Azure Power – A Good Way To Play The Secular Growth Of The India Solar Market
Summary The company has been expanding at a CAGR of 135% since May 2012. India offers huge growth potential with the solar market expected to increase to 100 GW by 2022 from around 5 GW now. One of the largest solar power developers in India with a strong pipeline. Azure Power (Pending: AZRE ) is amongst the largest developers and operators of utility scale solar assets in India. The company has committed to install 11,000 MW by 2022 in RE-Invest 2015. Though this target is more for the galleries than the company’s actual target in my view, the company will still grow tremendously even if it achieves a fraction of that figure. Azure Power started in 2008 and is currently present in the Indian solar commercial and utility sectors. The company has also built medium scale solar power projects in the rural parts of India. Currently the company has presence across 11 Indian states, with 242 MW of projects. Azure Power also has strong links with major USA financial institutions, having raised loans from IFC and US EXIM bank. The company is now thinking of doing an IPO in the US to raise $100 million. India is set to expand its solar industry to 100 GW by 2022, from around 5 GW now. Recently the Indian Prime Minister led the International Solar Alliance proposal in the Paris Climate summit, which shows the country’s serious commitment towards solar. India is expected to have a bright solar future and Azure Power should be a good way to play the Indian story. What Azure Power does Azure Power has presence across the utility and commercial segments and is rapidly expanding in rural India. Its top investors currently are IW Green (in which Mr. Inderpreet S. Wadhwa is the sole member), the World Bank’s International Finance Corp, Helion Venture Partners and FC VI India Venture. The company typically enters into 25-year, fixed price PPAs with government agencies and businesses. The company booked $22 million in sales for the 12 months ended June 30, 2015 and has plans to increase its operating capacity to 520 MW by December 2016. (click to enlarge) Extracts of P&L of Azure Power from F-1 filing with SEC Azure Power operates 17 utility scale projects and several commercial rooftop projects across India. The combined rated capacity of solar projects is 242 MW (out of which 18 MW was distributed rooftop solar). Its 100MW solar power plant was commissioned in Rajasthan in March this year and it also completed the first large scale solar plant in Uttar Pradesh in February 2015 The company has a good track record of completing its projects well ahead of the scheduled due dates. Azure Power has a goal to achieve 1GW and 5GW of projects, operating by December 2017 and 2020 respectively. (click to enlarge) “This is the first large scale capacity project operational under the Chhasttisgarh Solar and we are proud to have successfully brought down the cost of power by almost 64 per cent from Rs 17.91 per unit in 2009 to Rs 6.45 today, for this project.” – Inderpreet Wadhwa CEO Source: Indiatimes Project pipeline as of September 2015 Operational States Capacity (in MW) Punjab 36 Gujarat 10 Rajasthan 140 Karnataka 10 Uttar Pradesh 10 Chhattisgarh 30 236 Under Construction Karnataka 140 Andhra Pradesh 50 Rajasthan 5 Bihar 10 Punjab 28 233 Committed Madhya Pradesh 25 Delhi 3 Punjab 150 178 Commercial Rooftop 18 MW Data from Company’s F-1 filing with SEC Azure Power Positives Strong financial backing – The solar power industry is a capital intensive one and requires massive amounts of equity and debt funding. Azure Power has managed to garner both, thanks to its marquee investors. The company recently won a 150 MW order in AP despite stiff competition. A low cost of capital is essential to win and get good returns from solar power projects. In-house EPC – Azure Power is one of the few solar developers in India with an in-house EPC division. This not only allows the company to lower its cost, but also ensures quality components and design. Most other solar developers in India which are backed by PE investors such as Renew Power, get the EPC done from EPC players like L&T, Mahindras etc. This increases their costs and also sometimes may lead to quality issues. India has massive growth potential – The Indian renewable energy market is going to be one of the biggest markets in the world for the next 25 years. India has committed to make 40% of its total power capacity by 2030 to come through green energy sources. This will mean massive opportunities going forward for all solar players. Currently the Indian renewable energy capacity is less than 15%. Risks Although Azure Power looks promising and has executed well, the company has never been profitable in its limited operating history since 2008. Net losses amounted to $17 million for fiscal year 2015. Other problems common to independent power producers in India are related to land acquisition, regulatory delays and evacuation issues. Though India looks well committed on its target to attain 100 GW by 2022, the company’s profitability will further be affected if India is unable to meet its announced targeted capacity. Another major risk being faced by solar power developers is the increasing competition which has led to very low tariffs being bid in auctions. SBG Cleantech and SunEdison (NYSE: SUNE ) recently won solar tenders with an incredibly low price near 7 cents/kWh, which has been considered as risky by some market analysts. Azure Power which also wins projects through these tenders has to bid low in order to win new projects. US-based SunEdison Inc’s aggressive bid for the tender of 500 megawatts (MW) capacity offered under the Jawaharlal Nehru National Solar Mission (NSM) in Andhra Pradesh has seen India’s solar power tariff touch a record-low of Rs.4.63 per kWh (kilowatt-hour)…Some industry experts raised concerns over the viability of such an aggressive tariff, arguing it could result in further aggressive bids in the auction in Rajasthan-to be held later this year for a capacity of 420MW-given the lower solar park charges in the state compared with Andhra Pradesh. NTPC had invited bids from interested parties to participate in July. Source – LiveMint Conclusion Azure Power is one of India’s largest solar power producers with a massive expansion plan. The company has been considering a listing since June this year . It was one of the first players to enter the solar power generation in India. It has a leading market share in India with a good track record in project development across utility scale, commercial rooftop and micro-grids projects. There are no Indian renewable energy stocks listed on NYSE and Azure Power could be a good investment opportunity, given the massive solar installations the country is going to witness. I would look to invest in Azure Power given that the valuation is reasonable.