New Delhi: India is experiencing a historic rise in renewable energy merger and acquisition (M&A) deals this year despite the coronavirus pandemic that has taken a toll on economic activity.
The current calendar year has witnessed M&A transactions of around $2 billion, a 75 per cent jump from transaction volumes estimated at $1.2 billion in 2019, according to Manish Aggarwal, partner and head, infrastructure M&A, special situations group, KPMG in India.
Whereas, according to PwC’s estimates, the total deal value of M&A transactions in 2020 was about $4 billion and in 2019 it was at a disclosed value of about $2.7 billion. The variation in estimates is due to the fact that all transactions are not publicly reported.
Industry analysts said that market sentiments for M&A activities have improved and were expected to further accelerate in the coming months.
The sector is buzzing with activity -- most recent one being ReNew Power’s sale of its Karnataka wind farms to Ayana Renewable for Rs 1,600 crore. On 26 October Mint reported that New York-based private equity firm, Warburg Pincus, was exploring the sale of its stake in rooftop solar power company CleanMax. EverSource Capital alsoplans to buy out 167-MW solar rooftop portfolio of Azure Power for $112 million.
On 21 September Economic Times (ET) had reported that India Grid Trust, the KKR-owned first Infrastructure Investment Trust (InvIT) in the Indian power sector, was in the advanced stages of discussions to acquire India portfolio of Madrid-based developer, Fotowatio Renewable Ventures, in a deal worth Rs 750 crore.
Apart from this, UK-based investor, Actis’ acquisition of two solar projects in India totalling 400 MW from Acme Solar as reported by ET on 7 August. Earlier in February, EverSource had acquired Mumbai-based solar rooftop firm Origin Renewables.
Analysts said that though COVID-19 has impacted the renewable energy sector to some extent, it has not inhibited the growth of the sector in India. Market conditions are improving slowly with most economic activities coming back on track while project installation activities and renewable energy deals have also picked up.
“Current market conditions present value for money opportunities for investors in renewable energy space and weak hands to exit the market. Firms, which are interested in clean energy and have the funds to invest, are expected to be on a buying spree. Overall, it is a favourable market condition for M&A in the renewable energy sector,” said Amit Kumar, partner-clean energy, PwC India.
According to analysts, the available capital for the sector continues to be strong, which might trigger another round of acquisitions by and between larger players.
“COVID-19 has led to one of the lowest interest rate cycles globally and thus, capital is chasing high yield bearing assets. Thus, M&A in renewable assets, particularly operational ones, is likely to continue to be strong,” said KPMG’s Aggarwal.
As India races to reach 175 gigawatt (GW) renewable energy target by 2022 followed by 430 GW target by 2030, the race to be among the top players is leading to capital hungry platforms seeking large cheques.
The investors are responding for increasingly higher ticket sizes with this year already witnessing three transactions worth more than $500 million.
“Smaller players have drying access to equity capital and thus secondary transactions market space has a large pipeline. However, the transactions are constrained by high discom risk particularly exacerbated by tariff renegotiation processes in a few states and long receivable cycles in others,” Aggarwal added.
In June this year, Power Exchange India and Indian Energy Exchange had launched a real-time market trading platform for renewable electricity transactions.
M&A deals are of three types in the Indian market – asset sale of less than 500 MW, asset sale above 500 MW and fundraising activities. At present in the M&A sector, platform play with potential for monetisation via InvITs is leading to an increasing number of investors deploying capital.
High growth multiples ascribed by public markets might seed thoughts to make another attempt for an Initial Public Offering by some leading players, according to Aggarwal.
While strategic players have announced large renewable energy roll out plans which might heat up the market and cause further pressure on the cost of capital.
He added that there was also an expectation of players for some fundamental ‘structural reforms’ to be carried out urgently which would be critical to ensure a sustainable growth of the sector.