Orient Green

Orient Green Power has entered the capital market on 21^st September 2010 to raise Rs. 900 crore, via a fresh issue of 16.4 to 19.2 crore equity shares of Rs.10 each (depending on the price discovered). The issue, priced in the band of Rs. 47 to 55 per equity share, constitutes about 37% to 41% of post-issue paid-up capital of the company and closes on 23^rd September for QIB bidders and on 24^th September for retail and HNIs.

The company, promoted by Shriram EPC Limited, is an independent renewable energy-based power generation company, with present operating capacity of 213 MW, of which 172.5 MW is wind energy (4 wind farms in Tamil Nadu and Andhra Pradesh) while 40.5 MW is biomass and biogas (6 plants in Tamil Nadu, Maharashtra and Rajasthan). Entire present operational projects in the company's fold have been acquired through the inorganic route in the past.

Now, the company is embarking on greenfield expansion through the organic route, without any previous experience on this front, with promoter company Shriram EPC being the turn-key contractor for most of the projects. The company has 836.5 MW of capacity in committed and development phase, which comprises of 643 MW of wind energy, 178.5 MW of biomass projects and a 15 MW small hydro power project in Orissa. It can be essentially considered a wind energy player, as once the expansion gets completed, its portfolio, based on installed capacity, will comprise of 77% wind projects, 22% biomass and 1% small hydro projects.

At present, the company is a 94.75% subsidiary of Orient Green Power Pte Ltd, Singapore. Shriram EPC and PE investors Bessemer Venture Partners and Olympus Capital hold shares of Orient Green Power Pte Ltd. Post IPO, the Singapore company's holding will get reduced to about 56-60% in the company, depending on the price discovered.

Fund raised from the IPO will go towards capacity expansion and debt repayment:

a)       Establishment of a 300 MW wind energy project in Tamil Nadu - Rs. 510 crore

b)       Establishment of 5 biomass projects aggregating 45.5 MW capacity in India - Rs. 81 crore

c)       Re-payment of debt - Rs. 148 crore

For FY10, the company reported consolidated income of Rs. 56.2 core, of which, income from carbon credit stood at Rs. 8.1 crore. However, Rs. 6.5 crore of income from carbon credits is based on management estimates for which no carbon credit certifications have been received by the company. Also, since the time the company started its first power project in April 2008, post-acquisition of 8 MW biomass plant in Rajasthan, it has been reporting a negative bottomline. Hence, the company cannot be valued on PE multiple basis. Net loss for FY10 stood at Rs. 12.2 crore.

As on 31^st March 2010, the company's networth, on consolidated basis, stood at Rs. 386 crore, resulting in a BVPS of Rs. 13.96. Total debt, as on that date, was Rs. 420 crore. At the upper end of the price band, company is issuing shares at PBV of 3.9x .

Post issue, the company's equity will rise to Rs. 440 crore, if the book gets discovered at the upper end of the price band. At Rs. 55 per share, this works out to a market cap of Rs. 2,421 crore. Add to this the existing debt of Rs. 272 crore (post repayment of Rs. 148 crore from IPO proceeds). To complete the additional 345.5 MW power generation capacity (300 MW wind and 45.5 MW biomass, as stated in the objects of issue), besides the IPO proceeds, the company will borrow Rs. 1,361 crore as debt, which has been sanctioned, as of date. Thus the company's debt will rise to Rs. 1,633 crore, resulting in an enterprise value (EV) of Rs. 4,054 crore for 558.5 MW.

This works out to an EV of Rs. 7.26 crore per MW, as against cost of setting up of Rs. 5.7 to 6 crore per MW for the new projects, which will get operational only post-FY12. Also, company's present capacity has been acquired, inorganically, at much lower valuations of Rs. 3 to 4 crore, in the past, as all of them were second hand lying closed for quite sometime. Neither the company's present capacity (size), nor its financial performance, call for such a premium valuation.

Once a big rage, wind no longer is the 'flavour of the season'. The market has lost the fancy of wind energy companies, which operate on a plant load factor (PLF) of less than 25%. Even running bio mass power projects has its limitations of capacity of not more than 20 MW and its geographical dispersal across the country. Inducting skilled manpower for such bio mass project is also difficult , as local contacts and technical competence are key for success of these power plants. Inspite of such a difficult spread across the country, the company is also expanding in Sri Lanka, Croatia, The Czech Republic and Hungary. This is going to create more of administration problems, as managing power projects of lower capacity shall always be a big challenge.

Considering all these, it is definitely an expensive issue, which will also have administrative difficulty of running as plants will be spread across the globe, of smaller capacity. Much better established power players having significant presence in thermal power generation space is available and it will be better to avoid this issue and go with the selected listed power generating players.