The exponential growth in the Indian solar segment lowered market entry barriers and opened a plethora of opportunities for small- and medium-sized companies. While a greater number of projects and larger capacities are now available, low profit margins have compelled companies to seek capital for funding their projects. In a recent development, ACME Solar Holdings announced its plans to get listed on the bourses. In December 2017, the company received the green signal from the Securities and Exchange Board of India to go ahead with its IPO. ACME Solar’s choice of financial instrument emphasises the fact that the Indian renewable energy market has reached a sensitive point where traditional players prefer not to experiment. By going public and raising capital through an IPO, the company has taken the path more traversed to safeguard its interests and be more profitable.
ACME Solar is a joint venture of three entities – ACME Cleantech Limited, France-based EDF Energies Nouvelles and Luxembourg-based EREN. It has one of the largest solar energy portfolios in the country, with an installed capacity of 954 MW across 38 sites and another 1,060 MW under development at 11 sites. It recently won a contract to develop 200 MW at the Bhadla Solar Park by quoting the lowest ever tariff of Rs 2.44 per unit.
In September 2017, the International Finance Corporation (IFC), the World Bank’s finance arm, approved a loan of $150 million for ACME Jaipur Solar Power, a wholly owned subsidiary of ACME Solar Holdings, to develop a 250 MW solar project at the Rewa Solar Park in Madhya Pradesh. IFC will disburse $50 million in the form of non-convertible debentures and help mobilise $100 million from other lenders at a fixed interest rate for a long tenor. ACME Solar, which filed for its IPO in September 2017, plans to raise Rs 22 billion through the issue. It is considering a pre-IPO placement of 5.2 million equity shares aggregating Rs 5 billion, which would mean a smaller IPO and less dilution of its equity. Financial experts including ICICI Securities, Citigroup and Deutsche Bank are the lead managers for the IPO.
One of ACME’s primary goals is to repay its debt to its early investors. These include Rs 4.35 billion to Piramal Finance Limited, which extended a credit of Rs 7 billion to ACME Solar in July 2017. This is the second tranche of funding to ACME Solar by Piramal Finance. Prior to this, the latter had provided funds worth Rs 4.99 billion in partnership with APG Asset Management. Further, ACME Solar plans to repay a Rs 5.41 billion loan extended to it by its parent company, ACME Cleantech. About Rs 8.6 billion has been earmarked to fund the development of its 200 MW power plant at the Bhadla Solar Park. The company plans to invest the remaining amount in general corporate expenses.
The steep fall in solar tariffs and the resultant diminished profit margins have given rise to a cautionary sentiment among investors. The risks associated with solar power projects have increased. While the government is making continuous efforts to improve the situation, it will be a long time before the issues are resolved. Meanwhile, multiple IPOs in the power sector lost their initial sheen rather quickly. Thermal power majors such as Reliance Power and Adani have not succeeded in this space, despite their strong portfolios. The risks associated with the current plant load factors of thermal power plants and stricter environmental norms have been cited as the key reasons for the less-than-successful IPOs of these companies. Meanwhile, Azure Power, a leading renewable energy company, debuted on the New York Stock Exchange at a discount in October 2016 and has been trading at 10 per cent below its issue price.
To achieve the target of 175 GW of installed renewable energy capacity by 2022, a capital of $100 billion is required, putting investors in the driving seat for the moment. This could result in hard negotiations with developers and stalled deals until a more conducive investment environment is achieved. However, for credible developers and large companies with deep pockets and multiple assets such as ACME Solar, the risks are fewer and investor interest is likely to be high. Moreover, ACME Solar’s IPO comes at a time when the solar power segment is attracting investor interest. Also, the company seems to have set itself a clear path to disburse the raised capital in a phased manner, with enough buffer for a rainy day. If the company’s IPO succeeds, it will prove that traditional financial instruments are still a preferred way of raising capital. It will also open the IPO route for other solar power companies to fund project development.