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Orient Green Power (ORIN.BO): D/g to Neutral on execution issues
What's changed
We downgrade OGPL to Neutral and reduce our 12-month SOTP-based
target price to Rs20 from Rs48, which implies potential upside of 42%.
Since we initiated coverage on OGPL with a Buy rating on December 2,
2010, the stock has declined by 54.9% while the BSE Sensex fell 14.1%.
We believe YTD underperformance of Orient Green is on account of the
following: 1) delays in capacity additions due to transmission constraints
in the state of Tamil Nadu; 2) weak finances of Tamil Nadu state
electricity board thereby heightening uncertainty over utilization levels
and the recovery of outstanding dues; and 3) a lack of clarity on the REC
mechanism regarding the weak finances of the state electricity boards.
We do not expect clarity or positive news flows on any of the above in
the near term, which will remain an overhang on the stock.
We had expected to gain visibility earlier on the utilization rates of its
new projects in this quarter. However, we now anticipate that we will
have to wait until 2Q FY13E, given delays in commissioning wind
capacities for FY12E and the fact that the wind season will be over by
end-Sep 2011. Furthermore, OGPL earnings and valuation have very
high sensitivity to utilization rates. A 100bp change in utilization rates for
wind would impact valuation by 15% and affect earnings by 20% for
FY13E/14E. This is primarily because of the company’s high operating
leverage and interest expense.
Our calculations indicate that the market is implying negative value to
assets being constructed and current market price is composed of only
cash and book value of existing assets. We, however, believe the rerating
of the stock is contingent on visibility on 1) utilization rates; and 2)
realization of REC benefits, which may not happen until 1Q-2Q FY13.
Pending uncertainty on both utilization rates and realization of REC
benefits, we now assume a utilization rate for wind of 24% (vs. company
forecast of 27%-30%). Our number is a mid-point between management
guidance and the utilization rates implied by the market. Also, we await
more visibility on REC and assume no REC benefits in our earnings
estimates and valuation in the interim.
Valuation
We reduce our target price to Rs 20 and cut our EPS estimates by 69%-
66% for FY2012-2014, primarily on removal of the EPS benefits and
attributing the value of only announced projects in the pipeline.
Key risks
Key downside risks: 1) further deterioration of health of SEBs leading to
a relaxation of obligation of purchase of REC certificates; 2) margin
pressure due to high biomass fuel cost.
Key upside risks: 1) the realization of REC benefits and 2) higher-thanexpected
utilization rates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Orient Green Power (ORIN.BO): D/g to Neutral on execution issues
What's changed
We downgrade OGPL to Neutral and reduce our 12-month SOTP-based
target price to Rs20 from Rs48, which implies potential upside of 42%.
Since we initiated coverage on OGPL with a Buy rating on December 2,
2010, the stock has declined by 54.9% while the BSE Sensex fell 14.1%.
We believe YTD underperformance of Orient Green is on account of the
following: 1) delays in capacity additions due to transmission constraints
in the state of Tamil Nadu; 2) weak finances of Tamil Nadu state
electricity board thereby heightening uncertainty over utilization levels
and the recovery of outstanding dues; and 3) a lack of clarity on the REC
mechanism regarding the weak finances of the state electricity boards.
We do not expect clarity or positive news flows on any of the above in
the near term, which will remain an overhang on the stock.
We had expected to gain visibility earlier on the utilization rates of its
new projects in this quarter. However, we now anticipate that we will
have to wait until 2Q FY13E, given delays in commissioning wind
capacities for FY12E and the fact that the wind season will be over by
end-Sep 2011. Furthermore, OGPL earnings and valuation have very
high sensitivity to utilization rates. A 100bp change in utilization rates for
wind would impact valuation by 15% and affect earnings by 20% for
FY13E/14E. This is primarily because of the company’s high operating
leverage and interest expense.
Our calculations indicate that the market is implying negative value to
assets being constructed and current market price is composed of only
cash and book value of existing assets. We, however, believe the rerating
of the stock is contingent on visibility on 1) utilization rates; and 2)
realization of REC benefits, which may not happen until 1Q-2Q FY13.
Pending uncertainty on both utilization rates and realization of REC
benefits, we now assume a utilization rate for wind of 24% (vs. company
forecast of 27%-30%). Our number is a mid-point between management
guidance and the utilization rates implied by the market. Also, we await
more visibility on REC and assume no REC benefits in our earnings
estimates and valuation in the interim.
Valuation
We reduce our target price to Rs 20 and cut our EPS estimates by 69%-
66% for FY2012-2014, primarily on removal of the EPS benefits and
attributing the value of only announced projects in the pipeline.
Key risks
Key downside risks: 1) further deterioration of health of SEBs leading to
a relaxation of obligation of purchase of REC certificates; 2) margin
pressure due to high biomass fuel cost.
Key upside risks: 1) the realization of REC benefits and 2) higher-thanexpected
utilization rates.
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