India's rickety power network collapsed twice recently, plunging 600 million people into darkness, halting hundreds of trains and crippling communications nationwide. The blackouts were the worst in a generation and highlighted the urgent need to expand the country's dilapidated electricity grid.
Hydroelectricity accounts for about 20% of the country's installed generators. Reservoir levels have dropped alarmingly because of the weak monsoon rains so far this year, so India's power woes are set to mount in the coming months. This is where Greenko comes in.
It is a leader in domestic clean-energy projects, which include hydro, gas and biomass facilities. It is also moving into wind farms, aiming to produce 1GW of power by 2015 and 1.5GW in 2016. At that point 61% of its output should be derived from wind, 31% from hydro and the rest from gas/biomass. This huge jump in capacity over the next three and a half years underlines the opportunities open to the group.
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In June 2011 it raised £50m for expansion. On top of that, General Electric has pumped $50m into its wind subsidiary, and Standard Chartered has invested $70m. Both are terrific endorsements of Greenko's business model, which includes the building of 85 million tall turbines specifically designed to make the most of lower wind speeds.
The good news for investors is that there is huge upside in the shares after the recent blackout: the fundamentals for power firms are now arguably even stronger. There is an urgent need for power generation in India, and wind has already reached grid parity with coal because fossil fuels are domestically in short supply and production costs are therefore high.
The government has stipulated that it wants to add 29.8GW of renewables capacity between 2012 and 2017. House broker Arden has a price target of 227p per share, and is forecasting revenues and underlying earnings per share (EPS) for the year ending April 2013 of €52.1m and 6.9 cents respectively. The firm expects up to €156m and 23 cents, respectively, by 2015. Net borrowing of €90m equates to a gearing ratio of 38.5% and a 2.3 times 2013 EBITDA.
As an emerging-markets player, Greenko is not for widows and orphans. Risks include the weather, foreign-currency movements and tax changes. However, the long-term picture is very positive, and I value the stock on an eight times 2014 EBITDA. Adjusting for the debt and discounting back at 12% delivers an intrinsic worth of 180p per share.
Rating: SPECULATIVE BUY at 130p
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Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.
Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.
Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.
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