Share tips: A punt on Indian infrastructure

Last year was a bad one for Essar Energy, the India-based power generator and oil refinery group. The shares have been in decline since parent Essar floated a 23% stake in London at 420p a share. General disaffection with emerging markets, along with a weakening rupee, saw profits drop $303m.

Delays in acquiring licences to mine cheap domestic coal for its power stations left it having to buy more expensive deposits from abroad. Then, its billionaire founders, the Ruia brothers, got caught up in an alleged mobile telecoms scam in India, and a subsidiary was hit by a $656m tax.

But all is not lost. The rupee has strengthened 5% since the turn of the year, and downstream oil-refining margins have improved. India's GDP is set to expand by 6%-8% for the foreseeable future, and the state is aiming to spend $1trn on infrastructure over the next five years (India faces chronic power shortages.) So when Essar's run of bad luck does end, adventurous investors could make money.

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Essar Energy (LSE: ESSR), rated a BUY by Arden Partners

The City predicts 2012 revenues and earnings per share(EPS) of £12bn and 8p respectively, jumping to £15bn and 20p in 2013. I rate the stock on a through-cycle EBITDA multiple of seven, or 165p per share adjusted for minorities, tax and net debt of $5.7bn. Net tangible assets are 160p.

Essar is not for the nervous high debt, commodity price swings and currency volatility will make for a rough ride. But the group owns some quality assets, and is ideally placed to benefit from India's infrastructure spending. The next quarterly results are due out on 18 June. Arden Partners has a target price of 275p.

Rating: BUY at 103p

Paul Hill also writes a weekly share-tipping newsletter. See www.moneyweek.com/PGIor phone 020-7633 3634.