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Can NTPC steal Adani Green’s thunder?  

The solar pageant is between two contestants – one is young and aggressive, and the other is staid and pragmatic


It’s a fairy tale that calls to mind the Snow White one. This one has a 46-year-old (NTPC) and a seven-year-old (Adani Green). But unlike the Grimm brothers’ story, in which the stepmother covets primacy, this narrative has the seven-year-old yearning to be the queen of renewables.

Every time the young one asks the mirror (Mr Market), “Who is the worthiest of them all?,” the mirror replies, “It’s you with a valuation of 84x (price/book value).” When she persists and asks, “What about the 46-year-old”, the mirror replies, “She is worth just 0.8x!” Both times, the mirror is masking the truth – as valuations of neither reflect their true worth.

For instance, the good old public sector undertaking (PSU) is a powerhouse that literally lights up the nation – with an installed capacity of 65.8GW, it accounts for one-fourth of the electricity generated in the country. Once the toast of the town, NTPC is struggling for relevance in a changing landscape, in which burning coal to produce electricity is frowned upon. Instead, generating power from solar, wind and water is venerated as India is now party to the Paris climate accord that entails bringing down carbon emission intensity of GDP by 33-35% by 2030. India is also committed to ensuring that 40% of its installed power capacity is from non-fossil sources by 2030 with an interim target of 175 GW of non-hydro renewables by 2022 and 450 GW by 2030. Though India will miss its 2022 target (See: Missing the mark) given that the total installed capacity, as of FY19, in place is 78 GW, the movement to renewable is gathering momentum.

Sajal Kishore, analyst, Fitch Ratings, says: “India’s renewables story has really gathered steam over the past decade. In recent times, we have seen consolidation in favour of bigger players as the weaker ones have stepped out.” Concurring with the view, Kashish Shah, analyst at the Institute for Energy Economics and Financial Analysis (IEEFA), says: “India’s ambition is huge. There is ample place for a lot of developers at 93 GW... we are still scratching the surface. India is currently adding around 10 GW every year, of which 8 GW is solar. But to reach 450 GW we need to add 25-30 GW every year.”

While state discoms are also driving the transition towards renewables, it’s the PSU, Solar Energy Corporation of India (SECI), which is the bigger engine taking forward the government’s agenda. The agency acts as the nodal agency for developing renewable energy projects by signing power purchase agreement (PPAs) with the winning developers in competitive auctions and inks power sale agreements (PSA) with the buying entity (discoms) which minimises the offtake risk for developers who bid for SECI tenders.

Financial investors too are putting money where the power is green--propagating a new way of investing a.k.a ESG (environmental, social and corporate governance) investing. With ESG money coming in, the colossal NTPC is being de-rated and valued only at ₹1.04 trillion, while the relative newbie Adani Green Energy (AGEL) (which began its renewables journey in 2015) is valued at ₹1.82 trillion.

Now, here’s where the market is being indulgent. AGEL has an operational portfolio (solar, wind and hybrid projects) of 3.47 GW while NTPC’s renewables portfolio amounts to one-third of AGEL’s capacity at 1.083 GW. But NTPC’s under construction pipeline of 21 GW already dwarfs AGEL’s 11.39 GW. What is also pertinent to note is that with an operational portfolio (thermal and renewable) 27x bigger than Adani’s, NTPC has a large cash-generating business to power its growth in renewables. What the market perceives as NTPC’s weakness its thermal lineage is actually its biggest strength. The irony is that the combined market cap of the two Adani entities stands at ₹2.16 trillion – nearly twice that of NTPC’s! Isn’t that shocking (pun intended)?

Even as the market has turned partial to the younger one, here is how NTPC is upping its game.

Low and behold
What has been interesting to note is that, amid a pandemic-ravaged year that impacted the economy, resulting in poor power demand, the action in the renewables space has been hot with a whole new set of players emerging in India (See:Cooling off).

Among the prominent ones to enter the fray is the thermal behemoth, NTPC. In December 2020, NTPC burst into the scene as the aggressive Big B in Trishul by bidding the lowest solar tariff in AGEL’s own fiefdom and that too from Gujarat’s state electricity distribution company, GUVNL. “The record price of ₹1.99 is the lowest ever and just shows the intent of NTPC that it means business,” says Shah of IEEFA. While three other players too bid at similar tariffs, NTPC took a chunk (200 MW) of 500 MW order.

Again in early February, as the Andhra Pradesh Green Energy Corporation (APGEC) invited bids for 6.4 GW of ultra mega solar projects, Adani Green won five mega solar power projects of 600 megawatt (MW) totalling 3GW. But it was NTPC that quoted the lowest tariff of ₹2.48 per kWh (unit) for 600 MW compared with AGEL which quoted a tariff in the range of ₹2.49-2.58 per unit. When Apoorva Bahadur, analyst at Jefferies, asked during the Q3 concall whether the competitive intensity will go up significantly with NTPC cranking up its renewable game, Vneet S Jaain, MD and CEO, AGEL, explained that Adani too was close. “We got 3GW and our prices are in the same range except for the one location where our price was 2.58. In all other places we have closed at 2.48 or 2.49 and the place where we have 2.58 is because at that particular location, the solar radiation as compared to other locations was slightly lower. And also the rate of the land which was published by the AP government for that particular location, the land rate was higher as compared to other locations and that is the reason… (between AGEL’s and NTPC’s prices) there is a gap of ₹0.08, ₹0.09, ₹0.10, the remaining 2400 MW which we won as L1, the difference is either ₹0.01 or ₹0.02 only.”

The game has just begun for, at the fag-end of 2020, NTPC announced that it has set up a new subsidiary NTPC Renewable Energy (NTPC REL) to drive the PSU’s non-thermal expansion. Chandan Kumar Mondol, director (Commercial), NTPC, “We will not invest in any greenfield coal-based project in the near future. Going forward, most of the new investments would be towards renewables and almost all of the RE capacity additions shall be through this subsidiary.” NTPC, whose renewables portfolio stands at a mere 1.083 GW, has a long-term target of setting up 40 GW of renewables by 2032, accounting for 30% of its total planned capacity of 130 GW.

At present, NTPC REL has an order book to build 1.42 GW of solar projects, including 350 MW with Gujarat Urja Vikas Nigam, 470 MW with SECI and a recent order win of 600 MW in Andhra Pradesh, though it yet to receive the letter of award, confirming the awarding of the contract. Over the next six years, Mondal reveals that NTPC has a project pipeline of over 21 GW, which includes large scale ultra-mega renewable energy power park (UMREPPs) in states such as Gujarat, Rajasthan, Andhra Pradesh, Maharashtra and Madhya Pradesh. Around 2.88 GW is already under implementation and 1.49 GW is under tendering (See: Rising sun). “NTPC is also going ahead with floating solar units at reservoirs, as a step towards saving of land, and towards water conservation by reducing surface-water evaporation,” adds Mondol, who has held several key leadership positions across multiple business units at NTPC over the past 35 years.

What works in favour of NTPC is that it is starting out with a clean slate with no legacy issues and it is making its debut when renewable technology is becoming mainstream. Costs of photo-voltaic (PV) module, which account for 64% of overall solar project, have been coming off and more importantly it has a stronger balance sheet compared with AGEL.

Shining bright
Given that per MW of solar power needs an investment outlay of ₹45 million, NTPC would need ₹945 billion to complete its renewables portfolio of 21 GW. If one were to break it down further: for the 2.88 GW under implementation, the cost would be ₹129.60 billion and, for the additional 1.49 GW, the cost would be ₹67.05 billion. While the funding requirement is huge, the parent is cash rich with ₹26.24 billion on books as of March 2020, not to mention the cash flow of ₹246 billion (FY20) from operations, which gets generated annually after an interest payment of ₹112 billion (FY20). Therefore, NTPC has the financial wherewithal to achieve its renewables target.

That said, Fitch expects NTPC’s cash flow from operations to suffer in FY21, declining to ₹63 billion on account of pressure on working capital. NTPC has also ₹60 billion of debt maturing during the year, even as it plans to continue with its capex plan of ₹210 billion. Not to mention a potential payout of ₹65 billion in dividends in FY21. However, Fitch qualifies its observation stating that NTPC can secure adequate funding, even though its liquidity position will weaken, given its strong position in India’s power sector, solid access to domestic banks and capital markets, and linkages with the sovereign. For instance, NTPC’s payables are backed by letters of credit equal to 105% of average monthly payments and tripartite agreements between NTPC, the Reserve Bank of India (RBI) and state governments.

While NTPC will infuse equity worth ₹40 billion into the new arm, with a debt equity ratio of 1.56x (total debt of ₹1.77 trillion) and interest service coverage ratio of 4.34x, the parent has ample room to leverage its books. However, NTPC management mentions that the subsidiary will raise debt on its own.

For now, of the ₹40 billion equity infusion, NTPC REL has received ₹3 billion from the parent. The entity is now looking to raise a term loan of ₹21 billion since it is looking to fund its projects in a debt-to-equity ratio of 4:1. 
“NTPC REL has been a long-term issuer rating of IND AAA and shall raise the debt on its own books with only equity infusion by its parent,” reveals Mondal. AAA-rated instruments are considered to have the highest degree of safety regarding timely servicing of financial obligations and carry lowest credit risk.

NTPC REL is looking to borrow through both domestic and international markets to minimise borrowings costs. Bhanu Patni, analyst at India Ratings, believes NTPC REL will be able to finance its debt in a timely manner and at competitive rates to avoid any cash flow mismatch, and also that it would receive financial support from NTPC. Concurring with Patni, Aniket Mittal, analyst at MOSL, says: “Given its sovereign backing, NTPC can leverage its balance sheet to raise funds at cheaper rate and lend it to its renewables subsidiary to grow its portfolio.”

The other way NTPC could grow its renewables business is if the cash-rich PSU Coal India (CIL) picks up an equity stake in the renewables company. Though Mondal denied that any such proposal is on the table, the option could emerge in future given that CIL partnered with NLC India, another state-owned coal mining company in July 2020 for building 3GW solar energy projects over the next three years.

That means there’s some serious competition for Adani Green in the coming days.

Fast and furious
AGEL began its journey around five years ago with the world’s largest solar project (648 MW) at Kamuthi in Tamil Nadu. The company ended the pandemic stricken FY21 with a bang, by buying the 75MW operating solar projects of the beleaguered Sterling & Wilson, a Shapoorji Pallonji group company. Post the buyout, the company’s operating renewable capacity has surged to 3.47 GW (See: High radiation). However, NTPC is already hot at its heels with its 1 GW operational capacity and 2.88 GW under implementation.

While numbers from Ace Equity shows AGEL’s standalone debt stood at ₹10.64 billion as of September 2020, and on a consolidated basis, was ₹181.73 billion, India Ratings mentions that AGEL’s consolidated debt increased to ₹206 billion as of September 2020 with an increase in the operational capacity. As of H1FY21, 59% of AGEL’s consolidated debt was denominated in the local currency, and the rest in US dollars. Though the foreign debt is largely hedged, currency movement is a big risk with the company seeing these wild gyrations impacting its financials – it showed gains of ₹3.8 billion in FY20 against a loss of ₹0.6 billion in FY19.

Early this year, the company managed to rope in France’s Total as an equity partner in a special-purpose vehicle (SPV) that has 2.35 GW in operational assets, under 50:50 equity contribution. Total picked up 50% stake for ₹37.07 billion in the SPV and a 20% stake in AGEL for a total investment of ₹143 billion. Patni, believes the company has been able to recover its investment. “AGEL has been able to monetise a 50% stake at valuations equivalent to 100% of its equity value. Moreover, after a 50% stake sale to Total, AGEL will continue to consolidate the entire portfolio with no mandatory pay-out requirement to shareholders. This will ensure that the surplus funds generated at these special purpose vehicles (SPVs) are available for growth capital.” However, raising equity at premium valuation may be a tall task in itself.

The rating agency believes, over the medium term, debt addition will continue given the under-construction assets, while Ebitda generation will come with a lag leading to a higher gross leverage in FY21. Based on its 9MFY21 operating profit of ₹18.53 billion on a debt of ₹181.73 billion, AGEL has a debt-to-Ebitda ratio of 9.8x, which is considerably higher than NTPC’s. In its September 2020 debt presentation, AGEL stated that its “desired” net debt-to-Ebitda is 5-5.5x and debt-to-equity of 3.5x.

Adani has been using the SPV route consistently in the renewables space and this has allowed the parent to remain the holding company (holdco). As of March 2020, AGEL had 74 (direct and indirect) subsidiaries and one joint venture with Total. The company has a well-oiled funding strategy for its under-construction assets, explains India Ratings. AGEL uses letters of credit or revolving credit facilities at the holdco level to initially fund the capex. Within the next three-to-six months, the debt is tied up at the SPV level. Once the assets become operational and have stabilised, AGEL refinances the debt to lower interest cost and increase the cash flow, which could be used for funding other upcoming projects thereby, rotating the funds. As a result, the funding tie-up risk is mitigated. For instance, holdco level debt which could peak at ₹48 billion will bridge the cash flow gap that could exist for the initial few years and translates to a debt/MW at the holdco of ₹3.4 million/MW lower than the earlier debt/MW of ₹5.6 million/MW availed when ₹17.5 billion was raised at the holdco during FY18, mentions Patni.

But the big challenge for Adani Green comes from that fact that its cashflow from operations is a mere ₹20 billion compared with NTPC’s ₹246 billion. AGEL was able to upstream (by paying money to the parent) around ₹10 billion owing to refinancing activities at the SPVs over FY19-FY20. As on March 2020, its average cost of debt was 10.4%. However, given the repayment of ₹4.4 billion debt in FY21 and ₹5.2 billion by the parent, cash flows available for capex will reduce to that extent. In 9MFY21, its interest cost rose 151% from ₹7.79 billion to ₹11.84 billion, even as it managed to eke out a profit of ₹800 million.

The company, whose equity and debt investors include the likes of Pimco, Payden & Rygel, Fidelity, BlackRock, Prudential and AIA, is looking at commissioning 855 MW in FY21, 2.6 GW in FY22 and 2GW every year thereafter till FY26. According to Patni of India Ratings, the total under-construction portfolio would entail a capex of ₹735 billion, an equity requirement of ₹166 billion (25%) and debt of ₹59 billion over FY21-FY26. Gautam Adani had announced, after winning the world's largest solar order to build 8 GW of photovoltaic (PV) power plant along with a domestic solar panel manufacturing unit at an investment of ₹450 billion, that: “We have headroom for diluting 10-15% stake in Adani Green Energy” and that “Total is very much interested” in expanding its partnership with Adani.

But any proceeds from the stake sale by promoters need not necessarily find its way into the renewables business, since the group had an overall gross debt of ₹1.74 trillion ($24 billion) as of end-September, according to a report by Credit Suisse. A part of the fund infusion could go towards reducing the leverage.

Given the quantum of funding needed, the company is now looking at raising more debt at the holdco level to the extent of ₹48 billion as against the ₹14.4 billion at end-1HFY21. While the December 2020 investor presentation states that the company’s debt has elongated maturities of up to 20 years, it has not given further details. Kaushal Shah of Adani Green told analysts in the Q3 concall that the company is open to the idea of hybrid bonds, perpetual bonds that offer less than 2% interest rate: “We are evaluating that as a strategy…we will definitely issue bonds which will bring down our overall cost of capital, that’s aligned with the life of the assets.” Patni of India Ratings mentions that AGEL is looking at structuring its debt through a longer maturity profile, bullet maturity and lower interest rates since this will allow higher cash to be generated at the holdco level in the initial years, and post operationalisation at the SPV level.

In March, Adani Green Energy raised $1.35 billion through revolving project finance facility to fund its 1.69 GW hybrid portfolio of solar and wind renewable projects to be set up in four SPVs in Rajasthan. The loan, the first certified green hybrid project loan in India, has been spread across 12 global banks. “The new pool of liquidity strengthens AGEL’s strategy to fully fund its under-construction assets for scaling up capacity to 25 GW by 2025,” the company said in a statement.

“Although AGEL has demonstrated high flexibility in tying debt both domestically and internationally, inability of the company to tie up debt at the holding company level could lead to project completion delays,” points out Patni. Although AGEL has been tying up debt in foreign currency, the weighted average cost of debt, including hedging expenses, is 10.5%. As a result, Ind-Ra expects the consolidated interest coverage to remain at 1.6x-1.8x over FY20-FY23. The leverage and interest coverage ratios are, however, exposed to the volatility in forex, plant load factors and counterparty profiles. “Compared with other private developers' cost of debt, NTPC's would be at least a minimum 200 bps lower,” points out Aniket Mittal, analyst at MOSL.

Although the diversification in funding sources reflects upon the management’s capability to tie up debt in a timely and efficient manner, and also reduces the finance cost which stood at 10.7% in FY20 vs 11.1% in FY19, the debt refinancing leaves the company susceptible to forex exposure as its earnings are in rupees.

Adani Green did not respond to questions sent by Outlook Business.

Unlike thermal, where there is an assured return on equity of 15.5%, there is no such guaranteed return on renewable tariffs. “In a regulated model, your ROEs are pre-determined and it’s a more bottom-up approach, wherein you keep on adding your costs in-line with certain norms to finally arrive at the revenue. In a competitively bid out renewables project, it’s more of a top-down model, where you quote the tariff and the expenses (including interest cost) is your lookout,” says Mittal. Hence, it becomes important as to how cheap a developer can borrow and how well it can manage costs. “In a regulated thermal power project, interest cost on loan is pass-through but in renewables, that is not the case and it has a direct bearing on profitability,” explains Mittal.

Green sees red
So far, Adani hasn’t faltered on its execution, thanks to efficient project management capabilities comprising of timely delivery of project equipment, lower interest costs with minimal inventory and sourcing power. This has helped its capacity grew more than 3x in three years.  But NTPC too is good, if not superior, at project execution. Compared with its commissioning 10 GW over four years (FY16-FY19), its speed has picked up and the power major has commissioned close to 5GW in FY20 and 4.1 GW in FY21.

According to analysts, Adani Green Energy’s operational portfolio got commissioned over FY16-FY20, while its under-construction portfolio will be commissioned over the next five years till FY26, leaving open key risks related to construction and funding. One challenge is land acquisition which will be easier for NTPC as it is seen as a government entity versus Adani, a private player. However, the bigger challenge is that beleaguered discoms are fighting back (or dirty, depending on which side you are on).

For instance, following that record-breaking bid by NTPC in December 2020, GUVNL, the discom, cancelled and announced a retendering process for 700 MW of solar projects awarded earlier with tariffs ranging from ₹2.78 to ₹2.81 per unit. This is not the first time that GUVNL has canceled auctions citing high tariffs. According to Mercom, a clean-energy consultancy and communication firm, the discom had scrapped a 500 MW auction in 2018; the next year, it scrapped a 700 MW solar auction; and in Feb 2021, it scrapped yet another 700 MW solar auction. What’s more the state-power regulator, the Gujarat Electricity Regulatory Commission (GERC), has allowed the cancellation more than five months after GUVNL handed over the letters of award to the winning bidders. In fact, according to Shah of IEEFA, the SECI is sitting on 17 GW of auctioned tender but has been unable to get discoms to the sign on the dotted line. “That’s a double whammy for developers because demand has gone down and now discoms want to bargain. It’s a problem we don’t want to see but that’s what is happening now,” says Shah.

For instance, Ramnad Renewable Energy, a subsidiary of Adani Green, had entered into a power purchase agreement with Tangedco for the implementation of its 72MW solar power project at Kamuthi in Ramanathapuram district of Tamil Nadu. The Tamil Nadu Electricity Regulatory Commission had fixed a tariff of ₹7.10 per unit on September 12, 2014, and had extended the applicability of that tariff till March 31, 2016. But the plant commissioning got delayed and Ramnad was paid a lower tariff of ₹5.10 a unit. Though the Appellate Tribunal for Electricity ruled in favour of Adani Green, it just goes to show that discoms are now trying to wriggle out of high PPAs, and are also getting tacit backing from the government.

Of the operational portfolio, AGEL has 25% exposure to Tangedco, which has an elongated payment cycle. As a result, the receivable cycles (including unbilled revenues), though improved, remained long at 138 days at FY20, of which the receivables from Tangedco was 65%. The power ministry is allowing discoms with “surplus power” to relinquish PPAs of over 25 years with the central generating stations (CGS). Besides, discoms in Andhra Pradesh, Karnataka and Uttar Pradesh have tried to pull the plug on PPAs entered into wind and solar power developers. “Such cancellation or renegotiation, if finalised by discoms, may be legally challenged by the affected independent power producers (IPPs) and the resolution of the same could be a protracted affair,” Sabyasachi Majumdar, senior vice president and group head, ICRA was quoted as saying.

Though AGEL has secured PPAs at an average portfolio tariff of ₹3.26/kwh for 25 years against the national average power purchase cost of 3.6/kwh, its ability to stay competitive will also depend on the speed of its execution, its economy with expenses, and its ability to raise cheap credit.

Adani has built a good presence in renewables, while NTPC still has a nascent one. But, since there is no complexity in construction of a solar project, there is no risk around its execution and it can be completed between one and two years.

Rating agencies point out that investment in renewables can come under pressure, if a project’s liquidity decreases because of unforeseen costs or lower revenues, or if discoms raise affordability concerns. Only sponsors with strong balance sheets can withstand the probable volatility of cash flow.

That’s where NTPC has the edge.

As the cheapest electricity generator, NTPC can also look beyond Indian shores to scale its renewables portfolio. As the project consultant of the International Solar Alliance (ISA), NTPC plans to anchor 10,000MW of solar parks in ISA member countries in the next two years. According to reports, with the aim to generate higher margins, the PSU is targeting over 15GW of international projects along with its domestic plans of a further 67GW by 2032. Shah of IEEFA too believes that NTPC could well be poster-boy of renewables in India. “While there is no doubt that the opportunity in renewables is huge and there is enough room for all, I believe NTPC is best positioned to manage an encore,” he says.

For now the mirror (Mr Market) is not being true with its reflection, but we all know that the fairy tale ends well. So, it’s only a matter of time before the spell over NTPC breaks and investors discover its true potential.