Yield-seeking funds and financial investors flush with capital are driving up valuations, by bidding higher Ebitda multiples in the backdrop of global investors’ focus on ESG investing
India’ green energy deals are getting better valuations than pre-covid levels, as yield-seeking funds and financial investors flush with capital are driving up prices; according to several deal makers, analysts and chief executives of clean energy firms Mint spoke with.
These investors with a lower cost of capital are bidding higher Ebitda multiples than what they were quoting before the pandemic. This assumes significance given that India is running the world’s largest clean energy programme. Ebitda is earnings before interest, tax, depreciation and amortization.
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Experts say there is a definitive long-term shift towards the renewables story, and many Indian renewable energy players are mastering their business models to justify higher valuations.
“With the long-awaited good news on vaccines, emerging clarity on the US presidency, decisive actions by the governments across the world in dealing with the pandemic and excessive cash in the system, there is overall exuberance in the markets over the past couple of months," said Rajesh Ivaturi, partner, power and utilities at EY India.
Despite India’s green energy space facing a myriad of issues, dealmaking has gathered frenetic pace against the backdrop of global investors’ focus on ESG (environmental, social and governance) investing.
“Investors are flush with funds, especially post covid as they see their investments in fixed income yields dropping to 2% or negative returns in many countries. ESG has started playing a huge role in minds of investors," said Hero Future Energies Pvt. Ltd chief executive officer Sunil Jain.
Hero Future Energies is exploring a fresh stake sale in its clean energy business as reported by Mint earlier.
“The investors are willing to invest at lower returns in renewables (which incidentally also is like an annuity yield) but much better than fixed income yields. Of course, they price in the country and currency risk while investing in India, but even after that, returns for developers have improved as has the appetite of investors in the Indian renewables market," added Jain.
This also comes at a time when the incoming US President Joe Biden has promised a ‘clean energy revolution’ with his campaign promise of recommitting to the Paris Agreement on the first day of his administration.
“Green is the new oil and with the victory of Biden in US Presidential elections, ESG investors are pouring in money into renewable energy and avoiding coal and oil and gas, and other traditional energy players," said Vineet Mittal, chairman, Avaada Group.
“The ESG funds are overweight on Asia compared with the developed markets due to large scale and growth in Asia and it is expected to continue to grow the fastest in coming years. A weaker dollar also helps the investment," added Mittal, whose firm Avaada Energy Pvt. Ltd plans to raise about $220 million by selling a stake in the clean energy company.
Some of the large deals and transactions in play as reported by Mint include Hyderabad-based Mytrah Energy India Pvt. Ltd looking to appoint Barclays Bank to sell a majority stake and Goldman Sachs-backed ReNew Power Ventures Pvt. Ltd exploring an overseas listing.
“Financial investors with a lower cost of capital are bidding higher Ebitda multiples than what they were quoting before the pandemic. One can’t compete at these prices," said the head of a large clean energy platform requesting anonymity. The firm had had to opt out of an ongoing sale process.
Some experts, however, remain circumspect.
“Globally, there is a marked increase in ESG investments leading to some interest in Indian renewables, which is one of the fastest growing renewable energy markets in the world. But in India, the supply of renewables papers still exceeds the demand from growth investors and renewables IPOs have not yet commenced," said Kuljit Singh, transactions partner at EY, in an emailed statement.
“Ultimately, Indian renewables developers will have to identify unique investors and will need to bring out some differentiation if they have to raise growth capital; else, some of them will have to settle for M&A sales at relatively lower multiples," Singh added.
An investment of Rs4.7 trillion has been made in India’s renewable energy space over the last six years, with an expected Rs1 trillion investment opportunity annually till 2030.
This also comes at a time when India’s solar power tariffs hit a new record low of Rs2 per unit last month during a bid conducted by state run Solar Energy Corporation of India Ltd.
“Indian renewables sector is seeing enhanced levels of interest from domestic and international investors as evidenced by the lower tariffs discovered in recent auctions. The M&A market is also active with a number of willing buyers and sellers leading to efficient price discovery," said Sanjiv Aggarwal, partner at private equity major Actis and head of its Asia energy business.
Actis, which invests only in emerging markets, has been very active in the country’s clean energy business, and has also emerged as a front runner to acquire a majority stake in Finland’s state-controlled power utility Fortum Oyj’s 500 MW Indian solar projects.
“The valuations offered today are better than the pre-covid level offers. Two things benefit from lower interest rate regimes—one is high growth stocks and the second thing they favour is the high and secured yield," said the promoter of a large clean energy platform that is seeking buyers.
Experts also suggest caution due to issues such as power procurement curtailment, delayed payments and tariff-shopping by distribution companies (discoms).
“This is indeed a great opportunity for the Indian renewables sector to attract low-cost capital given the overall low interest scenario across the world. However, we need to be cautious about the legacy issues of the electricity sector and it is really incumbent on the government to continue towards market-based reforms in the electricity sector to ensure its long-term viability and meet the investor expectations," said Sanjeev Aggarwal, founder and chief executive officer of Amplus Energy Solutions.
Malaysia’s state-run oil and gas company, Petroliam Nasional Bhd, or Petronas, owns Amplus, one of India’s largest rooftop solar power producers. It is also looking to invest in Tata Power’s renewable energy infrastructure investment trust (InvIT).
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