Orient Green Power Company Ltd Management Discussions.

Company Overview

Orient Green Power Company Limited (OGPL) is Indias leading listed renewable-only Independent power producing company focused on developing, owning and operating a diversified portfolio of wind energy power plants.

The Companys portfolio as of March 2019 stands at 425 MW comprising of installed and operational capacity.

Headquartered in Chennai, Tamil Nadu, OGPLs assets are spread across Tamil Nadu, Andhra Pradesh, Gujarat, and Karnataka. Further, it also owns and operates a 10.5 MW wind power plant in Croatia.

Further, the Company has diversified off-take agreements and supplies the power generated to SEBs, Group Captive Customers, Merchant Power as well as to open access. Our customers enjoy attractive tariffs with periodic upward revisions.

In addition to the majority shareholding held by the Shriram Group, Orient Green Power is backed by global private equity funds Bessemer Venture Partners and Olympus Capital. OGPL is part of the Shriram Group which has interests in financing, engineering & construction, software and technology services and wind turbine manufacturing.

Economic Overview

After a promising start to 2018, the global economic expansion decelerated in the second half of the fiscal amidst challenges, following an increase in trade tensions and tariff hikes between the United States and China, a decline in business confidence, a tightening of financial conditions, and higher policy uncertainty across many economies. The combination of the above factors resulted in slowing the global growth rate to 3.2 % in the second half of the year from 3.8 % in the first half of the fiscal. In the near future, these challenges are likely to drag growth to sub 3% levels for the global economy, given that most of the developed nations are growing near about their potential growth rate. Similarly, the growth of emerging markets is expected to be weighed down by factors ranging from slowing external demand, rising borrowing costs and persistent policy uncertainties.

Growth in the United States has remained solid, bolstered by fiscal stimulus. Labor market as well remains robust, thereby aiding consumption. Labor productivity also showed signs of improvement. Going forward, the growth rate is expected to soften following removal of monetary accommodative policies, fading off of fiscal stimulus and the subsequent impact on trade and investment following the on-going tariff war with China. Growth in Euro region moderated much more than anticipated, given the softening of exports following slowing external demand and appreciation of the Euro. The growth in the region was also impacted to some extent following withdrawal of monetary support by the ECB - which stopped adding to its balance sheet. Growth in the region is expected to remain steady, if not moderate, given the benign global growth trade. Further, Japanese growth slowed to an estimated 0.8 percent in 2018, reflecting contractions in the first and third quarters due to bad weather and natural disasters. Growth though, is expected to pick up going forward following pick up in employment activities.

Growth for Emerging and developing economies edged down to an estimated 4.2 % in 2018 marginally lower than expected, as a number of countries with elevated current account deficits experienced substantial financial market pressures and appreciable slowdowns in activity. The Chinese economy grew at 6.6 % during the year demonstrating resilience. New regulations on commercial bank exposures to shadow financing, together with stricter provisions for off-budget borrowing by local governments, have slowed credit growth to the non-financial sector. However, the authorities reiterated their intention to pursue looser macroeconomic policies to counter the potential economic impact of trade disputes with the United States. Going ahead, while domestic consumption is expected to remain strong, weakening global demand is expected to marginally lower the growth rate going forward.

Closer home, Indias economy expanded at 6.8 per cent during the year, retaining its tag of the fastest growing major economy in the world. The growth was largely driven by strong domestic demand, investments made in recent years and initial spurts of growth from the improving investment cycle. The first half of the year exhibited fairly robust growth before challenges in the financial sector resulted in sharp drop in liquidity conditions to arrest the pace of growth in the second half. This resulted in accommodative monetary policies, which provided a fillip to the economy, which was also helped by fairly benign inflationary trends. Exports as well picked up momentum presenting a buoy to the manufacturing sector. However despite the positives, softening of private consumption and fixed investments remain cause of worry. Going ahead, the momentum is expected to gradually pick up following Govt.s commitment towards adhering to fiscal prudence.

Industry Overview

India presently is the worlds third largest consumer of electricity. The countrys demand for electricity, which has expanded in sync with its economic growth, is expected to maintain its momentum and is likely to be the fastest growing energy market in the world for the next two decades. India accounted for 16% of the global coal consumption (2017) - emerging as the second largest consumer of coal globally. Coal remains the dominant fuel, accounting for ~64% of Indias energy consumption.

India is also the third largest producer of electricity in the world. the Country has a diversified energy mix ranging from conventional sources such as coal, lignite, natural gas, oil, hydro and nuclear power to viable non-conventional sources such as wind, solar, and agricultural and domestic waste. The sector has steadily evolved over the years offering wide range of opportunities across the value chain. Both public and private sector have made sizeable investmentsin the sector which has resulted in steady addition of capacities and enhancement of Transmission & Distribution. Further, the introduction of power trading, Power Exchanges and REC mechanism unleashed a new growth wave especially for the RE sector.

India has achieved numerous landmarks in recent years, most prominent being a meaningful reduction in Power deficit. The Demand supply scenario has improved considerably for several states across India. From an era of deficits, the states have moved considerably towards a situation where the average deficit has narrowed down significantly. Factors such as policy clarity, political push as well as administrative reforms have encouraged capacity addition. Further, the energy mix of the country is also changing over the years - while Coal continues to dominate the scene, the Governments attempts towards diversifying and increasing the share of clean energy has resulted in proportion of Renewable Energy increasing in the overall mix growing steadily in recent times.

Wind Energy India

India with installed capacity of 36 Gw, is the fourth largest Wind energy market in the world in terms of installed capacities. The countrys capacities has grown at a CAGR of 11% over the last 5 years, on the back of supportive Govt. policies and the nations attempt towards increasing the share of RE in the overall energy mix. Over the last decade, wind has become the largest contributor to renewable energy capacity additions in India. It presently constitutes around 46% of the countrys overall RE capacity.

The capacity addition till 2017 were through Feed in Tariff (FiT) mechanism. Subsequently, the tariff regime has been shifted from Feed-in-Tariff (FiT) to bidding route. Since then, the tariffs for wind energy too have reduced by 50% in less than 1 year. Both wind and solar energy tariffs are now less than the conventional sources. Introduction of competitive bidding has helped the renewable energy tariffs to achieve grid parity.

As per Industry reports, India is expected to add another 14 GW-16 GW of Wind Energy capacities over FY19-23.

Wind potential of India is estimated as more than 300 GW at a hub height of 100m. And as such the Government has been undertaking steps towards boosting the Renewable Energy / Wind Energy generation in the country. Some of the measures include a mix of fiscal and financial incentives which includes, concessions such as 80% accelerated depreciation, concessional custom duty on specified items, income tax exemption for 10 years, etc. In addition, State Electricity Regulatory Commissions (SERCs) are determining preferential tariffs. Indian Renewable Energy Development Agency (IREDA) provides loan for setting up wind power projects.

However, despite the potential and Government support the sector has to grapple with challenges surrounding grid Integration, project viability following over aggressive bidding by developers, scheduling and forecasting and fragile financial position of the Discoms. The limitation of power grids makes it difficult to successfully generate wind energy in India. The fluctuations in voltage and grid frequencies are major challenges. This means that the wind energy that is being generated is not being efficiently delivered to the consumers and there is a lot of wastage. The scalability and sustainability issues associated with all forms of renewable energy are also the problems associated with wind energy.

Solar Energy India

India is the second largest Solar Energy market in the world in terms of installed capacities, having overtaken the USA recently. As of March 2019, Indias grid connected solar capacity stands at ~ 28 GW, as compared to 9 GW in 2015; with another 40 GW of solar power being at different stages of bidding and installation. Over the FY15-19 period installed capacities has grown at a CAGR of 66%. The stellar growth was primarily driven by supportive and growth centric policies of the Government and drop in panel prices. The technology required to efficiently convert it into a usable form of energy is very complicated, and the initial investment can be dauntingly expensive. It is for this reason that the industry requires a certain degree of government support, and fortunately, the Government has obliged. Some of the key initiatives / measures include

• Development of Solar Parks and Ultra Mega Solar Power Projects

• No inter-state transmission charges and losses to be levied for solar and wind power

• Bank loans up to a limit of USD 2.3 million will be given to borrowers for purposes like solar based power generators, biomass based power generators, wind power systems, micro-hydel plants and for renewable energy based public utilities viz. Street lighting systems, and remote village electrification

India has also set an ambitious target for itself, of achieving 100 GW of solar power by 2022.

Due to its favorable location in the solar belt (400 S to 400 N), India is one of the best recipients of solar energy with relatively abundant availability. Every year, India is showered with about 5,000 TWh of solar power. The Indian Solar Loan Programme is one of the most impressive programmes supported by the United Nations Environment Programme. It has also won the Energy Globe Award for Sustainability.

Further, in addition to solving Nations energy requirement Solar Energy sector also has immense potential to create new jobs; 1 GW of Solar manufacturing facility generates approximately 4,000 direct and indirect jobs. In addition solar deployment, operation and maintenance creates additional recurring jobs in the sector.

Business Overview

Wind Energy Business

OGPL, ranks amongst the countrys leading wind energy generating companies with assets aggregating 425 MW as of March 2019. The Companys wind assets are also located across some of the best wind sites in the country. Further, the Companys asset comprises a mix of installations by leading suppliers.

Update - Transition Phase

OGPLs journey towards transforming its business is progressing well. The journey which commenced in FY15 has seen the business make steady progress towards improving its cash profit, reducing its interest outgo and improving its liquidity profile.

OGPL post selling off the Biomass business is now a pure play Wind Energy generating Company. With assets placed across some of the best wind sites in the country, the management is now fully geared up towards consolidating its leadership position in the business. Exit from biomass has also resulted in improving the profitability, return ratios and financial profile of the Company. The Company is now much, leaner, agile and growth focused and is undertaking all the requisite measures towards reviving the business. Further, with improving business environment in terms of better grid availability, introduction of bidding mechanism, buoyancy in REC market, the Company is well on track towards delivering steady consistent returns. The wind business now continues to operate in an environment wherein grid availability continues to remain elevated - 95% plus on a consistent basis. Financially viable tariff rates for both the consumers and wind project developers alike has spurred the demand for renewable energy in turn leading to a healthy and sticky demand curve for the business. Lastly, the revival in REC market on the back of favorable demand - supply has also helped ease the Companys liquidity and cash flow profile. Stringent actions on the part of regulatory organizations have ensured REC emerges as an ancillary revenue stream for the Company. Steady demand coupled with limited supply resulted in majority of the certificates getting traded above their floor prices. For the fiscal year 2019, the Company liquidated its entire REC inventory - garnering revenues worth Rs. 2,860.23 Lakhs at an average price of Rs. 1,200 per certificate. The revenue would have been even higher had it not been for cyclone Gaja which resulted in lower units generation ~400 lakh units.

Further, the Company is also in discussion with the bankers for reducing its average cost of debt. The Company has been successful in lowering its debt for five consecutive years which has strengthened the balance sheet and gearing ratio. In recent period we have also been able to refinance loans which were restructured under 5/25 scheme amounting to Rs. 76,438.00 lakhs. The combination of the above measures have resulted in not only improving the profitability of the business, but at the same time has also eased and improved the liquidity profile of the Company as well. A look at the Financial Profile since FY14-15 clearly shows a steady decline in debt each year for the last 6 consecutive years. We expect the liquidity position to be fairly comfortable on the back of the above measures.

In light of the above developments, with most of the legacy issues getting addressed and macro environment improving the Company is now well positioned to chart a new course for itself; a path which will be more profitable, consistent and value creative for all its stakeholders.

REC Mechanism -

Renewable Energy Certificate (REC) is a market-based instrument promoting renewable energy. The mechanism aims to enable obligated entities to meet their requirements of generating a percentage of power from renewable sources. Where entities are unable to set up projects themselves to generate the required proportion of renewable power, they can purchase RECs for the shortfall. One REC certificate is treated as equivalent to 1 MWh. REC certificates are bifurcated into solar RECs and non-solar RECs. RECs are sold by entities by eligible renewable energy projects only.

Human Resources

The Company believes and views its employees as its most important assets. As of March 2019, OGPL has a work force of 53. The Company practices best in class HR policies focusing on the overall well-being of the employee. The key aspects of HR include recruitment, training and development and compensation.

The competency development of the employees continues to be a key area of strategic focus for the Company and as such undertakes requisite training and development exercises for its employees. The programs are implemented at all the levels and across all functions. The Company also assigns individual and team goals which are aligned with the overall mission of the business - which not only fosters healthy competitiveness amongst individuals but also acts as a team building exercise, ultimately leading to a productive organization.

Further, the Company has also established a transparent working environment as it believes that employees voice and feedback are extremely important.

The end result of which is high employee engagement levels and lower employee turnover ratio.

Internal Controls and adequacy

The Companys internal control framework supports the execution of the strategy and ensures regulatory compliance. The foundation for internal control is set by the risk management framework, financial control, internal audit and supporting policies.

The overall aim of the companys internal control framework is to assure that operations are effective and well aligned with the strategic goals. The internal control framework is intended to ensure correct, reliable, complete and timely financial reporting and management information. The framework endorses ethical values, good corporate governance and risk management practices.

It also has an effective audit committee in place which carefully scrutinizes audit reports submitted by the internal auditors. The committee is empowered to follow up and implement progressive measures to further elevate the standards of internal controls.

The internal control system is supplemented by an extensive program of internal audits, reviews by management, and documented policies, guidelines and procedures.

Managements Responsibility Statement

The management is responsible for making the Companys consolidated financial statements and related information mentioned in this annual report. It believes that these financial statements fairly reflect the form and substance of transactions, and reasonably represents the companys financial condition and results of operations in conformity with Indian Generally Accepted Accounting Principles / Indian Accounting Standard.

Safe Harbour

Some of the statements in this Annual Report that are not historical facts are forward looking statements. These forward looking statements include our financial and growth projections as well as statements concerning our plans, strategies, intentions and beliefs concerning our business and the markets in which we operate. These statements are based on information currently available to us, and we assume no obligation to update these statements as circumstances change. There are risks and uncertainties that could cause actual events to differ materially from these forward looking statements. These risks include, but are not limited to, the level of market demand for our services, the highly competitive market for the types of services that we offer, market conditions that could affect our services, our ability to create, acquire and build new businesses and to grow our existing businesses, our ability to attract and retain qualified personnel, currency fluctuations and market fluctuations in India and elsewhere around the world, and other risks not specifically mentioned herein but those that are common to any industry.