Questor share tip: OPG shares power higher

The Indian power company could see its shares double within the next two years, says Questor.

Pre-tax profits jumped 70pc to £17.95m, on revenues up 78pc to £98.8m during the year ended March.
Pre-tax profits jumped 70pc to £17.95m, on revenues up 78pc to £98.8m during the year ended March. Credit: Photo: PA

OPG Power Ventures
94p+¾
Questor says BUY

INDIA has power problems, and the mass blackouts of July 2012 that left millions powerless were a stark reminder of that.

OPG Power Ventures (OPG), an Indian infrastructure company that is listed in London, could provide part of the solution for the country, while providing healthy returns and income for investors along the way.

The company hinted that income from dividends could be only 12 months away and said it is already delivering excellent progress on profits and revenues, which has resulted in the share price almost doubling in the past 18 months.

The full-year results announced yesterday underlined the investment case. Pre-tax profits jumped 70pc to £17.95m, on revenues up 78pc to £98.8m during the year ended March.

The company is growing quickly through its vast power plant construction project. It has already completed three power plants on time and on budget at a site in Chennai, southern India. The next plant – Chennai IV – is also on target to be completed within the next year.

OPG has just signed a 15-year power contract guaranteed by the state of Tamil Nadu and this provides steady revenue.

The largest input cost is for the coal to fuel the power plants’ furnaces. The company aims to use a mix of local Indian coal and imported Indonesian coal at a ratio of about 40/60. Shortages of Indian coal last year resulted in the ratio shifting to about 20/80, and with Indonesian coal costing about a third more, total coal costs were about 10pc higher.

The final issue investors have to face is currency risk around the Indian rupee. Last year the Indian rupee slumped in value by about 25pc, and when results and dividends are translated back into sterling they will take a hit if the rupee weakens.

However, currency movements are short term, and the rupee has since recovered about half of those losses.

Questor is not blind to the risks here. Investors are exposed to a big construction project, Indian bureaucracy, commodity prices in coal and foreign exchange markets.

However, having said all that, OPG has delivered during the past two years on all these fronts. What’s more analysts expects profits to triple by March 2016.

This is one for the long term. Buy.