Profit from India's wind-power revolution

India is in desperate need of energy. And it aims to make up much of the shortfall with renewables. Here, Tom Bulford looks at one small-cap company that is poised to profit from India's fast-growing wind energy sector.

A curious letter in The Times the other day argued the attractions of wind power. Its basic idea was that while wind was free' fossil fuels were not.

I suppose there is some truth in this, but when it comes to generating power from wind, it is hardly conclusive. After all, as many critics have pointed out, the wind cannot be relied upon to blow.

But one place the wind does blow with fair gusto is along the coast of western India. Here, wind energy is beginning to answer to the country's desperate need for energy.

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If India is going to match the economic progress of its arch economic rival, China, it will have to generate far more energy than it does today. Little more than half of Indian households are connected to the country's grid and India's total energy generation capacity is 159 gigawatts (GW) for a population of 1.1bn. China, on the other hand, with an only slightly higher population of 1.3bn has generating capacity of 860GW. India is going to have to move fast to close the gap.

Why India needs energy solutions now

The Indian government is on the case, though the measures it has taken should not be taken at face value. It has established the type of targets and industry structures that almost invariably fail to achieve as much as is expected of them.

The 2003 Electricity Act was designed to introduce private sector competition into the industry. Electricity regulatory commissions were set up to act at state level and a central commission sits above them, determining tariffs for cross-border flows of electricity. Meanwhile the government has announced a series of five-year plans. The goals of the latest of these were missed by a predictably wide margin. At peak periods of demand the supply of electricity is 12% short of the level required, with the country's industry bearing the brunt of the shortfall.

India needs more electricity and in common with other countries it is looking to increase the proportion from renewable sources. It wants to double its installed power capacity to 342GW by 2017. At the same time it wants to treble its clean energy capacity to 54GW. The majority of this is expected to come from wind.

Already the wind energy sector is well established in the country. India ranks fifth in the world for wind energy generation and, according to the Indian Wind Energy Association, "the unexploited resource availability has the potential to sustain the growth of wind energy sector in India in the years to come". But given India's shortcomings to date, to what extent should we believe this bullishness?

Ravi Kailas is chief executive of Caparo Energy India (CEL). When I spoke to him last week, he confirmed that India is especially well positioned for wind-power generation. The industry has been nurtured by a range of financial incentives, including tax breaks and carbon credits.

But Kailas believes that wind energy is close to becoming competitive with coal-fired power even without such assistance, and he is keen for Caparo to become a big player in the sector.

How this wind-power generator could meet India's energy shortfall

Caparo's plan is to generate 5GW of wind power by 2017 through a two-pronged attack. Phase 1 involves the purchase at agreed and attractive terms of wind farms built by Suzlon, a global wind power manufacturer based in India. For Phase 2, Caparo intends to acquire sites and then have the wind farms built by another leading global manufacturer, Gamesa.

Caparo has already signed agreements with Suzlon to deliver 500MW of capacity by March 2012 and a further 500MW by March 2013. It expects to have 3GW of capacity in place by the end of 2016. Meanwhile Caparo has signed an agreement with Gamesa under the terms of which Gamesa will deliver another 2GW of capacity by the end of 2016.

Having raised $80m through a placing of shares at 115p when listing on AIM in October, and a further $112m of mezzanine finance, it is fully funded for the first 750MW of capacity. By the time it has achieved this it should be generating a cash flow that is sufficient to finance further investments.

Despite this promising outlook Caparo's shares have drifted. The company still expects to have to raise further finance, which could be why there has been little interest in the shares which are now trading at 98.5p. At this level, though, Kailas reckons they are undervalued.

On the basis of deals done in the sector involving peers such as Greenko, Iberdrola and KSK, Indian wind power assets have been valued at $1.4m-$1.8m per megawatt. Caparo, though, which is financed for 750MW of capacity, is valued at just $285m. Perhaps there is something to be said for wind power after all.

What if they're right?

By the way, this report is causing uproar. I think some investors just don't want to think about the possibility of such terrifying conditions here in the UK. I suppose I'm the same I'm a believer that we Brits will muddle on through, as we always do.

But I'm also humble enough to accept that I'm not always right. And I've seen exactly the sort of economic climate this report portrays happen before. I was there in the 70s. These guys have a knack of getting their big calls right. If they're right with this ominous vision, I think the "four crucial money moves" outlined here sound like a very smart idea.

This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.

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Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.