MIDAS SHARE TIPS: Profits set to surge as OPG Power Ventures targets Indian firms' desperate need for reliable electricity

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London-listed Indian companies have delivered a mixed stock market performance and some UK investors have been badly burned. However, OPG Power Ventures should prove a more worthwhile investment.

Its business is based in India but it is focused on a lucrative part of the energy market and dedicated to generating strong returns for shareholders. At 102½p, the stock should produce decent returns over the next few years.

India desperately needs more electricity. Demand is growing and state-owned energy companies cannot keep up. There are routine power cuts, hitting businesses and consumers daily. Over the past decade the Indian government has introduced a number of initiatives to improve the situation. In particular, it has invited the private sector to participate in the market.

Powered up: OPG completed its Gujarat plant this month, taking its total generating capacity to 750MW

OPG founder Arvind Gupta realised this was an opportunity not to be missed. Having spent his early career managing various divisions of OPG Enterprises, the family business, he established OPG Power Ventures as an independent firm in 2000 and listed it on AIM eight years later.

Most of that time has been spent building coal-fired power plants, initially in Tamil Nadu in the south, where Gupta has a strong network of contacts, and latterly in Gujarat in the north-east of the country. Planning permission has taken time and there have been construction delays, but this month the company revealed that it had completed plants in both regions with a total of 750 megawatts of capacity.

That would be enough to power more than half a million homes in the UK and many more than that in India, but OPG has chosen not to supply the domestic market. Instead, it is focusing exclusively on commercial and industrial customers because they have to pay more for electricity in India than consumers. OPG supplies most customers directly and makes sure it charges slightly less than they would pay to state-owned rivals.

Opportunity: OPG founder Arvind Gupta

India’s need for electricity is so acute that OPG is allowed to undercut state-owned operators because it eases demand and still accounts for only a fraction of companies’ national or regional needs. Some of its electricity is even sold directly to state-owned distributors, such as the Tamil Nadu Generation and Distribution Company.

The group has also differentiated itself from rivals by installing sophisticated boilers at its power plants that are capable of generating electricity from local or imported coal. This matters because local coal releases less energy than imported coal and its supply is unreliable.

Gupta’s approach seems to be working. OPG this month unveiled a 21 per cent rise in pre-tax profits to £21.65million for the year to March 31 and said it hoped to start paying dividends relatively soon. Analysts expect profits to increase almost 50 per cent to £32.2million in the current year and to £47.4million in 2017. Dividends are widely expected to kick in at that point, starting at modest levels but building up over time.

Completing sizeable plants in the north and south of the country is no mean feat and OPG has already signed up 200 customers. Now it hopes to increase coal-fired capacity by 1,000MW, largely by expanding existing operations, where the infrastructure is already in place and planning permission has been granted. Gupta is also keen to provide green energy. Sites have been identified for wind and solar power and the group is expected to build up to 300MW of capacity from renewables.

OPG has done well so far. It has delivered on its promises to investors, it is making money and is forecast to become significantly more profitable over the next couple of years. Just over half of the shares are owned by directors and their families, so the board is incentivised to deliver for investors. Reassuringly, too, institutional investors such as M&G and Legal & General hold the stock.

Midas verdict: India is lagging the world in terms of energy consumption and needs to catch up to fulfil its economic potential. OPG has created a robust business and prospects look bright. Buy.

Traded on: AIM Ticker: OPG Contact: opgpower.com or 01624 681200