Financial risks building up at the wrong time

24 January 2022 |

Listed renewable IPP stocks have taken a battering in the last few months. ReNew stock touched a low of USD 5.65 this week after listing on NASDAQ in August 2021 at USD 8.50, a fall of 33%. Azure stock fell from a high of USD 48.39 in January 2021 to USD 15.55 this week, a fall of 70% in one year. Both stocks are down between 36-44% over the broader indices in the last four months. Another prominent listed stock, Sterling & Wilson, has done relatively better but that could be partly attributed to Reliance announcing a 40% investment stake in the company in October 2021. Nevertheless, the stock is still down 48% over its issue price, in just two years since its IPO.

  • Falling module prices and interest rates policy have inured investors to growing risks in the sector;
  • Monetary tightening poses a major short-medium term risk for project developers and capacity addition prospects;
  • The government must find a way to correct course on power distribution and policy fronts to ease the impact of financial volatility;

The biggest reason for the price crash is proposed monetary tightening by the US Fed in response to inflation concerns. Financial markets have been kept afloat in the aftermath of COVID by the extraordinary monetary stimulus provided by central banks. But as inflation escalates owing to supply side disruption and demand pick up, and rates tighten, yield expectations are going up. Investment sentiment towards renewables has also turned negative for a couple of other reasons. Future of the fiscally expansionist US Build Back Better Bill, which earmarked USD 555 billion in federal government spending towards renewable energy and clean transport incentives, seems uncertain. The Bill is being pruned down over affordability concerns. The market is also anxious over module cost spikes caused by supply side disruption in China and various direct and indirect trade barriers. As a consequence, international renewable stocks have fallen precipitously across the value chain. But the Indian stocks seem to have fallen by a relatively higher proportion. Valuations are more reasonable now at about 8-9x EV/ EBITDA but the if the market sentiment remains negative, prices may stay depressed for some time.

Figure: Relative stock price movement against US and Indian indices (2021)

Source: BRIDGE TO INDIA research

We have maintained for some time that investment sentiment in the sector has been fired by twin engines of falling module prices and interest rates. Despite a plethora of policy and viability risks, these two factors have sustained investment appetite and boosted valuations. A negative outlook on both fronts therefore has dreadful implications. The disconnect between investment euphoria and ground level reality seems to be disappearing. Many developers including Tata Power, NTPC, JSW Power and Sembcorp, amongst others are aiming to list their renewable businesses in the near future. Valuation compression could make raising capital extremely difficult and threaten plans to scale up activity by 3-4x in the coming few years. Although the government is bound to ignore stock price movements, depressed valuations should be food for thought for the policy makers. By correcting course on distribution side reforms and providing policy certainty, the government can ease the impact of financial volatility.

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PS The other major listed renewable stock, Adani Green, mysteriously remains immune to market movements. Since September 2021, the stock has gained 80% to reach market cap of USD 41 billion, which defies all logic.


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