Green capital chasing companies

Last week, Thailand-listed Global Power Synergy Public Company announced the acquisition of a 41.6 per cent stake in Delhi-based Avaada Energy through its subsidiary Global Renewable Synergy Company. Avaada has 1.4 Gw of operational solar generation capacity and about 2.4 Gw of under construction projects.

Analysts believe the approximately ~3,374-crore deal was done at 9x enterprise value (EV) to Ebitda (earnings before interest, tax, depreciation and amortisation) multiple.

Avaada is owned by Vineet Mittal, who as part of the Welspun group was behind the setting up of 151-Mw Neemuch Solar Plant in Madhya Pradesh.

In February, a Goldman Sachs-backed Renew Power deal with RMG Acquisition Corporation II (or RMG II) was at a slightly higher 9.7x Ev/ebitda multiple.

“The 10x Ev/ebitda multiple is on the higher side. Most deals probably happen at 8.5-9x. But it also depends on how Ebitda is defined and whether all projects are operational or under construction projects have also been factored in. If you were to assume all are operational projects, then 8.5 to 9 is realistic,” said a senior executive in a PE firm.

In the case of Renew Power, the forward Ebitda of FY22 was taken as the basis of calculation.

For under construction projects with an internal rate of return of 10-12 per cent, 8.5-9x Ev/ebitda multiple is the top end in the private market.

“It could be different in the public market. When an investor is putting in money, he is putting it in for both constructed and under construction projects,” said the executive. The merger with the special purpose acquisition company, RMG II, will make Renew Power a Us-listed firm. The overall $1.2 billion equity proceeds include a private investment in public equity of $855 million. Another $345 million will be through cash held by RMG II. The transaction reflects a $4.4 billion postmoney equity valuation for Renew and an enterprise value of $7.8 billion.

When Renew came out with a draft prospectus in 2018 for an IPO in the Indian market, it said its equity investors had by then put in a total of ~6,697 crore ($898 million) in the company.

Anuj Upadhyay, institutional research analyst at HDFC Securities, however, says renewable companies earning a 13 per cent internal rate of return on equity usually get an EV to Ebitda ratio of 10x.

“For companies like NTPC that do not have much debt, this multiple is 8x. For Adani Green which has higher debt and whose renewable capacity will be half of what NTPC capacity will be by 2030, this valuation parameter is 33-35x,” said Upadhyay. He said returns will be higher than 8x once NTPC Renewable is listed.

For domestic institutional investors used to a 15-16 per cent return (which is also a prudential requirement), a 10 per cent return is not attractive, says Upadhyay. The reason is that the output in renewables is not consistent and the regulatory regime is also still evolving.

Upadhyay says FIIS, PE and others would probably get 7-8 per cent in other markets, so they are better off investing in India. Globally, there is about $35 trillion chasing firms with high ESG scores.

Investors will need to lower return expectations because there is so much capital chasing projects in India. “A little down the road, the competitive intensity could reduce and return expectations would again go up. In 2018, the market had become very competitive but then it improved as equity availability reduced,” said the executive quoted earlier.

Sanjiv Aggarwal, partner, energy, with investment firm Actis, says one of the reasons capital availability and competition have increased is that even players like NTPC are moving away from their carbon fuel business and getting into renewables.

“All energy firms are keen to show more investment in green energy. In developing Asia, apart from China, India is the only market that offers scale in that 1-2 GW capacity or higher can be built. In no other Asian market do you get these kinds of capacity allocation,” he said.

According to him, India offers the right kind of risk-return profile which is why his company likes to invest here. “There are periods when the market becomes very competitive and we decide to sit out on auctions till the risk-return profile returns are at a better level. Overall, India is a very attractive market for us,” he said.