Green energy capex on a charged-up rebound, says CRISIL analysis

Credit profiles seen stable, given strong accruals and investor interest

Capacity addition in the renewable energy segment surged 145 per cent year-on-year in the first eight months of the current financial year (FY22) with 8.23 Gw added as of November. The solar segment led the additions with 7 Gw, way above the 5.4 Gw it added in the entire FY21.

The outlook for FY22 remains positive, with 11.5-12 Gw of solar energy and 2 Gw of wind energy expected to come online by March, involving an investment of Rs 53,000-55,000 crore.

In FY23, the solar and wind segments are expected to see capacity additions and investments of 17-18 Gw and Rs 76,000-78,000 crore, respectively.

The key drivers for renewable energy growth:

* A healthy solar and wind energy pipeline following robust allocations of 58 Gw across the two segments over FY19-2021. Also, Covid-related extensions have led to a bunching up of projects pending from previous years that are expected to be commissioned in the current and next financial years.

* The ability to avail of financing at lower costs compared with previous years amid a low interest rate regime and global investor interest in the Indian market. Indian renewable energy entities managed to raise $2.6 billion via green bonds in the domestic market as of November this financial year compared with $0.4 billion in the corresponding period in FY21.

* The increasing size of key players in the market provides benefits of scale (cost optimisation and support from an increasing operational base). That said, the average portfolio of the top 10 players, which form 35-40 per cent of the operational base, grew from 6.1 Gw in March 2021 to 8 Gw as of November.

This comes against the backdrop of a relatively weak execution momentum over FY19-2021 owing to various policy changes (changes in the goods and services tax or GST rate, imposition of additional duty, contract renegotiations, etc) and Covid-related restrictions, with capacity additions averaging 8.2 Gw over the period.

Consequently, weighted average tariffs have also declined, especially in the solar segment where tariffs dropped from Rs 2.7 per unit on average in FY19 to Rs 2.5 per unit (excluding hybrid and storage tenders) currently due to the drivers mentioned earlier, coupled with stable module pricing, but helped by a declining safeguard duty trajectory. Going forward, module pricing dynamics, including the availability of supply (considering import barriers such as a basic Customs duty levy and a restricted list of approved module manufacturers) and moderation in module pricing will be a key monitorable for the capacity addition outlook.

Meanwhile, the credit outlook for the renewables sector is expected to remain ‘stable’, backed by strong investor interest and an expected increase in cash-flow generation for leading players in the sector. These factors are expected to help balance equity and debt capital, thereby improving leverage ratios and optimising the capital structure of key players.

The 10 leading players have raised over Rs 20,000 crore of equity in the 15 months through June 2021 and more tie-ups are in the pipeline. Innovative structures such as special-purpose acquisition companies and infrastructure investment trusts have also been used for the first time in the sector to raise funds.

Further, cash accrual is expected to rise with an increase in the operational portfolio of such players. These drivers are expected to lead to stable or moderately improving leverage for leading players. CRISIL Ratings believes the total debt/Ebitda of the 10 leading renewable developers should fall marginally from 7.9 times last financial year to 7.4 times next financial year.

The regulatory environment is expected to be reasonably supportive, as seen in the last calendar year with the extension of inter-state transmission waivers and schemes for discoms to ease receivable liquidity pressures of gencos and help them tide over any pandemic-related disruptions in FY23.

That said, payment risks from state-run discoms still loom as their credit profile remains weak. In addition, variability in wind speeds may be a monitorable for wind players as it may dampen generation levels against market expectations. These remain credit-sensitive factors for renewables developers.