India is the country with the second-largest population in the world, and it is on track to become the largest. It also currently ranks as the world's third-largest electricity market. The overall growth of the country's economy is robust and is estimated to come out to 6.9% for the full year with real GDP having grown 7.7% during the past three quarters, according to the country's government data.
Despite being still a developing country and having low per-capita electricity consumption, India's electricity demand is rapidly increasing and expected to double within the next 12 years, according to India's Economic Times news outlet. India has made significant strides in renewable energy, ranking third in the Renewable Energy Country Attractive Index for 2021, while also being the world's third largest energy-consuming country. India has the fourth largest country globally in installed renewable energy capacity, including large hydro, wind and solar power capacity.
A leader in renewable energy adoption
India has pledged to achieve a target of 500 gigawatts of non-fossil-fuel-based energy by 2030. India saw the highest year-over-year growth in renewable energy additions in its history in 2022, with an increase of 9.83%. The country's installed renewable energy capacity, including large hydro, has increased by 396% over the last eight and a half years and stands at over 174.53 gigawatts as of February 2023.
Normally, India does not allow more than 75% foreign-owned business to operate in the country without specific government permission. However, foreign direct investment (FDI) of up to 100% is permitted in the renewable energy industry, with no prior government approval required. This shows that the renewable power generation sector enjoys strong government support.
ReNew: India's top renewable energy player
ReNew Energy Global (RNW, Financial) is the largest player in the Indian renewable energy industry. ReNew specializes in bulding and operating large-scale wind and solar energy projects. At present, the company has 7.3 gigawatts of operational capacity and a market capitalization of $2.13 billion. ReNew currently holds the largest renewable net operating capacity (solar, wind and hydro) in India and is committed to additional development of 6.1 gigawatts of projects which are expected to come into production by 2025.
ReNew faces competition from other providers, including pure-play renewable companies such as Azure Green Energy (AZRE, Financial) and conglomerates like Tata Power Renewable (TATAPOWER) and Adani Green Energy (ADANIGREEN). However, ReNew's energy portfolio is one of the most diversified among its competitors, with a nearly equal split between solar and wind energy generation. This diversification may enable ReNew to benefit from different technological advances and mitigate risks associated with specific energy sources, such as the increase or decrease in solar PV module prices as well as government import policies and incentives.
ReNew's long-term power purchase agreements (PPAs) with its customers typically have contract durations of up to 25 years. This is an essential part of the company's strategy to ensure stable cash flows and maintain a robust competitive position over the long term. This way, ReNew can carry high long-term debt as long contracts carry stable cash flows. However, counterparty risks to these PPAs remain and need to be monitored carefully as some of the Indian state owned power distributors have precarious financials. The following chart shows ReNew's total portfolio as well as PPA customers (counterparties).
ReNew is implementing an ambitious plan to extend its presence throughout the green energy industry by both backward and forward integration. This would give the company greater control over supply and demand, and it has applied for a production-linked incentive to manufacture wafers, cells and modules in-house. By doing so, ReNew aims to have the power to set prices, minimize supplier risk and reduce the impact of customs duties on solar cells and modules. If successful, ReNew's ability to self-manufacture could reduce costs and increase revenue. Additionally, it could help win government-related projects due to concerns over energy security and nationalistic sentiment. Smaller competitors who lack this capability are at risk from ReNew's initiative.
Green hydrogen initiatives
ReNew has recently set up a partnership with Indian construction giant Larsen & Toubro (LT) to jointly develop, own and operate green hydrogen projects following the Indian government's announcement of its Green Hydrogen Policy. This policy targets the production of 5 million metric tonnes per annum of green hydrogen by 2030, and ReNew's partnership with Larsen & Toubro demonstrates its ability to capture new long-term growth opportunities and establish itself as a vertically integrated green energy leader in India.
Valuation and financials
ReNew started trading on the Nasdaq via a special purpose acquisition company (SPAC) merger on Aug. 24, 2021 at an initial price of $9 per share and market cap of $4.5 billion. The company raised about about $1 billion from its public listing on the Nasdaq (with about ~$700 million accruing to the company after the de-SPAC transaction). It was the first Indian renewable company to go global and get listed in the U.S. market. ReNew combined its business with RMG Acquisition Corporation II, a SPAC company, which had raised $345 million in its Dec. 14, 2020 IPO in the U.S.
The company is currently not profitable on a GAAP basis, but the operating cash flow (as shown in the yellow bars below) is ramping up quickly. The current market cap is $2.1 billion with debt of $5.59 billion. The company's cap rate (OCF/enterprise value) is currently 12%, showing strong cash generation. This cap rate compares quite favorably with other power producers in India and outside India.
ReNew's operations are very capital intensive, so the company has taken on heavy leverage. The equity-to-asset ratio is 0.16 and the debt-to-equity ratio is 4.25. The following chart illustrates the liability and equity side of the balance sheet.
In terms of major institutional shareholders, the Canada Pension Plan Investment Board (CPPIB) recently announced it has become the majority owner of ReNew, agreeing to buy $268.6 million worth of shares from Goldman Sachs (GS, Financial) on March 2, 2023. With this, the CPPIB will own 51% of ReNew's outstanding shares. CPPIB first invested in ReNew in 2018, after the company aborted its India IPO plans, deploying around $392 million at a $2.2 billion valuation. Being domiciled in India then, the per-share price for the transaction for the private company was 410 India rupees. Goldman Sachs was a pre-IPO investor in ReNew, but now after this transaction it's out. Abu Dhabi Investment Authority owns about 15.1% of the shares and JERA Co., Japan's largest power company, owns 7.36%.
Conclusion
ReNew Energy is an interesting opportunity to gain exposure to the fastest growing large economy in the world. The company's shares are accessible via the Nasdaq, and it has the CPPIB as the majority owner. The CPPIB is a sophisticated, long term investor, and its ownership gives me more confidence in the stock.
The stock is currently selling at substantially below its de-SPAC price, making the valuation attractive on a risk-adjusted basis according to my analysis. The cap rate is very good at ~12%. Renewable energy is currently the cheapest form of energy in India and enjoys strong government support. The company has large ambitions to become an important power producer in India, which has vast and rapidly-growing electricity demand.
As the company matures, I believe it can become a strong earnings generator, which explains the interest of pension funds like the CPPIB. Of course, India is a developing country subject to booms and busts, and there is ever present foreign exchange risk. A large portion of the debt is denominated in U.S. dollars and thus in a source of vulnerability if the value of the U.S. dollar should rise versus the Indian rupee.
