Tata-Welspun deal signals industry consolidation

Tata Power Ltd’s purchase of renewable energy business of Welspun Enterprise Ltd at an enterprise value of $1.4 billion, the biggest in Indian renewable energy space, has put the spotlight on consolidation in the sector, investment bankers and analysts said.

The acquisition comes at a time when Indian solar tariffs have hit record low, which along with mounting debt has forced players to put their assets on block in a highly competitive environment.
For Tata Power, which had a minimum presence in the solar sector so far, it is a quantum leap. “We have seen sharp fall in silicon prices. We had waited for capex cost to stabilise and tariffs to come close to grid parity before setting ambitious rollouts,” Anil Sardana, Tata Power, CEO said. The deal, which is valued at Rs.7.7 a mega watt, involves 990 megawatt of solar power projects and 150 megawatt of wind projects and expand Tata Power’s renewable energy portfolio to 2.3 gigawatts. The deal also involves a 60 per cent debt component.

More deals

“The Indian solar market has been attracting a lot of international developers for whom acquiring projects that are already in operation could be a less risky way to enter the market than bidding in a hyper competitive auction. Also, large Indian power conglomerates who had earlier stayed away due to skepticism might look at acquisitions as an attractive, lower risk entry strategy as solar goes mainstream,” Raj Prabhu, CEO and Co-Founder of Mercom Capital Group said.

There are more deals in the pipeline. According to Mercom Capital, among developers with large operating portfolios, Indian projects of SunEdison, which filed for bankruptcy in the U.S. recently, is the next obvious target, while smaller portfolios of Lanco might also be on the block.

The firm estimates that at least 2-3 gigawatts of solar project pipelines could be for sale. Solar tariffs in recent auctions have fallen to sub Rs.5 levels. Interestingly, Welspun has not participated in any of the bids.

According to Mercom’s solar projects tracker, Welspun solar projects have ranged from Rs.5.2 to Rs.12.64 per mega watt, with the weighted average of about Rs.7.86 per mega watt, excluding a viability gap funding project. Compared to this, the current market bids are in Rs. 4.5-5 per mega watt range.

“Consolidation is starting to occur in the industry. The volume of secondary assets and power purchase agreements available in the market has increased significantly year over year,” Rahul Goswami, managing director at clean energy investment bank Greenstone Energy Advisors, which is handling some of the transactions involving renewable capacity.

Banks wary

Banks are wary of financing to solar projects bid aggressively.

“Lack of additional capital to scale is one of the drivers behind consolidation. Small or mid-sized platforms are finding it difficult to compete in recent tenders and are increasingly considering monetization,” Mr. Goswami said.

According to Equirus Capital, a mid market focused investment bank, there are at least 5 other wind and solar platforms having operational capacities of over 400 mega watt, which are in the midst of transaction discussions. These involve a combination of primary fund raising as well as strategic buyout.

“ In the last 12 months this is the fourth large transaction (over $150 million) that has happened in the sector,” Ashish Agarwal, Director-Infrastructure, Equirus Capital, said.