India is the fourth largest consumer of energy in the world — and also the fourth largest importer of crude oil. Its energy consumption has exploded in recent years and experts have suggested it may need to double or even triple its supply by 2030.
Infrastructure is already constrained and in some areas, businesses find themselves without electricity on an all-too-regular basis. Consistent electricity is paramount to development, but given the massive capital investment needed to create the infrastructure, that’s no easy task.
The government has turned to the private sector to help ease the supply gap. OPG Power Ventures (LSE: OPG) formed in 2000 to take advantage of subsidies on offer and has been constructing power plants across the country.
Such is the state of India’s power deficit that OPG is allowed to undercut state providers. The company also largely supplies businesses, which pay higher rates. These two factors should combine to create profitable and defensible revenues.
Operations are based in industrial estates to take advantage of the increased subsidies, with 450 MW capability in Tamil Nadu and 300 MW in Gujarat generated from coal power stations. A further 186 MW is under development or in the pipeline.
The company’s share price has risen about 7,950% since it listed on AIM back in 2008 and recent results have been impressive too. My interest in the company was piqued by Foolish investor Mark Slater, son of legendary investor Jim Slater, who built a sizeable position in the shares.
And the bad news?
Of course, a few things hang over the company or else the shares wouldn’t change hands for only six times earnings. Firstly, investors tend to distrust foreign companies that list on AIM, due to the market’s relaxed regulatory framework. Investors should remain sceptical of foreign listings – why can’t the company source capital in its own market, for example?
Plenty of companies have taken advantage of AIM rules, but I don’t think that is the case at OPG. I’m far more concerned by its stretched balance sheet – particularly the massive receivables figure of £59m. That’s more than three times last year’s profit. Admittedly, the company said it would have received £35m by the end of FY18, which would leave the total figure at £24m. But that’s still a considerable amount.
OPG also has a significant debt pile of over £200m. It has recently increased the timeline to pay off that debt, thus reducing the immediate burden on the income statement and freeing up cash to invest. That said, the company still paid £16.7m in finance costs last year and a large portion of that debt has variable interest rates set, so payments could rise in the future.
These factors explain the firm’s price-to-earnings ratio of just six. I’d worry that an Annus Horribillis could expose the fragile balance sheet and destroy shareholder value. That may never happen, but I’d prefer to find a less indebted home for my capital.
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Zach Coffell has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.