30 April 2022 | BRIDGE TO INDIA
Shell just announced 100% acquisition of Sprng Energy from Actis with an enterprise value of USD 1.55 billion. The company has a portfolio of 2.3 GW solar and wind projects including 0.8 GW capacity in construction. Earlier this month, Tata Power announced USD 500 million investment from Blackrock and Mubadala, equivalent to about 10% stake, in its integrated clean energy platform comprising project development, EPC, solar manufacturing, C&I, solar pump and EV charging businesses. The two deals, the largest in nearly a year, have been closed reportedly at 9x and 12x FY2023 EBITDA respectively. The deals are a proof that Indian renewable sector continues to be a magnet for the world’s largest investors for its sheer size and growth prospects.
The valuations are significantly more attractive in relation to the two publicly held IPPs, Azure and ReNew, both of which are listed in the USA and currently trading at around 7.5-8.0x FY 2023 EBITDA. The deals again raise the fundamental question: what is the optimal ownership model for Indian renewable assets? A public listing is regarded as the ultimate exit by most project developers and investors – significantly better valuation than in private markets (most buy side analysts assign valuation multiples of 12-20x EBITDA to renewable assets), ease of raising further capital (continuous access to capital markets) and operational freedom for the management (no dominant institutional investors).
But a listing on stock exchanges comes with its own set of constraints and uncertainties. Public markets are impatient and, being prone to general market sentiment, can be irrational. Analysts expect a steady quarter-on-quarter jump in revenues and profits. But that is almost impossible to deliver given the dependence of these businesses on a number of exogenous variables – equipment prices, exchange rates, cost of debt, policy flip flops and delays in PPA execution or transmission connectivity. As an example, US-listed Azure and ReNew are taking a beating along with other international renewable stocks because of fears around rate rises and local regulatory regime.
Figure: Relative performance of Azure and ReNew stocks against S&P500 in last 6 months
Source: Google Finance
Trading history of listed power stocks in India also offers a cautionary tale. The power sector has been perennially ridden with acute challenges including delayed payments from DISCOMs, PPA renegotiation, unviable projects and unpredictable policy. Sobered by past shocks, the Indian public market does not quite seem ready to offer heady valuations to renewable stocks. In contrast, private investors are willing to ride out short-term uncertainty and take a longer term view. Moreover, the huge wall of ESG money pouring into the sector offers a readymade put option to private investors.
NTPC and Tata Power are preparing for jumbo listings over the next 1-2 years. Their progress will be interesting to watch for the whole sector.
PS. This note excludes financial deals or valuation of companies involving Adani group. A separate note on valuation of renewable IPPs shall follow in the coming weeks.