India | Solar Energy – Fixed Income
Azure power is a leading independent power producer and developer of solar energy in India. The
company, founded in 2008 by Indrapreet Wadhwa, was a pioneer in India’s Solar projects and
developed the first private utility scale project in 2009. Currently, the company has a total portfolio of over 2.1 GWs spread across 23 states and 35+ operational utility scale projects (~1 GWs) in addition to several commercial rooftop projects. The company has a 1+ GW contracted pipeline with average tariff of INR 3.00 (~USD 4.6 cents)/kWh. Azure’s long term goal is to achieve 5 GWs by end-2020.
The company sells its generated energy using long term Power purchase Agreements (PPAs) with its customers, which provide cash flow stability and earnings visibility. ~75% of Azure’s off-takers are rated A to AAA credit rating domestically. The Restricted Group’s (RG) portfolio, which backs the USD bond, enjoys a superior off-taker profile with over a third being taken up by sovereign backed entities such as NTPC and SECI. 98.5% of the RG portfolio has 25 year PPAs in place with the remaining 1.5% on a 12 year PPA.
Azure Power was the first Indian power company to list on the US Stock Exchange. Currently, its market capitalization stands at INR 25.9bn (USD 377m). Azure is majority held by Canada’s pension fund, CDPQ and IFC which together control over 50% of the company. Its holders also include 2 venture capital firms, Helion Venture and Foundation Capital while Mr Inderpreet Wadhwa holds a little over 6%. Azure is rated Ba3, Stable by Moody’s and BB- by Fitch Ratings.
FY2018 Results Review (Consolidated)
Azure Power’s FY2018 results came in line with expectations. Revenue reached INR 7,701m in FY2018, up 84.1% year-over-year (YoY). This primarily came about on incremental revenue from projects that were launched over the last 2 years which led to generation of 1.2bn kWh in FY2018 versus 618m kWh in FY2017. Various projects commenced operations in Punjab, Karnataka, Andra Pradesh, Uttar Pradesh, and Telengana among others in FY2017 and FY2018. As such, Azure’s operating capacity increased to 968MWs and 35MWs of Commercial and Industrial Rooftops at end-FY2018 from 747MW and 24MWs at end-FY2017. Plant load factor was slightly over the period at 18.2% (PPA guarantee a minimum 12% PLF). Management expects this to pick up to 19-21% over the next 2-3 years as the new constructions are concentrated in high solar radiation zones.
Azure’s adjusted EBITDA in FY2018 increased 93.4% YoY to INR 5,821m from INR 3,010m in FY2017. Adjusted EBITDA improvement in FY2018 is attributable to the increase in net revenue. Moreover, the company’s Adjusted EBITDA Margin improved to 75.6% in FY2018 from 72.0% in FY2017.
Azure reported a higher cash burn in FY2018 of INR 18,224m, compared to INR 15,460m burn in FY2017. This came about despite positive OCF generation during the year of INR 1,839m, as the company continued to spend heavily on new projects. As such capex was INR 19,666m (up 27.4% YoY). Of the total capex, INR 17.5bn was attributable to new projects in Andhra Pradesh, Uttar Pradesh, Telangana and various rooftop projects.
As expected, Azure’s balance sheet was further levered during the period in order to support its project pipeline. Total Debt reached INR 53,109m from INR 50,856m in FY1H18. Within the last 12 months, total debt has increased by INR 20,411m. While the company successfully issued India’s first Solar Green Bonds and raised INR 31,260m, it used INR 26,397m of proceeds to repay term loans related to its projects in Punjab, Gujarat, Uttar Pradesh, Karnataka, Rajasthan, Bihar, Andhra Pradesh and Telangana. During the year, Azure also raised INR 10,683m for projects in Maharashtra, Uttar Pradesh, Andhra Pradesh among others. As such, the USD bond now constitutes a large portion of the company capital structure accounting for 67% of its total debt. While the company remains well capitalized for its project pipeline, its largest shareholder, CDPQ, also has a Right of first offer on Azure’s assets whereby the company can bring in CDPQ as a minority equity investor in projects without existing shareholders' dilution. This could potentially allow the company to free up some its balance sheet capacity, if ever in need.
The company had liquidity resources of INR 9,730m at end-FY2018 and minimal short term debt of INR 874m, resulting in a comfortable Cash/ST debt ratio of almost 10x. Interest Coverage however remained weak at 1.1x while both gross and net leverage too remain high at 9.1x and 7.7x, respectively. We expect these to gradually decline as new projects come on stream and become EBITDA accretive. The liquidity position should remain at comfortable levels given the long term nature of most of the borrowings at the company.
FY2018 Results Review (Restricted Group)
The Restricted Group (RG)’s topline reached INR 5,387m in FY2018, up 90% from INR 2,836m last year. EBITDA almost doubled to INR 4,765m over the period while the margin improved 205 bps to 88.5%. However, this was slightly below management guidance at the time of the bond offering of INR 5,716m in revenue and INR 5,213m in EBITDA. The 100 MW project in Telangana which was the only project under construction at the time of the bond issue commenced commercial operations in 4QFY17 as guided. As such, the total portfolio of 621 MW is currently operational.
Similar to the consolidated group level, the RG reported a cash burn in FY2018 owing to high capex, albeit lower than last year. RG reported OCF of INR 2,633m during the year versus capex spend of INR 8,734m. Although elevated, this was significantly lower than FY2017’s capex spent of INR 12,317m. As such, with the whole portfolio now operational, we expect capex to gradually decline over the coming quarters. Fitch Ratings expectations, at the time of issue, for capex was INR 6.5m in FY2018 to decline to INR 3.5-4m from FY2019 onwards.
Gross debt was more or less stable over the period, and will continue to be so, with the USD bond being the sole borrowing under the RG. Net debt was INR 29,614m and gross and net leverage stood at 6.9x and 6.2x, respectively. This was an improvement from 9.1x and 8.4x at end-1HFY2018. Interest coverage was weak at 1.5x as the company recorded various one off interest costs related to the repayment of term loans during the period.
Conclusion and Recommendation
Azure Power’s consolidated FY2018 results came in line with expectations with revenues increasing 84% YoY in FY2018. This primarily came about on incremental revenue from projects that were launched over the last 2 years which led to generation of 1.2bn kWh versus 618m kWh last year. Consolidated EBITDA increased 93.4% YoY while the margin improved 364 bps. Cash burn was higher in FY2018 as capex remained elevated. Of total spent, almost 90% was spent on new projects in various states across India. Various projects commenced operations during the year, taking Azure’s operating capacity to over 1 GW from 771 MW in FY2017. Management reiterated its FY2019 guidance of 1.3-1.4GWs of operational capacity and USD 143-151m of revenues.
The Restricted Group (RG)’s topline increased 90% while EBITDA almost doubled and the margin improved 205 bps to 88.5%, in FY2018. However, this was slightly below management guidance at the time of the bond offering of INR 5,716m in revenue and INR 5,213m in EBITDA. The 100 MW project in Telangana commenced commercial operations in 4QFY17 and as such, the total portfolio of 621 MW is currently operational.
Gross debt was more or less stable over the period, and will continue to be so, with the USD bond being the sole borrowing under the RG. Gross and net leverage improved to 6.9x and 6.2x from 9.1x and 8.4x at end-1HFY2018. Interest coverage was weak at 1.5x as the company recorded various one off interest costs related to the repayment of term loans during the period.
Within the India renewable players, Azure Power’s operating performance has been in line with guidance and the company has been less aggressive than its peers in terms of inorganic growth. We also like Azure’s superior counterparty credit profile leading to lower working capital needs. Although its leverage remains high, we expect this to gradually decline as new projects come on stream and become EBITDA accretive. AZUPOE 5.5% 2022’s have widened recently along with the rest of the Indian renewable complex and currently trades at 89.4/8.5% on the offer side which we view as attractive and retain our BUY recommendation.