Is Orient Green Power A Multibagger?

Is orient green power debt free?

Orient Green Power (Symbol: GreenPower) can deliver multibagger returns if held for the long term (say, 3-4 years), because:

Green power is the future 

Orient Green Power is all set to reduce its debt meaningfully

Income from Renewable Energy Certificates (RECs) will add to the company’s bottom line

The Andhra Pradesh Electricity Regulatory Commission (APERC) has ruled in favor of the company in its case against the AP government

The Future of Green Power 

Renewable power stocks of the 2020s are like the software stocks of the 1990s. Way back in the 1990s, Mphasis (then known as BFL Software) was traded at 12 bucks (FV 10) and Infosys was traded at 150 (FV 10) on its listing day. I know about it as I traded these 2 stocks. Many other software companies traded at par or just above par. 

Likewise, I believe that renewable power stocks have miles to go – and, like software, Indian companies can set up green power facilities abroad or provide services to foreign companies. The possibilities are endless and the sector’s growth can be exponential.

Orient Green Power’s Debt Reduction and Prospects

Orient Green Power generates very healthy operating cash flows of about Rs 200 crores per year, a good part of which it uses to repay debt.

In H1 2023, the company generated Rs 107 crores in operating cash flows of which it used about Rs 64 crores to repay long-term debt.

can we buy orient green power?

As of September 2022, Orient Green Power’s long-term debt stood at Rs 1,050 crores, while its short-term debt stood at Rs 122 crores. This debt is likely to be reduced soon because the company is issuing rights shares for Rs 230 crores to repay long-term debt and for general corporate purposes. I believe that the company’s long-term debt will fall to about Rs 800 crores, after the rights issue, which will dramatically reduce its interest expense and increase its net profits.

In the quarter ended September 2022, the company incurred an interest expense of Rs 26.57 crores. If we annualize, the company’s annual interest expense works out to about Rs 104 crores (for long-term debt worth Rs 1050 crores). If the debt reduces to Rs 800 crores, the annual interest expense will come down to about Rs 80 crores. Let’s check how this impacts its profitability:

what does orient green power do?

In H1 2023, Orient Green Power reported profit-before-tax-and-exceptional-items of Rs 45.75 crores after providing Rs 54 crores as interest payment (debt Rs 1,050 crores). On the reduced debt of Rs 800 crores, the company’s interest expense will reduce to Rs 40 crores for 6 months and Rs 80 crores annually. 

Assuming the same profitability levels going forward, Orient Green Power is likely to generate a half-yearly profit-before-taxes worth about Rs 60 crores (45.75 crores + 14 crores in interest saving), or Rs 120 crores for the year. The company’s capital is Rs 751 crores, and this annual profit number translates to an EPS of Rs 1.60 and a Cash EPS of Rs 2.70 going forward (I’ve added depreciation to the net profit for calculating the CEPS). 

So, Green Power’s price can jump to anywhere between 16 and 32 in the next 1-2 years. It is currently priced at Rs 8.35. The forecasted price makes it a 2x-4x bagger.

Income from Renewable Energy Certificates (RECs) 

In 2020, the Central Electricity Regulatory Commission (CERC) set the REC price to nil. The company suffered because of this order and its profitability took a dive. However, The Appellate Tribunal for Electricity (APTEL) has set aside the CERC order of 2020 and the company restarted trading in RECs, which boosted its revenues by Rs. 48 crores for the year ended March 2022.

The validity of these RECs is perpetual, and they are an evergreen income-generating machine. 

Favorable Judgment Of The Andhra Pradesh Electricity Regulatory Commission (APERC) 

The AP government and DISCOM had stalled payout to Orient Green Power because the government walked back on the agreed rate (because of government change). However, recently, the Andhra Pradesh Electricity Regulatory Commission (APERC) has issued an order in favor of the company and directed AP Discom to pay it Rs. 31.94 crores. 

Based on all the factors above, I estimate that Orient Green Power is a stock to add to one’s portfolio for the long term.

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