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RE market forced to consolidate through the primary route


13 November 2018 | BRIDGE TO INDIA

RE market forced to consolidate through the primary route

In the first nine months of this year, 10,081 MW of utility scale solar capacity has been auctioned, up nearly 70% over the entire year 2016. A close look at the auction results shows some very interesting trends – despite the sharp increase in auctioned capacity, number of winning bidders has fallen to 26 from 49 two years ago. Average winning bid size has increased to 124 MW from 63 MW. And market share of top five developers has increased to 65% from 47% in 2016.

  • Smaller players are being squeezed out by adverse risk profile, increasing volatility in the sector and stagnation in secondary market activity;
  • With M&A activity being relatively slow, consolidation is being dictated by the primary market;
  • As much as 50% of total wind and solar capacity may be stranded if current owners are not able to find successful exits;

Figure: Top winning developers in utility scale solar auctions

Source: BRIDGE TO INDIA research

Market consolidation is a sign of evolving maturity of the Indian solar sector. Competitive bidding and capital-intensive nature of the sector mean that scale is becoming increasingly more important. Larger players benefit not only from procurement and execution efficiencies but also greater access to financing and better ability to absorb risks. The smaller players are unable to cope with adverse risk profile and increasing volatility in the sector.

An especially interesting aspect of this consolidation is that it is being dictated by primary market. The secondary route ie, M&A has failed to take off, unlike in most other countries. Deals have been held back by mismatch in valuation expectations, poor corporate governance norms and sub-standard construction quality. That scenario is unlikely to improve anytime in the near future particularly as interest rates are on the way up. In a declining rate environment, refinancing provided a sweet upside to the sellers and acted as a deal catalyst. But the trend has reversed. We estimate that a 2% increase in senior debt cost can depress equity valuation by as much as 15%.

Our research shows that successfully completed M&A deals in the last


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