ReNew Energy Global PLC

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 2/5

ReNew Energy Global PLC is a renewable energy company based in India, focusing on wind and solar power generation and transmission, providing clean energy solutions primarily within India.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

ReNew’s business centers around developing, building, owning, and operating wind and solar power plants, which generate revenue through long-term power purchase agreements (PPAs) with government entities, power utilities, and large corporations.

Business Overview

ReNew’s primary business is the generation and distribution of renewable energy. This business model is particularly dependent on government contracts and long-term agreements, making a significant part of their revenue highly predictable, but also very sensitive to regulatory changes. The core components of their business include:

Wind Power Generation: Developing and operating wind energy farms, contributing a significant portion of their power output.
Solar Power Generation: Developing and operating solar farms, which have seen increased investment and focus in recent years.
Hydro Power Generation: ReNew has invested in several small scale hydro power projects, with the goal of diversifying its operations and revenue streams, and adding to the stability of earnings..
Hybrid Projects: ReNew is exploring hybrid wind and solar projects, often with energy storage systems, for providing more reliable power output..

Revenue distribution is largely dependent on long-term PPAs, reducing the volatility of their revenues but also limiting price increases and therefore, profit margin increases.

The Indian renewable energy sector is rapidly evolving, marked by ambitious government targets and significant investments to achieve energy independence. Here are the most relevant trends:

Growing Market Demand: There is an increasing demand for renewable energy, driven by both government policies and a push towards sustainable practices by corporations. However, this growth also intensifies competition and places pressure on profits.
Technological Advancements: Continuous improvements in solar and wind technologies are enhancing efficiency and reducing production costs. As a result, new equipment can often be cheaper, but old equipment becomes more uncompetitive.
Policy and Regulatory Framework: Government incentives and regulatory changes heavily influence the sector. These can include tax breaks, subsidies, or mandates which can significantly impact companies in the sector.
Financing Challenges: Securing financing for capital-intensive renewable projects often requires navigating complex funding and regulatory schemes..

Competitive Landscape

ReNew operates in a competitive environment with both domestic and international players, but what sets it apart is its strategy that incorporates aspects of each:

Established Local Presence: ReNew has a solid base and reputation, which was helped with a long-term presence in the Indian renewable energy market. They are often favored by Indian authorities over foreign investors..
Technology Adoption: ReNew aims to utilize and embrace cutting-edge technologies. This is important since as they move to expansion to new technologies or projects, the competitive landscape could erode their profitability over time.
Strategic Partnerships: The company has created strategic partnerships to leverage expertise and expand market reach. This is particularly important to take on projects of different and increasing sizes.

Financials

ReNew’s financial performance is characterized by significant growth, alongside a complex and challenging financial situation:

Revenue Growth: ReNew has shown steady growth in revenue, driven mostly by new capacities installed and from new PPAs. The majority of income derives from the sale of electricity through government contracts and corporate agreements which are often very long-term and thus very predictable.
ROIC Volatility: While ReNew demonstrates capacity to generate revenue, the return on invested capital is highly volatile, which may be attributed to high initial investments of green projects, a characteristic of this industry. The adjusted ROIC shows how the company is able to return more capital when excluding goodwill. This is a common trend. High ROICs can be attributed to brand reputation, strong networks, or unique resources. Low ROICs imply competition and lack of differentiation.
Margins: While gross margins are somewhat stable around 60-70%, EBITDA margins appear to be declining after 2021 and currently are around 40%. This also shows the company’s struggles with profitability.
Debt: ReNew carries a significant amount of debt on its balance sheet which is around 70% of capital structure, which it uses to fund its expansion. This high leverage poses risk and makes the company vulnerable during times of high interest rates.
Share dilution: The company issues a large amount of shares diluting its investors.

The financials are characterized by high debt and significant volatility. The long term outlook is not good at all as the company’s core market is not profitable and there’s been continued share dilution. It is important to consider that this analysis does not take into account the value of government guarantees, which may significantly impact the evaluation.

Understandability

The complexity of ReNew’s business model is rated 3 out of 5 for the following reasons:

Moderate Complexity: Renewable energy generation itself is not overly complex. Wind and solar technology is relatively easy to understand and have a common base, including the financial side of PPAs.
Regulatory Complexity: The business is heavily influenced by government regulations, mandates, and the bidding process for PPAs, all which are sometimes complicated. There is an extra layer of complexity for companies that operate across different regions within India as some regions have different rules.
Accounting Nuances: The various financial instruments that a company like Renew has can make analysis more complicated.
Risk Profile: The mix of government contracts with long-term, yet potentially volatile earnings makes its risk profile unclear to a typical investor.

Balance Sheet Health

The balance sheet of ReNew is considered weak, and rated a 2 out of 5:

High Debt Levels: The company has high debt levels relative to equity, which makes it vulnerable to market volatility and interest rate changes. While debt is useful for investment, it also introduces significant risks.
Large Goodwill and Intangibles: The acquired goodwill and intangibles on its balance sheets are huge, which implies the company is paying premium for the companies they are acquiring and their performance will be scrutinized more intensely.
Cash Position: ReNew maintains adequate cash for their immediate needs but, the amount of current liabilities they have is also substantial.
Reliance on Government: The company is highly dependent on governments to issue and fulfill PPA commitments. Change of preference or government failure to meet these obligations could have a direct impact to the company’s finances.

Recent Concerns and Management’s Response

During a conference call at the end of 2023, the management has cited concern about the increasing cost of debt and how that impacts the company’s profits, and further states that they may have to seek a capital raise. This shows that the management is aware of the impact but this also poses additional pressure to its investors. Also, in the investor day presentation from February 2024, the company stated they will not take up projects with lower than a 13-14% ROE. Management also mentioned that if the market does not improve they may have to defer a few of the projects.

Despite the strong growth, ReNew Energy faces significant challenges around its debt, ability to generate long term profits, and sustainability of its business.