ReNew to retire debt, build M&A warchest with proceeds from planned IPO

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India’s largest renewable power company, ReNew Power, aims to deploy the funds through a planned initial public offering (IPO) of its equity on acquisition and to diversify into allied sectors.

Borrowing cost had spiked to Rs 8.3 billion during FY17, against Rs 5.3 billion in FY16. As on December 31, total borrowing was Rs 151 billion.

ReNew had filed for an IPO last month and plans to raise Rs 260 billion from the market. Of the net proceeds, it will utilise Rs 19.5 billion for redemption or early redemption of debentures issued by it or by subsidiaries. Last year, it closed a non-convertible debenture issue of Rs 22.35 billion to raise debt for projects.

“We intend to continue our expansion through active evaluation of inorganic (mergers & acquisitions) growth opportunities,” ReNew mentioned in its draft prospectus.

The firm has also said might consider expanding into adjacent verticals in the renewable energy (RE) value chain, “transmission and distribution infrastructure, energy storage,  thir-party engineering procurement construction, and operations and maintenance contracting, to develop new growth areas”.

“If the company is using the proceeds from fundraising for redemption of debenture issues, it’s a wise decision. Retail (individual) investors would derive comfort from the marquee institutional shareholders, (presuming) due-diligence would have been performed by them,” said Dara J Kalyaniwala, vice-president of investment banking at PL Capital Markets.

Since inception in 2012, the project capacity of ReNew has increased to 5.6 Gigawatt (Gw). This includes the two acquisitions it made recently — KCT Energy (103 Mw) in 2017 and Ostro Energy (1,100 Mw) in April 2018. It also acquired four entities of Vikram Solar Group, Shruti Power Projects and Helios Infratech in 2016. In the same year, it also acquired all voting shares of Sunsource Energy Services.

For the DRHP, the firm has mentioned its portfolio till March 2017, which is 3,921 Mw. ReNew, founded by Sumant Sinha, is also promoted by Goldman Sachs, which has 48 per cent stake.

The firm has 540-Mw project acquisitions in pipeline that include 60 Mw projects of SREI Infra and 40 Mw of India Energy (Mauritius). However, as it prepares to be the first RE company to be listed in India, it has also seen profits slide 44 per cent in FY17 to Rs 509 million, against the previous year. In FY15, its loss was Rs 416 mn. Income from operations, however, doubled during the same period but so did the finance cost to back inorganic growth and highly-competitive bidding. Earnings before interest, taxes, depreciation and amortisation was Rs 13.1 billion, a 76.3 per cent increase over the previous financial year. Finance cost rose to Rs 8.25 billion during FY17, over Rs 5.3 billion during FY16.

ReNew said its finance costs increased majorly due to an increase in bank borrowing and other loans for financing new wind and solar energy projects, and refinancing of existing loans, among others.

As the business is heavily dependent on cash flow from the sale of power, which in turn is proportionate to the financial health of state power companies, ReNew’s income generation is likely to remain steady but unpredictable, according to a sector expert.

In addition, there is constantly falling rates in solar energy and introduction of competitive bidding in wind power. Lower rates affect the internal rate of return (IRR) for project developers. According to market estimates, IRR at the current Rs 2.5 per unit stands at 8-11 per cent.

“In the past, we have experienced delays in the receipt of payments from state electricity distribution firms, including in Maharashtra and Rajasthan. Non-payment or delay in payment under our power purchase agreements could negatively impact our results,” ReNew has mentioned in its prospectus. Trade receivables spiralled to Rs 4.6 billion (as on March 2017) due to delays in payments from state electricity distribution firms. Of this, a major chunk is overdue for more than 90 days.

“RE is a nascent sector and that should ideally work in favour of the company. The pricing would be a factor of return on equity and return on capital employed,” said Kalyaniwala.

In Numbers
  • Rs 260 bn: Amount ReNew plans to raise from market
  • Rs 19.5 bn: Amount company aims to spend for redemption of debentures
  • 2: Number of energy companies it acquired in 2017 
  • 44%: Decrease in company's profit against the previous year’s
  • 55%: Increase in finance cost, against the previous year’s

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