By Ashay Abbhi
The solar power segment in India is facing challenging times with a large number of projects getting delayed due to policy constraints, regulatory uncertainties and inadequate transmission infrastructure. The segment is also facing a liquidity crunch. A large number of business groups that had entered this space in the past few years with the intention of creating high-value assets are now looking to sell their solar portfolios to deleverage their balance sheets. A recent deal between Essel Infraprojects Limited and Adani Green Energy Limited (AGEL) points towards this growing trend of offloading solar power assets to create liquidity.
The Essel Group has entered into an all-cash deal with AGEL to sell 205 MW of its operational solar power assets. Located in the states of Punjab, Karnataka and Uttar Pradesh, the assets have an enterprise value of Rs 13 billion (about $181 million). Long-term power purchase agreements (PPAs) have been tied up for all these projects with state-owned discoms. The Essel Group has a total solar portfolio of 685 MW, of which 310 MW is operational and 375 MW is under construction.
The Essel Group’s debt situation has forced it to sell off its assets. This is the second tranche of asset sale by the company, after it sold its stake in the entertainment business. The proceeds from the sale will be used to pay part of the Rs 70 billion owed by the company to its creditors. The total debt of the Essel Group stands at Rs 224 billion, of which the promoters owe about Rs 110 billion and Essel group companies together owe about Rs 114 billion. After the sale of 205 MW of assets, the group is looking to offload its remaining power projects as well. Meanwhile, for AGEL, this marks the first acquisition of operating solar projects. One of the highlights of this deal is that the projects are relatively new, with an average remaining PPA life of around 22 years. The lucrative PPAs and long asset life will lead to better returns for AGEL. The company’s total portfolio stands at 5.5 GW, of which 2.5 GW is operational, and the rest is at various stages of development and is expected to be operational over the next two years.
The assets are part of 10 subsidiary companies of the Essel Group, which will be acquired by AGEL. These are Essel Bagalkot Solar Energy Private Limited, Essel Gulbarga Solar Power Private Limited, Essel Urja Private Limited, KN Bijapura Solar Energy Private Limited, KN Indi Vijayapura Solar Energy Private Limited, KN Muddebihal Solar Energy Private Limited, KN Sindagi Solar Energy Private Limited, PN Clean Energy Limited, PN Renewable Energy Limited, and TN Urja Private Limited.
Ever since the solar power segment moved towards competitive bidding, merger and acquisition (M&A) activity has been on the rise. Aggressive bidding and low tariffs have rendered many projects unviable, leading to the exit of some of the large players in the segment. Most of the assets in the market have been picked up by international players with deep pockets and large appetites.
In 2018-19, Renewable Watch Research tracked over 24 M&A deals worth close to Rs 323.17 billion (excluding the acquisition of stake by Royal Dutch Shell in Singapore-based Cleantech Solar). The biggest transaction of the year was the acquisition of 1,100 MW of Ostro Energy’s assets by ReNew Power in April 2018 for $1.83 billion. Other notable deals during the year include the Greenko-Orange deal for $925 million, ReNew’s acquisition of Indian Energy Limited for Rs 364 million, and Hinduja National Power Corporation’s acquisition of Kiran Energy Solar Power for Rs 10 billion.
The Adani-Essel deal exhibits the other side of M&A deals in the segment – the profitability of solar power assets. The Essel Group’s divestment of its solar portfolio, rather than its other businesses, points towards the lucrative nature of solar power assets in the country. In the current low-tariff environment, solar power returns are higher in the long term than in the short term. The offtake risks are lower and capital and operational costs are decreasing, making solar power plants increasingly bankable assets. For companies willing to put in the required funds, the solar power segment offers a cost-effective investment opportunity. Therefore, the trend of M&As in the segment is likely to continue as companies look to exit their portfolios to generate quick cash.