As one of the few firms that are publicly listed, the Inderjeet Wadhwa founded Azure Power, listed at the NYSE (New York Stock Exchange in October 2016), Azure Power commands a special cachet in the Indian solar sector. Unlike many of its peers, not only has it stuck to solar, but also narrowed its focus even further by saying a clear no to manufacturing itself. It’s most recent investor presentation on January 16, where it shared its plans for the future, are an important pointer to how top developers see the market evolving. And in their strategies, you also get a good window to the pitfalls and opportunities they can spot.
We bring you some of the highlights from the Azure pitch then, which has some very interesting nuggets, among other things. One of the more interesting ones- How many firms in any sector, see their first deal as their highest priced deal ever? For Azure, their first project in Punjab, at Rs 17.91 per unit for a 2 MW project with NTPC as buyer, was to prove to be the rousing start the firm needed to commit. No other project has touched those heady heights, although it seems safe to assume that the bottom of the solar market has been hit at Rs 2.48 per unit that it hit for a SECI auction for Rajasthan. Subsequent bids have started trending higher, and its own projections for the next four years seem to assume a realisation of closer to Rs 3 than Rs 2.50. Of course, with an 87 percent reduction in BOS (Balance of system) since that first project, the numbers are not as scary as they would have been otherwise.
So what are the headline numbers in the presentation?
For starters, the firm has a 7.1 GW committed portfolio, between its existing and future commitments. Credit quality has been accorded high priority, as one can imagine in a sector with just one or two buyers typically. Azure claims that 85 percent of its portfolio is committed with Government of India owned entities with SECI at 80 percent and NTPC at 4 percent , while discoms take up 15 percent. A small part is with Indian railways and other government owned PSU’s.
This portfolio is expected to generate a blended cost of Rs 2.92 per Kwh for almost 4GW of the new wins. That’s a 15 percent improvement over some of its recent auctions with SECI, according to the firm. The firm informs that a letter of award (LOA) has been received for a total of 2 GWs of solar power projects and 500 MW of manufacturing facility of cells & modules. That it has exercised greenshoe option for additional 2 GW of projects and 500 MW of manufacturing and awaiting LOA. For the manufacturing option,it has tied up with Indian firm Waaree Energies for 500MW, and is in talks with others for the remaining 500 MW, while making it clear that it will never enter manufacturing itself.
Azure sees a further potential upside to these projects, thanks to good terms for surplus power production, or even curtailment, where price as per PPA has been negotiated. It cites the use of bifacial modules, use of green bonds, and further drops in module and balance of system (BOS) costs as reasons to be hopeful of further gains in productivity.
An interesting aspect of the presentation is that is could be called as too back ended, in effect, too much of the projections follow after a slow phase that covers all of 2020-21. Thus, surprises on the policy front and other disruptions continue to be an issue probably. On the other hand, capex forecast does peak in FY 2021 due to the 2GW project in hand.
The firm is clear that it should be able to grow on its own cash flows, once the 7GW portfolio is in place. In fact, where projects are not meeting internal thresholds, it has already sold off 450 MW worth of them, with another 150 MW up for sale next.
The Azure presentation, while erring on the side of optimism as all pitches must, is certainly a fair indicator of the immense potential for growth that exists in solar in India today. And if done right, the returns do not have to be poor, as Azure projects, with an IRR of 20 percent. The greatest challenge to that growth and returns, as we have seen in the past two years, is the health of discoms in India, and reactive government policies. With a budget due on February 1, with high hopes of tackling at least the former problem, Azure will be counting on some good news to make projections meet reality soon.