Despite the headwinds of a weak Indian rupee which depreciated by 19 per cent against the euro in the 12 month reporting period, the company still managed to grow revenues by 38 per cent to €53m (£42m) and increase operating profit by almost 40 per cent to €27.5m in the financial year to end March 2014. On a constant currency basis, revenue actually rose almost 60 per cent.
After deducting net finance costs of €14m, pre-tax profits shot up two thirds to €13.5m year-on-year to lift adjusted EPS up by over a half to 4.5 cents. And with 252MW of new capacity added in the period, and a further 100MW post the period end, then capacity has more than doubled to 661MW since April last year, of which wind power accounts for 348MW. This means that the company is on target to hit 700MW of total operating capacity ahead of this year’s wind and monsoon season. The wind season starts next month.
The pipeline is equally robust: around 423 MW of projects are under construction and 1,240 MW are in active development as Greenko delivers on its strategy of creating a diversified hydropower and wind portfolio for India's high demand power market, supported by a reliable roll-out of high yield assets. The target is to achieve 1,000MW of operating capacity by next year, and to double capacity to 2,000MW by 2018.
The political back drop is also encouraging as clean energy is becoming an increasingly important part of the Indian energy market and will provide a significant portion of the Indian Government's 12th Plan target for new capacity. The Indian energy market is now witnessing a paradigm shift, with the emphasis changing to price discovery using reliable supply contracts, instead of unsustainable subsidised power.
Given the major shortages in domestic coal and gas supplies in the country, the market environment now reflects global commodity pricing in the financial return expectations for energy companies. This effect is most prominent in the bidding process across multiple states with tariffs well above rupees 5/kWh (Euro 80/MWh). Furthermore, following the newly elected Prime Minister's statement to strive to deliver “24/7 power availability in the country”, renewable energy is now viewed as a key priority. This can only be good news for Greenko with its high quality portfolio of hydro and wind capacity.
It’s important too that all of Greenko's renewable projects can achieve grid parity, the point at which they do not rely on state subsidies to turn a profit. In fact, due to the relatively high cost of coal in India, the cost of wind and hydro generation projects is below that of coal fired projects. In turn, this places the company in a far better position than other developers of renewable projects in other parts of the globe.
Robust revenue and earnings growth
Over the next couple of years around 392MW of projects under construction will be completed which in turn should deliver substantial returns to shareholders. This explains why analyst Adam Forsyth at broking house Arden Partners is forecasting a further ramp up in revenues and profits for the financial year to March 2015. He predicts turnover will rise by an eye-catching 81 per cent to €96m which will drive up operating profit from €27.5m to €63m. On this basis, expect pre-tax profit of €35.2m and EPS of 13 cents, or 10.5p a share. This means that Greenko’s shares are trading on around 15 times forward earnings. The price to book value is 1.5 times. Analyst Harold Hutchinson at broking house Investec predicts pre-tax profits of €34m for the same period.
It’s my view that these forecasts look pretty sound as there is clear visibility on how these revenues are going to be generated from a designated pipeline of new capacity across a number of wind and hydro projects in India. For the financial year to end March 2016, analysts are predicting a further ramp up in turnover to between €146m to €178m to deliver operating profits of above €100m and pre-tax profits of between €50m to €55m. On this basis, EPS could be as high as 18.5¢, or almost 15p, which means the prospective PE drops even further to little over 10.
For a company set to quadruple EPS over the next two financial years, this doesn’t seem a high rating at all to pay for a slice of those earnings. It also explains why Investec have a target price of 275p on the shares.
Target price
To arrive at this figure Mr Hutchinson of Investec notes that given the over-riding ‘net short’ position in the Indian power market, in practical terms “we would expect Greenko assets to trade at a premium to new build costs, reflecting the value of having assets actually in the ground to benefit from the excess demand for power. The question boils down to estimates of new build costs, and a reasonable ‘premium’.” Investec use an estimate of €0.8m/MW for new build of wind and €1.1m for hydro in India. Their capacity multiples approach suggest a fair value for Greenko’s shares of between 251p to 417p.
Investec also look at the cash profitability of the business in relation to the company’s enterprise value (market value plus net debt). The benefit of this particular analytical approach is that it captures some of the ‘growth value’ of a company, rather than just the value of the assets in the ground. True, the ‘fair’ cash profit multiple valuation for a company is dependent on a number of factors including: underlying cash flow, the age of assets, the underlying tax rate, weighted cost of capital employed, and longer-term growth.
That said, a growth company like Greenko should be able to achieve a multiple of between 9 to 11 times cash profits. So on the basis that Investec expect Greenko to generate cash profits of €143m in the financial year to March 2016, and after factoring in net debt of €551m, analysts at the broking house arrive at an equity value per share of between 295p and 453p.
Clearly, if Greenko manages to deliver and hit analysts’ earnings estimates, then Investec’s 275p target price doesn’t seem unreasonable. Arden Partner’s have a fair value of 245p a share, or 50 per cent above the current share price. My own target price range is between 225p to 230p, or the equivalent of seven times cash profit estimates to Greenko’s enterprise value for the financial year to March 2016.
So trading on a bid-offer spread of 161p to 162p, valuing the company’s equity at only £242m, and offering 44 per cent upside to my target price, I still maintain that Greenko’s shares are well worth buying into.
■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
