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View Points | December 2017

Power-packed M&A thrust

<span style="font-weight: bold;">Renewable energy is likely to witness significant activity in terms of capital-raising and thematic M&amp;As. </span> <p></p> <p> It can be a pure 'make-in-India' story in the making. Ever since the US has decided to pull out of the historic 'Paris Accord on Climate Change,' the weather for the renewable sector in the country is turning out to be exciting.The reasons for this are many. The new and renewable vertical is all set to add new colour to the India growth story going forward.</p> <p>Geographically, the country has the longest coastal line and a bright and shining sun over a terrain of a sub-continental size. If harnessed properly and connected to the national grid, renewable energy can solve the country's long-spell of power shortages and slash its import bill to a sizable extent by relying less on shipping in fossil fuels - be it crude or coal. </p> <p> <span style="font-weight: bold;">Government initiatives</span><br /> A host of regulatory tailwinds add sheen to the country's `Make in India' renewable narrative. For starters, the Ministry of New and Renewable Energy has formed the National Solar Mission with an ambitious target of deploying 20,000 MW of grid-connected solar power by 2022. Further, the government has revised the target of grid-connected solar power projects from 20,000 MW to 1,00,000 MW by the year 2021-22 under the National Solar Mission. Together these initiatives will create an enabling policy framework to make India a global leader in solar energy.</p> <p>The government has also put the wind into the sail of wind power generation under the National Wind Resource Assessment Programme. The ministry, through National Institute of Wind Energy, Chennai and 794 dedicated Wind Monitoring Stations (WMS), has pegged the potential for wind power generation at about 102,788 MW. To cut a long story short, the sun and the wind together will trigger a tectonic shift in the domestic energy vertical. The grid-connected wind power capacity has jumped by 5.5 GW in 2016-17, while solar capacity reached scorching heights of 370 per cent in the past three years.</p> <p> <span style="font-weight: bold;">Benefits to industry</span><br /> There is a binary to the renewable energy story that has been playing out. It can make the country the low-cost manufacturing hub for the world, breathing a new lease of life to power clunker sectors like cement and steel, the core growth drivers of the economy despite their cyclical nature. Solar power tariff is slowly coming down and hit a low of `2.44 per unit while wind power tariff receded to `3.46 per unit. These are major positives for the industry since high energy cost is often cited as major drag on industrial revival and lower capacity utilisation. </p> <p> <span style="font-weight: bold;">Money matters</span><br /> But a major headwind that had been blowing against the not-so-fashionable renewable energy space was the acute fund crunch. But, this to a greater extent was resolved by the entry of `Green Bonds' that primed the cash flow by environmentally responsible funds or environmental, social and governance (ESG) aligned investors into the sector. Market regulator Securities and Exchange Board of India (Sebi) also gave a thumps up to the Green Bonds, or the debt papers being issued for raising funds from capital market for investment in the renewable energy space by allowing the firms to list Green Bonds in the trading platform to inject liquidity and give an easy exit option for investors.</p> <p>Already, a host of firms have raised money by issuing Green Bonds though it is yet to become in vogue with local investment community. But, going forward, with the bonds turning out to be the new green shoots in the capital market by delivering an above average return compared to similar instruments, investment funds and high net-worth individuals (HNIs) are expected to lap up the Green Bonds Already companies like Greenko, IDBI Bank, Axis Bank, NTPC and many others have raised money by issuing these bonds from the market with many more renewable firms waiting on their wings to tap the market.</p> <p> <span style="font-weight: bold;">Investor's delight </span><br /> With a bright map laid out for the future growth with black shadows over the sector, the renewable energy space is fast becoming the green shoot with investors' evincing keen interest in parking their funds in the business. As a natural corollary, growing up in size and scale through arranged marriages and alliances is becoming the order of the day. While some firms operating in the space have already tied the knots, many others are in the look-out for potential suitors to live happily ever after.</p> <p>This rising M&amp;A activity is a direct offshoot of changing scale, maturity and investor class. With substantial thematic mergers and acquisitions, the sector is fast evolving with three distinct themes being discernible - strategic investment by domestic players in third party assets, consolidation and global utilities and funds evincing keen interest in the domestic renewable firms which are up and running.</p> <p>For instance, Tata Power's bulge bracket investment in 30 MW wind asset of Indorama, the Hinduja's picking up stake in the 22 MW solar asset of Fonroche, IDFC's investments in 45 MW solar assets of Punj Lloyd and 24 MW wind assets of Jindal steel are a few key inflexion points in the renewable sector with domestic firms being the prime movers.</p> <p>Sembcorp's investment in Green Infra and Enel Green Power's in BLP energy are also proofs for global funds' growing appetite for a pie in the evolving Indian renewable space. In terms of consolidation to enhance scale, the Tata Power-WelspunRenewable deal and Leap Green taking over Inox Renewables 200 MW portfolios are a case in point.</p> <p> <span style="font-weight: bold;">Bright future</span><br /> If things remain same - with the wind blowing in the right direction and sun shining -- over the next few years, renewable energy is likely to witness a significant activity in terms of capital-raising and thematic M&amp;As. As the sector's scale, return profile and maturity change, the key to succeed will attract the right set of capital-raising avenues and strategic partners to remain competitive and enhance shareholder value.</p> <p>The most exciting episode of the renewable story being played out is that the technology is still in its nascent stage and evolving, which means there is sufficient headroom for future growth in industry with enough space for more players. This will put the sector in the bull's eye triggering more action on the M&amp;A front.</p> <p>The continuing growth in volumes will make clean power cheaper. The dramatic fall in tariffs, rising awareness towards renewable improved storage technology and stricter regulatory framework will change the energy landscape dramatically in the years to come. This will throw up a totally different business eco-system that will be innately distributed and decentralised in nature.</p> <p> <span style="font-weight: bold;">Author: Sapna Seth, Director, Singhi Advisors</span></p>
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