ReNew breaks away from the competition

India’s largest RE developer, ReNew Power, recently completed acquisition of Ostro Energy, a wind and solar project developer with a total portfolio of 1,108 MW. The acquisition, the largest in the sector so far, makes ReNew Power by far the biggest renewable developer in the country with a total portfolio of just over 5,900 MW including capacity under construction. The company is now in the process of launching its IPO in the domestic market.

The Ostro acquisition is likely to be a high watermark for sector M&A for many years due to lack of similar opportunities in the market;
Actis has benefited from attractive wind feed-in-tariffs and excellent market timing to make an estimated 25% annualized return on its investment;
ReNew Power is breaking away from rest of the market through aggressive expansion and fund raising;

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Figure: Commissioned and pipeline capacity of top RE developers as of March 2018, MW

Source: BRIDGE TO INDIA research

We believe that the Ostro acquisition would be a high watermark for sector M&A for some time to come. Very simply, there are few opportunities of this size and quality. Deal closures also remain slow because of wide gulf in valuation expectations and nasty due diligence surprises. Moreover, we believe that interest of the buyers is likely to wane over time – primary project pipeline is looking bountiful and interest rates are beginning to rise.

Ostro Energy was set up by Actis, a UK based PE fund, just 4 years ago. It has been valued at INR 108 billion (USD 1.6 billion), or about INR 97.5 million/ MW of capacity. We consider the gross valuation steep at about 7.5x EBITDA and estimate Actis’ exit IRR at about 25%. That is in large part due to its excellent market timing – it quickly built up a juicy portfolio of feed-in-tariff based wind projects (90%) and has sold out possibly at the market peak.

The Ostro deal caps 2 years of exceptional deal making and fund raising for ReNew Power. It is financing the deal through 100% cash, in part by raising USD 247 million in equity funds from Canada Pension Plan Investment Board (CPPIB). In the last two years, it has completed five acquisitions and raised USD 1.5 billion in overseas debt and equity funding. It is believed to be considering several further bolt-on acquisitions and has won 1,200 MW of new capacity in auctions in the last six months alone. The background to such aggressive deal making lies in the company’s imminent IPO plans. We understand that the company is hoping to get a valuation of around 8.5-9.0x EBITDA.

First domestic IPO of a renewable IPP in many years – Orient Power launched an IPO in 2010 – would be an exciting and much anticipated development. But time will tell whether the company delivers on its bold plans or fails to live up to expectations.

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