Don't Miss This Enormous Power Opportunity
LONDON -- When you think of electricity generators, you probably think of stable income shares like FTSE 250 incumbent Drax Group (ISE: DRX.L) , or the 13 billion pound FTSE 100 stalwart that I consider to be the king of dividend shares.
It's quite a different story in India, where strong economic growth is causing energy consumption to surge. The International Energy Agency expects electricity demand in India to triple by 2035, requiring 650 gigawatts of new generating capacity to be built before then.
125 x Drax
The International Energy Agency expects electricity consumption in India to reach 3,200 terawatt hours by 2035.
To put this into context, Drax -- a 2 billion pound company that operates the U.K.'s largest coal-fired power station -- generated a total of 26.4TWh in 2011 -- just 0.8% of the projected annual demand in India in 2035.
As luck would have it, four of India's fastest-growing energy companies have chosen to list their shares on the London Stock Exchange, providing U.K. investors four very different routes into the giant Indian electricity market.
(Incidentally, you can find out about some of the other top growth sectors the Fool's analysts have selected for 2012 in this free report, which I highly recommend.)
Shareholders in Essar Energy (ISE: ESSR.L) have had a torrid time since the company's flotation in 2010. Despite this, it remains a 1.6 billion pound company, and it could now be that the worst of its troubles are behind it.
Essar currently owns and operates 2,800 megawatts of electricity generation capacity and has a further 9,670MW under construction. It's also involved in the oil business and owns the Vadinar oil refinery on the west coast of India. This newly expanded facility has a throughput capacity of 405,000 barrels per day and is well positioned for shipments to European and Asian markets.
Essar made a thumping loss in 2011, thanks to a tax dispute, but things could now start to improve -- although its $5.8 billion long-term debt concerns me.
KSK Power Ventur
KSK Power Ventur (ISE: KSK.L) has 933MW of coal, gas, and wind operating capacity, with a further 3,600MW under construction and 5,000MW in planning. Its revenues have grown from $6 million in 2007 to $383 million last year, but it has failed to deliver consistent profitability, resulting in a roller-coaster ride for long-term shareholders.
KSK seems likely to become a significant power generator in India, and its growing size and maturity may help it to gain more favorable financing terms going forward. It has also made good progress with securing cheaper domestic coal supplies, while its growing renewable capacity should provide a hedge against future fuel supply issues.
OPG Power Ventures
OPG Power Ventures (ISE: OPG.L) is a smaller alternative to KSK. Much of its output is sold directly to large, local industrial concerns, with the balance being sold to a regional utility.
OPG has a market cap of just 117 million pounds and at 33 pence is trading below its net asset value of 37 pence per share. It has cash of 38 million pounds and net debt of just 31 million pounds, making it relatively lightly geared. OPG's profits were wafer-thin last year, thanks to the disposal costs of some old facilities, but I think it is worth much more.
OPG is targeting 700MW of capacity and looks well placed to achieve this. It should shortly reach 190MW and has 92MW due to commission in 2013, followed by 460MW in 2014.
Greenko Group (ISE: GKO.L) is focused on clean-energy projects in India. It currently has 214MW of capacity, consisting of hydroelectric and biomass facilities, and is making a determined effort to move into wind power, with three 100MW facilities under construction in partnership with General Electric.
Greenko's target is 1000MW by 2014, and its focus on renewables could be a major benefit if current problems with the coal and gas supply in India continue. Like OPG, Greenko is currently trading slightly below its book value and could easily double in value if things continue to go well.
Avoiding the middleman
Of these companies, KSK and OPG in particular are focused on building multiple small plants that sell much of their electricity directly to local industrial customers.
This is a defensive measure made necessary because India doesn't have a modern national grid to distribute electricity throughout the country. Distribution problems are currently being made worse by regulated tariffs that are too low and by shortages of domestic coal and gas.
India's biggest electricity problem at the moment is fueling new generating capacity and distributing electricity effectively. Major infrastructure upgrades and price increases will be needed to fully resolve these issues in the years to come -- which could slow economic growth.
The companies I've highlighted are all taking different approaches to these problems -- but crucially, they are successfully managing to overcome them, and I think that all four have the potential to double in value over the next three to five years.
My top picks would be Greenko -- for its lack of fossil-fuel dependence -- and OPG, for its smaller size, industrial customers, and flexibility. But why not leave a comment below and let me know what you think?
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