs portfolio of committed and development projects includes approximately 836.5MW of prospective capacity, comprising an estimated 643.0MW of wind energy projects, 178.5MW of biomass projects and a small hydroelectric project of 15.0MW. OGPL is the second larges IPP in both wind power generation and biomass-based power generation in India, with a market share of 8.7%. and 7.1%, respectively. OGPL has grown its business by acquiring, operating and developing renewable energy assets of third parties and by developing green-field projects. The companys diverse customer base include SEBs, distribution companies, private commercial and industrial consumers and a power trading company Orient Green Power Limited is the largest independent operator and developer of renewable energy power plants in India with a total of 213.03 MW installed capacity. Currently, this is split out between Wind and Biomass with Wind energy forming the majority.In the future they plan to add a small component of hydro electric power to the mix and increase the committed and development project capacity to 836.5 MW. Orient Green Power also derives revenues from the recognition of carbon credits. Wind energy

Wind energy capacity of 10,890MW accounts for 52.0% of the total renewable capacity of the IPPs. The countrys onshore wind power potential has been estimated at approximately 48,500MW. There is a growing number IPPs involved in wind power generation in India, with nearly 15.0% of the total wind power capacity installed as of March 2009 coming from the IPPs.

Biomass energy

The aggregate installed capacity of biomass-based power in India has increased at a CAGR of 24.4% during FY2002-09. As of FY2009, the total installed capacity including co-generation projects and waste-to-energy-based capacity was 1,811MW, of which 1,049MW comprised bagasse-based cogeneration, 703MW agri-residue with the remaining comprising waste-toenergy. IPPs account for nearly 75.0% of the total biomass power generation capacity in India.

Small/mini-hydroelectric power

The aggregate installed capacity of small hydropower plants in India increased at a CAGR of 8.1% over FY2003-09 from 1,519MW to 2,413MW. IPPs account for nearly 33.0% of the total installed capacity for small hydropower in India. While India has nearly total potential of 14,000MW for small hydropower, it has achieved around 18.0% of this potential. A majority of the good small hydropower sites are in the north and north-eastern regions of India.

Here is the break-up of planned energy generation from various sources:

IPO DETAILS
OGPL has set a price band of Rs47-55/share for its Rs900cr IPO, which opened for subscription during September 21-23, 2010. At the lower and higher end of the price band, the issue would involve dilution of 40.9% and 37.2% of the fully-diluted post-issue paid-up capital of the company

FUNDING
The total fund requirement to set up 800 MW of capacity stands at Rs 5,092 crore, of which some of the capex has been already incurred. At a 70:30 debt-equity, the company may require more than Rs 1,500 crore of equity funding. However, of the Rs 900 crore funds raised, only Rs 590 crore will be utilised towards project development and the rest towards repaying part-debt. As the company turns profitable and pays down debt, funds may be freed up to be ploughed back into the capex. Yet, a gap in equity financing is likely to remain. While the company has not turned profitable, the projects' efficiencies may improve, making OGPL profitable this year.

FINANCIALS OF ORIENT GREEN POWER LIMITED

The company had revenues to the tune of Rs. 104.47 million in 2009, and Rs. 441.58 million in 2010, and a net loss of Rs. 113.08 million and Rs. 122.41 million respectively. Because of the limited history, and the planned expansion these financial numbers dont hold as much meaning as it would for a company for a much longer operating history. The grading report by CRISIL also indicates that these numbers do not contain the profits from the wind business as the ownership of the wind assets was only transferred in Jan 2010, and the report says that they expect the financials to improve on profitability going forward.

INVESTORS

REASONS FOR IPO ISSUE

COMPETITION
We operate in a competitive environment. Our competition depends on a host of factors, such as the type and size of the project, the complexity and location of the project, our previous relationships with customers/government bodies in the region, and location of competitors projects.

In our wind energy business, we mainly compete with other independent power producers for suitable land for wind farm construction, WEGs, engineering and construction services, PPAs with SEBs and for private customers.

In India, some of our key competitors are TATA Power Company Limited, IDFC-Green Infra Limited, CLP Power India Private Limited and Indian Energy Limited. In Europe, we expect to compete with Acciona Energy, EDP Renewables, EDF Energy, Iberdola Renewables S.A. and Theolia S.A.

In our biomass power plant business, we primarily compete with other independent power producers, such asGreenko Group, Surya Chakra Power, Shalivahana Green Energy, Goa Energy Private Limited and Prathyusha Power Private Limited. In most cases, biomass competition is limited to securing a license for a preferred location and fuel sourcing if a competitors plant is in a relatively close region.

COMPARISON WITH OTHER LISTED COMPANIES

STRENGTHS
We are a leading Indian independent renewable energy-based power generation company.

We operate in the rapidly growing renewable energy sector, which benefits from increasing demand for electricity and regulatory support.

We have a flexible business model that is scalable and sustainable and that enables us to deliver predictable growth from a diversified and balanced portfolio of projects.

We have an experienced management and operating team with relevant industry knowledge and expertise, including the ability to improve operational performance of acquired assets.

We are able to leverage the expertise and experience of one of our Promoters, SEPC and its affiliate WEG manufacturer, LSML.

We have secured debt financing for a significant number of our committed and development projects.

CONCERNS
Lower PLFs to suppress IRRs: OGPLs 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 CERCs 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.

Poor financial health of SEBs: Renewable energy-based projects depend, to a great extent, on the SEBs for off-take under RPOs, which is a concern. Most of the SEBs suffer due to weak financial health on account of the huge losses incurred by them due to the distribution of power at subsidised rates.

Uncertainty in fuel availability: Wind power plants generally suffer due to low PLFs as the power generation primarily relies on the wind conditions, which vary across the seasons. OGPLs wind energy plants currently have a PLF of 20-21%, which is lower than the normative PLF of 25% set by the CERC. Going ahead, the company has planned huge capacity addition in wind power, operations of which could be hit by the changing weather patterns and resultant wind conditions. Similarly, in case of the biomass plants, the company does not have any longterm fuel tie-ups and relies on the farmers for sourcing raw materials such as wood, rice husk, etc. Thus, any shortage in the availability of these raw materials and hike in their prices would affect the companys profitability.

RECOMMENDATION RATIONALE HUGE POTENTIAL FOR THE DEVELOPMENT OF RENEWABLE POWER IN INDIA
\Renewable energy-based power capacities have registered the highest pace of growth in the overall capacity additions in India compared to non-renewable sources, increasing their share of total power capacity from 2.0% in FY2003 to around 10.0% in 2010. The renewable power sector has huge potential, which still remains untapped. The key drivers for the renewable energy sector in India include: (i) The demand-supply gap in the power sector (ii) Regulatory incentives and the availability of CDM benefits and/or Indian renewable energy certificates (REC), when fully-implemented by the Indian government, (iii) a large untapped potential, (iv) environmental concerns regarding the use of fossil fuels, (v) the desire to strengthen Indias energy security, and (vi) a viable solution for rural electrification.

Wind energy has become an attractive form of renewable energy in India due to its sizeable untapped potential. Installed capacity of wind power in India has increased at a CAGR of 30.0% since FY2005 and accounts for 70.0% of the total renewable energy installed capacity in India. As of October 2009, Indias total wind power capacity stood at approximately 10,890MW. Karnataka and Gujarat have the highest wind energy potential at 11,531MW and 10,645MW, respectively. In terms of the utilising potential, Tamil Nadu leads with 78% gros potential utilisation and capacity of 4,305MW. According to MNREs Annual Report for 2008-2009, Indias onshore wind power potential is estimated at approximately 48,500MW. Thus, only 22% of the total potential has been utilised implying huge scope for development.

As of October 2009, 2,125MW of aggregate installed capacity of biomass power (including waste-to-energy) existed in India. Bagasse-based generation accounts for 1,241MW, or approximately 58.0% and non-bagasse biomass-based power accounts for 817MW, or approximately 38% of total biomass power. The aggregate installed capacity of biomass-based power in India has increased at a CAGR of 24.4% during FY2002 to FY2009. Currently, India is estimated to produce approximately 500 million metric tonnes (mmt) of biomass per year, of which approximately 120-150mmt is surplus, which can be utilised for power generation of up to 17,000MW. In addition, there is also approximately 5,000MW of power generation potential from bagasse-based cogeneration and around 2,700MW from waste-to-energy projects

Government support: The government has undertaken various measures to promote renewable energy in India, which would act in favour of the companies in the space. Renewable energy projects enjoy fiscal incentives such as 80% accelerated depreciation, duty-free imports, tax holiday and preferential tariffs.

A major advantage of the renewable energy projects is the shorter execution time duration as compared to thermal projects. While the biomass projects can be commissioned within 15-18 months, the wind energy projects can be executed over six-seven months. The land requirement is low for these projects, while the regulatory hassles are also comparatively lower. OGPL currently has 400MW 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. As per management, construction works of the 74MW of biomass projects are at advanced stages and hence would be commissioned over the next 7-8 months.

CONCLUSION
The renewable energy sector is set for healthy growth due to its vast unexplored potential and supportive government policies. Leader OGPL has 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 an implied P/BV of 1.7x 1.9x on FY2012E financials, which we believe is fair considering higher RoEs of its business and the risks associated with lower PLFs. The IPO is a vailable 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.