Renewable energy (RE) continues to make headlines in India, and increasingly so since Andhra Pradesh (AP) signaled its intention to renegotiate RE Power Purchase Agreement (PPA) tariffs via an order dated 1 July, 2019. A single state looking to retrospectively renegotiate contracted power sale prices can have a ripple effect and dampen investor sentiment for the entire sector. As a result, 2019 saw a range of RE-related headlines, including ones predicting the sun setting on solar in India, calling out heightened default risk for RE, stoking the fear that non-performing renewable energy assets (RE NPAs) will impose a burden on banks, and highlighting the increased financial woes of the RE sector in general. Such headlines preceded the order issued by the AP government, and they only grew in number after it was announced.
Given this, it would be reasonable to assume that investors may have re-evaluated their enthusiasm for RE. After all, why would they increase their exposure to a sector in the face of such a pessimistic outlook? In this context, investors are certainly voting with their feet. However, it appears to be in the opposite direction to where the headlines are pointing.
Consider the following four trends that are playing out in the RE space in India:
Trend #1: Outperforming developer stock prices
There are only a few large India-focused RE developers with shares traded on stock exchanges, with Adani Green and Azure Power being the most notable. The former is listed in India, and while the latter has an overseas listing, its operations are entirely India centric. Comparing their performance since the beginning of 2019 against the Nifty 50 benchmark paints a telling picture. The benchmark was up 12 per cent as of November end, Azure Power was up 47 per cent, while Adani Green was up a remarkable 333 per cent for the same period.
Figure 1: Adani & Azure vs Nifty 50 (Jan 1, 2019 = 1.00)
Source: CEEW-CEF analysis
In our analysis from August, titled “To IPO or not to IPO”, CEEW-CEF had specifically pointed out that RE developers were looking at segment-level secular improvements in returns on capital despite the sharp decline in PPA tariffs in recent years. We concluded that piece by pointing out that it would be premature to write off the equity capital markets as viable sources of project development capital. It would appear that Adani and Azure’s common equity shareholders, who are last in line in terms of claims over project cash flows (and who should therefore be the most concerned about stress building up in the sector), concur with our view and are not in fact buying the headlines.
Trend #2: New money continues to enter the fray
It is not just existing equity traded on the secondary markets that has attracted investor interest. New primary capital continued to be deployed in 2019 in meaningful volumes. This was done via three broad routes (i) new capital committed to grow capacities in established platforms, (ii) new entrants bidding for capacities, and (iii) entirely new development platforms being announced. Examples of the first route include ADIA and GIC’s USD 495 million investment in Greenko (June 2019); ADIA, Goldman and CPPIB’s USD 300 million investment in ReNew Power (July 2019); Masdar’s USD 150 million investment in Hero Future Energies (November 2019); and CDPQ’s USD 75 million investment in Azure Power (November 2019). In terms of new entrants, after a hiatus, international developer UPC Renewables renewed push into the Indian market via two successful bids for 350MW of solar capacity (January and November 2019), and new local entrant Navayuga Power’s submission of a 500MW manufacturing bid linked to 200MW of solar projects (November 2019) were notable. Finally, Temasek and EQT’s announcement (November 2019) of intent to set up a new RE development platform with an initial USD 500 million capital allocation is an example of the last route.
Trend #3: Overseas bondholders’ continued affinity for Indian RE paper
If investors have an appetite for junior equity in both the primary and secondary markets, it should not be surprising that the appetite for relatively senior debt remains even more robust. The year 2019 saw several billions dollars’ worth of capital raised in the overseas bond markets by Indian RE developers, primarily to refinance project debt. Adani Green’s USD 500 million (May 2019), ReNew’s USD 300 million (September 2019), and Azure’s USD 350 million (September 2019) offerings are just some examples. However, two issuances stood out for the benchmarks they set – Greenko’s USD 950 million offering (July 2019) for its size and Adani Green’s USD 362 million offering (October 2019) for its investment grade rating, structure and 20 year maturity.
Trend #4: Payment delays – India is not just Andhra Pradesh & Tamil Nadu
Contract renegotiation, curtailment, and payment delays represent the three principal risks for operational RE projects. Of the three, concerns around payment delays have garnered their fair share of headlines. In this context, the views of the head of India’s leading RE developer, as shared recently with Reuters, represents one of the most significant commentaries on the subject. This exchange of views first addressed the broader negative impact of attempts by Andhra Pradesh to renegotiate contracts. However, it also went on to observe that “late payments by distribution companies overall was not as severe as it had been a few years ago” and “with the exception of states like Tamil Nadu and Andhra Pradesh, most states have started paying on time”.
In closing, it is true that there are areas of concern in the RE sector in India and that several regulatory and legacy issues of the power sector need both timely and impactful redressal. However, it is equally true that the situation is not quite as grim as many headlines would have us believe. India’s energy markets are deepening and continue to offer large and viable opportunities for investors and financiers alike. Balanced evaluations that weigh both sides of the story are integral to developing a holistic understanding. In fact, a significant cross-section of investors happens to be increasing capital allocations to Indian RE on the basis of precisely such objective assessments. Perhaps it’s time for the rest of us to take a cue from their actions.
At CEEW-CEF, it is our endeavor to present you such balanced and nuanced views on the state of the sector and the emerging market developments. Share your views and comments on the above CEF analysis at [email protected]
