Buy ACME Solar Holdings Ltd For Target Rs.330 by Motilal Oswal Financial Services Ltd
Fueling a greener tomorrow!
A focused play on renewable energy generation!
* ACME Solar Holdings (ACME) boasts a diversified portfolio of ~7GW of renewable capacity (operational + under construction + pipeline) spanning solar, wind, hybrid, and firm & dispatchable renewable energy (FDRE) projects. As of date, the company has an operational portfolio of ~2.5GW, while the total project pipeline, including under-construction projects, stands at ~4.4GW.
* About 86% of the company’s portfolio is contracted with central off-takers, including SECI, NTPC, SJVN, and NHPC, involving minimal counterparty risk. The portfolio consists of about 49% plain vanilla solar projects, 2% plain vanilla wind projects, and 49% hybrid, FDRE, and other projects.
Modeling a strong 52% EBITDA CAGR over FY24-FY27E
* We estimate ACME’s EBITDA to clock a CAGR of 52% over FY24-FY27, as the under-construction pipeline is commissioned and operational capacity surges ~3x over FY24-FY27E.
* The company is set to operationalize the 0.35GW/0.1GW/2.3GW projects in 4QFY25/FY26/FY27 (FY24 operational: 1.34GW). We are modelling a stable EBITDA margin of 87%-89% over FY26-27, in line with peers.
* Also, ACME has continued to bid and win new projects in YTD FY25 (1.9GW in the YTD FY25), and the pipeline has continued to expand given the robust pace of new Letters of Award (LoAs) by SECI and other central agencies in YTD FY25.
ACME’s 100%/83% of FY26/FY27 upcoming capacities are PPA backed
* Of the total under-construction projects, amounting to 4.43GW until FY29, the company has already signed power purchase agreements (PPAs) for projects totaling ~2GW. This implies that the entire FY26 revenue/EBITDA is ‘in the bag’ i.e., backed by PPAs. With PPAs signed for 83% of the capacity coming up in FY27, a significant portion of the FY27 revenue/EBITDA is also ‘in the bag’.
* Additionally, LoAs have been granted for the other 2.1GW projects. A few of these projects could be converted into PPAs over 4QFY25-1HFY26 in our opinion, thus enhancing the visibility of FY27 earnings further. Additionally, ACME has grid connectivity in place for all its under-construction projects with an additional ~2GW of connectivity (both applied and secured) available for future bids. This alleviates any concerns regarding grid availability.
ACME up-trading into complex projects to preserve mid-to-high-teen IRR
* The company’s share of complex renewable energy (RE) projects has risen recently, with FDRE and hybrid projects now accounting for 49% of the entire portfolio (including under-construction projects).
* With rising competition in the RE sector, equity IRRs in some segments, such as plain vanilla solar and wind projects, have witnessed deterioration (low teens). The complex projects, though, still enjoy healthy IRRs (mid to high teens), according to our channel checks.
* ACME is one of the few players building wind capabilities. This gives the company an edge over peers, such as NTPC Green, which is less focused on wind energy.
EPC margin, debt refinancing, and operating cash flow to fund growth
* We are building in cumulative capex of INR397b over FY25-27 for the 4.43GW pipeline. We believe this would be financed by a combination of: 1) project debt, 2) operating cash flow generated over FY25-27, and 3) debt refinancing of projects being commissioned, raising debt proportion beyond the initial 75%.
* Over FY25-27, 3.93GW of projects entailing a total capex of INR407b are likely to be commissioned, assuming 10% of additional debt refinancing for these projects yields a total cash flow of INR41b.
* In addition, we estimate operating cash flow to remain strong during FY25-27, totaling INR24.8b, which should aid financing for under-construction projects. Of the total under-construction capacity of 4.4GW, the company has already secured debt for 1.7GW, amounting to INR165b.
* While net debt to EBITDA is elevated throughout FY24-27, we anticipate this ratio to taper off by FY28 as the majority of the under-construction pipeline is commissioned.
Delays in PPA signing and high competitive intensity remain the key risks
* While the company remains confident about signing PPAs for all the underconstruction projects in the near to mid-term, this has been a key investor concern in the sector recently (media article).
* Further, with intensifying competition in the RE sector, equity IRRs in a few segments, such as plain vanilla solar/wind projects, have experienced deterioration. However, complex projects enjoy healthy IRRs (in the mid-to-high teens) according to our channel checks. The rising competitive intensity remains a key risk worth monitoring, in our opinion.
* However, we believe that ACME is one of the few players building wind capabilities, enabling it to win complex projects, which offsets competition risk to some extent.
Valuation gap vs. NTPC Green to narrow; limited downside risk from hereon
* We initiate coverage on ACME with a BUY rating and a TP of INR330. We assign an EV/EBITDA multiple of 11x to FY28E EBITDA. Adjusting for net debt, we derive our TP of INR330, implying a 59% upside potential.
* Our EV/EBITDA multiple is at a discount to competitors, such as NTPC Green, which is trading at ~14x FY28 EV/EBITDA. Further, the Street is currently attributing 15x EV/EBITDA to the renewable businesses of JSWE and Tata Power.
* We believe ACME’s steep valuation discount vs. NTPC Green is unsustainable and should narrow in the coming quarters. We further believe that NTPC Green’s premium valuation is largely a function of lower financing costs (up to a 2% interest rate advantage). However, this advantage is dented given that NTPC Green outsources both EPC and O&M for its projects (which other players perform in-house).
* Assuming a 10% EPC margin and a 50% O&M margin for solar projects, we estimate NTPC Green will lose 79% of the interest cost savings over the project life. While we acknowledge NTPC Green’s superior financing cost, we highlight that ACME (as well as other players who undertake in-house EPC/O&M for projects) saves significant costs.
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