City analysts are increasingly reassured that Indian power supplier OPG Power Ventures (OPG:AIM) is back on track. But investors seem less willing to give the benefit of the doubt, possibly creating a valuation anomaly and buying opportunity.

The £150m AIM company issued a brief year-end update on 31 May covering the 12 months to 31 March 2017. ‘During the year we stuck to our strategic priority of maximising the cash contribution of our existing assets and thereby making our business stronger for the long term,’ spelled out chairman Arvind Gupta.

Points of note for investors include firm per kilowatt/hour (KWh) pricing and impressive plant load factor (PLF) statistics of 76% at its plant in Chennai, and 63% at its Gujarat installation. The PLF is calculated by actual output during a given period as a percentage of a plant’s maximum capability. Private sector average PLF was 55.7% in the year to April 2017, according to statistics from India’s Ministry of Power. The Gujarat plant is on target to hit an average 75% PLF later this year.

Improved cash collection

OPG has also improved cash collection and renegotiated its debt facilities to fund future energy generation projects, which could ‘potentially increase dividends in the medium-term,’ say analysts at Macquarie Capital. Macquarie anticipates a big jump in the payout over the two years with OPG set to make its maiden return to shareholders worth 0.8p per share for the year to 31 March 2017. The analysts are forecasting a 1p per share payout this year to March 2018 before steeply rising to 3p in 2019.

The market remains sceptical and the share is largely unmoved at 42.25p, potentially creating an opportunity for investors. ‘In our view, the risk perceptions are overdone and have drifted away from underlying fundamentals,’ say Macquarie analysts Dominic Nash and Dilip Kejriwal.

Powering up

OPG has spent years building its 714MW (megawatt) asset base of coal-to-electricity plants in Chennai and Gujarat, and is increasingly looking at solar and wind for environmentally-friendly energy. The company has a 62MW solar project in Karnataka progressing with a ‘secured a Letter of Intent for the 124MW Jharkhand project and expects to commission it by end-2018,’ Macquarie’s Nash and Kejriwal explain.

The shares are currently trading on a price to earnings (PE) multiple of 5.3-times this year’s anticipated 8p of earnings per share (EPS). That’s a circa 50% and 35% discount to Indian and EU utilities respectively, according to Macquarie’s industry analysis.

Growth is coming through and the 2019 income yield would stand at 7.1% if dividend rises come through as anticipated. 

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