Interview with Chintan Shah

“The M&A trend is expected to continue”

The renewable energy sector in India has witnessed disruption over the past two years, with new technologies and business models contributing to a low-tariff and low-margin environment. Investors have struggled with changing dynamics that significantly eroded their previously high returns on investment. Meanwhile, liquidity crunch, increasing regulatory uncertainty and legacy issues have further dampened financiers’ interest. A comprehensive evaluation of the current renewable energy ecosystem and innovations to keep up with changing trends may be the need of the hour for financiers. In an interview with Renewable Watch, Chintan Shah, director (technical), Indian Renewable Energy Development Agency (IREDA), spoke about recent developments and emerging trends in financing renewable energy projects. Excerpts…

What have been the key developments in the renewable energy financial space in 2019?

The banking sector is currently saddled with a number of issues as various banks are undertaking prompt corrective action (PCA). This limits the amount of financing available for renewable energy projects. As a result, only large banks outside the PCA and several non-banking finance companies (NBFCs) are working to provide finance for the sector. However, as most banks are now coming out of the PCA, things seem to be looking up now. Despite the crunch, a good borrower and a good project should be able to raise funds. A project that is properly conceived, researched and documented will attract finance. Projects with poor features or weaker borrowers may face problems. Further, projects in which regulatory matters such as safeguard duties were not considered by developers while bidding are likely to find fundraising a big challenge.

What is IREDA’s current exposure in the sector? What is your target for 2019-20?

IREDA’s exposure in the sector stood at Rs 210 billion as of March 2019. The company is well poised to continue its growth trajectory. IREDA has been growing steadily over the past five years and intends to continue charting this path. IREDA’s exposure in the segment is leaning more towards solar as compared to wind this year, as opposed to a balanced portfolio in the previous year. This trend is likely to continue for the next few years. In the present environment, IREDA is better placed to understand the dynamics and associated risks in the sector as compared to commercial bankers.

What were some of the positives and negatives in the sector over the past one year?

The entire industry is undergoing consolidation, which leads to the emergence of larger and more prudent players. Also, global funds such as Brookfield and Macquarie are now entering the market with a fair amount of growth through organic and inorganic routes. Singapore-based Temasek is the latest entrant in the Indian green energy market. The entry of funds into the sector will have a positive impact as these are highly solvent and have detailed due diligence processes. This also indicates that the Indian renewable energy sector has matured. On the negative side, regulatory challenges continue to plague the sector. Primary among these are the ongoing issues of backtracking of PPAs by Andhra Pradesh and payment delays by discoms. However, these may not have a long-term impact on the sector as most of the projects coming up now have PPAs backed by NTPC/Solar Energy Corporation of India Limited.

What is your perspective on the heightened merger and acquisitions activity in the sector?

Mergers and acquisitions (M&As) are not a new phenomenon in India and usually come in erratic spurts. The previous financial year (2018-19) witnessed major M&A activity in this sector because the capital markets were good and there was a positive sentiment all around. However, this year consolidation has been low. This is primarily because the capital markets have not been performing well. We expect it to improve again, leading to greater consolidation as investors may look to free up their capital and give projects to bigger players. The funds entering the Indian market are likely to play a larger role in this respect. So, while the M&A trend is expected to continue, the nature of activity may change.

For some investors, the low-tariff environment may also be the reason to exit the market; however, it is not a general sentiment. Low tariffs are associated with fairly large-scale projects, wherein economies of scale come into the picture, which may take care of the low margins. Bankers usually invest in projects that meet financial criteria such as the debt-service coverage ratio. Therefore, we may also look at low-tariff projects provided our benchmarks are met.

What has been the experience and what is the future of emerging instruments such as IPOs and bonds in the sector?

Recent initial public offerings (IPOs) by companies have been deferred considering that the valuations and capital markets have not been too great. In fact, some companies have opted for M&A-based growth.

The future of finance undoubtedly lies in bond markets. The global market is doing well at present but the Indian market lacks the required depth. That said, over the past three years, a niche bond market has emerged, which will take some time to mature. The renewable energy sector will have to rely on the Indian bond market as there is a huge amount of capital available in this space. It only requires the right instruments and platforms to channelise the capital from these bond markets into the renewable energy sector. IREDA has been raising domestic bonds essentially on the debt side and we have been fairly successful in that.

What issues and challenges directly impact renewable energy financing?

Technology advancements led to a major disruption in the sector, with solar power tariffs falling from as high as Rs 17 per unit in the past to Rs 2.70 per unit at present. Same has been the case with the wind power segment. This disruption is a cycle that impacts the equity end, original equipment manufacturers and bankers. Therefore, it is important for bankers to innovate and be agile enough to change the business model and appraisal methodology as per the market requirements.

As a financier, what would be your key recommendations to the government to improve investor interest in the sector?

For bankers, policy certainty is critical in this sector. Policies must be designed for the long term so that they get the same incentives and income on commissioning that were perceived during their conceptualisation. This is what the industry, equity financiers and bankers need at present.

How has financier interest in emerging renewable energy technologies evolved over the past year?

Financier interest in the renewable energy sector has decreased over the past year due to several factors. One of the primary reasons is banks being under PCA, which has created a liquidity crunch. This, coupled with issues such as those in Andhra Pradesh, makes financiers sceptical about the regulatory environment in the sector. However, these factors do not affect entities such as IREDA that have a deep understanding of the present market environment.

What are the key trends likely to emerge in the financing scenario of the renewable energy sector in the coming years?

The Indian market lacks instruments for bankers or NBFCs to offload their assets on to the bond market directly. Globally, this is done through instruments like alternate investment funds (AIFs) or asset-based securities (ABSs). Moving forward, bankers and NBFCs would be working towards the creation of mechanisms for these methods. The timeline for this, however, remains unclear. The regulatory process and rules are in place, and are waiting for the right environment to emerge.

What are some of IREDA’s key plans for the coming years?

One of the key goals for IREDA is to have its own AIFs and ABSs. We have set a tentative timeline for executing this by the middle of the next financial year, to set a trend for others in the market to follow.

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