20 June 2016 | BRIDGE TO INDIA
As the Indian solar sector grows, there has been growing pressure on Indian project developers to churn their capital. The merger and acquisition (M&A) activity in the sector is gathering pace and it is believed that as many as 3,000 MW of projects are on sale right now. Last week, a report quoted that IDFC Alternatives, an Indian private equity fund, is in advanced discussions to buy 275 MW of solar assets from Acme Solar (refer). This comes on the heels of successful closure of Welspun’s sale of 990 MW of solar assets to Tata Power (refer) and another reported sale of 337 MW of renewables capacity by NSL to Brookfield Asset Management.
- Sale of post-development renewables assets is a time-tested and proven method to free up capital but there have been very few successful exits in India
- The Indian solar market is shifting gears to move into the next phase of its development and a liquid secondary market is essential for its sustainable growth
- A few more successful deals and/ or listings will help set more industry benchmarks, act as a proof of concept and attract other investors to the sector
There are essentially two routes for project developers to recycle their investment and free up capital for future growth. Sale of post-development renewables assets is a time-tested and proven method in other countries. It is relatively quick and easy with a highly standardised approach but India does not have the kind of domestic patient capital – typically utilities and pension funds or insurance companies looking for long-term predictable cash flows – needed for buyout of such assets. International pension and insurance funds have been the mainstay of secondary markets worldwide, but so far they have stayed out of India. Public listing of businesses or special purpose investment vehicles is another viable option with many successful international examples (NRG Yield, NextEra Energy, Abengoa Yield, Pattern Energy Group and TransAlta Renewables in the USA) but so far, there is none in India. Indian renewable IPPs have not been able to muster the scale or profitability to successfully list on stock exchanges.
The lack of secondary capital raising options has been a big concern. Other than the transactions listed above, examples of successful exits in the sector have been very few so far. Sembcorp, the Singapore based utility was a notable exception when it bought majority control in Green Infra with a total capacity of 516 MW in 2014. Part of the problem is the big gap in valuation expectations of developers and secondary market investors. Competitive bidding nature of the Indian market means that margins are relatively thin to pay a reasonable premium to initial developers as well as a satisfactory risk adjusted return to secondary investors.
It appears that things are beginning to change slowly. With yields in their home markets at all-time lows, international pension and insurance funds are eyeing Indian investments. Some transactions have already fructified in the road sector (refer) and we believe that solar transactions are not far away. Meanwhile, Azure Power and Renew Power are believed to be planning an Initial Public Offering (IPO).
The Indian solar market is shifting gears to move into the next phase of its development and a liquid secondary market is essential for its sustainable growth. A few more successful deals and/ or listings will help set more industry benchmarks, act as a proof of concept and attract other investors to the sector.