ReNew Energy Global Plc (NASDAQ:RNW) Q3 2023 Earnings Call Transcript

ReNew Energy Global Plc (NASDAQ:RNW) Q3 2023 Earnings Call Transcript February 17, 2023

Operator: Thank you for standing by and welcome to the ReNew’s Third Quarter Fiscal Year 2023 Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. . I would now like to hand the conference over to Nathan Judge of Investor Relations. Please go ahead.

Nathan Judge: Thank you Jason and good morning, everyone, and thank you very much for joining us. This morning the company issued a press release announcing results for its fiscal third quarter 2023, ended December 31, 2022. A copy of the press release and the presentation are available on the Investor Relations section of ReNew’s website at www.renew.com. With me today are Sumant Sinha, Founder, Chairman and CEO and Kedar Upadhye, the CFO. After the prepared remarks we will open the call for questions. Please note, our Safe Harbor Statements are contained within our press release, presentation materials, and available on our website. These statements are important and integral to all our remarks. There are risks and uncertainties that could cause our results to differ materially from those expressed or implied by such forward-looking statements.

So we encourage you to review the press release we furnished in our Form 6-K and presentation on our website for a more complete description. Also contained in our press release, presentation materials, and annual report are certain non-IFRS measures that we reconciled to the most comparable IFRS measures, and these reconciliations are also available on our website in the press release, presentation materials, and annual report. It is now my pleasure to hand it over to Sumant.

Sumant Sinha: Yes, thank you Nathan and a good morning, good afternoon, or good evening to everybody listening in on the call. Welcome to the call. Let me start off by saying that the Indian renewable energy market remains incredibly robust and we see plenty of high return investment opportunities in the horizon, where we do believe we have a competitive advantage, specifically in the complex projects and corporate PPA segments. We have developed a platform that is differentiated not only in India but even when compared to peers globally. We have operational expertise across renewable energy, technologies with leading proprietary digital capabilities that creates optimal and customized product for our customers. We believe that the world is shifting, customers are increasingly recognizing the climate change imperative as an existential risk and are moving rapidly to decarbonize.

We are one of the few companies globally that can deliver that decarbonization solutions for our customers that most of the companies are not really focusing on as much. As these solutions require technological leadership, complexity, and customization we believe that we will be the decarbonization leader and will be even better positioned to capitalize on these opportunities more than ever before. From our perspective as we look at it today, we believe that our EBITDA will grow at least 50% over the current base as we execute on our entire portfolio in the coming two years. We expect to layer further growth on top of this with a particularly interesting round of upcoming auctions over the next year, given the complexity. In addition to this is the evolution of opportunities and digitalization and green hydrogen that provide our investors incredible upside options that many countries are not focusing on as much at this point.

We believe that the value of our shares do not reflect one of the best growth rates in the renewable energy industry combined with equity returns that are among the highest in the world, so much so that we have already brought about $60 million of our own stock which represents over 15% of the fees load in only the last 10 months or so. We have another $90 million of authorization or another 20% of fees load approximately and we have every intention to use that authorization aggressively given where the current share price is. We believe the value of the company has been highlighted with over 500 million of asset sales over the past 18 months at valuation multiples that are consistently higher than new build multiples. Starting on Page 4, to discuss highlights this quarter.

We continue to report strong growth and for the first nine months of this fiscal year 2023, revenues from contracts with customers grew 24% year-on-year. Adjusted EBITDA was 18% higher and cash flow to equity increased 11% from the same period in the prior year. We have commissioned capacities of 7.7 gigawatts operating and the total capacity under construction currently is 5.4 gigawatts and another 337 megawatts is in the process of being acquired, which brings our total portfolio size to 13.4 gigawatts. So far this fiscal year our core operations, what we can control, are tracking within a smidge of our internal budget provided at the beginning of the fiscal year. With only about six weeks left in this fiscal year, we expect that we will end the year around INR 61 billion to INR 63 billion.

The revision in guidance is essentially for reasons beyond our control. This includes delayed completion of the acquisition that we had announced earlier this fiscal year and which is still under process. Based on where we are in the process, we now expect the acquisition to close early next year. We had expected that this acquisition would add about INR 3 billion or so this year in our original guidance, which looks to be realized in FY 2024 and beyond. Even though the acquisition has not contributed to EBITDA this year, it is contributing to our balance sheet. The lockbox date was set at the beginning of this fiscal year, and we retain the economic value and cash generation, which accrues to our balance sheet. Also, carbon credit sales of around INR 1 billion that we expected to be realized this fiscal year are now likely to slip into early next fiscal year, given the backlog of projects that are in the process for registration at various carbon exchanges.

Also, weather continues to be a bit of a headwind and whilst we capture the majority of the negative hit this year in our guidance at the beginning of the year, the weather along with a variety of other items, look to end up another INR 1 billion or so worth in our beginning of the year assumptions. We are focused on the long run and still believe that ReNew will be delivering adjusted EBITDA of INR 89 billion to INR 94 billion over the next several years or about 50% higher than this year. Virtually all of this growth is contracted and highly visible. As we have reiterated many times, we are focused on creating value and one of the key determinants of creating value is maximizing returns not only through disciplined bidding and product offerings, but also through execution.

In this way, SECI began granting extended construction time line which may present us an opportunity to enhance the returns on these projects under development. Module prices are also down 20% or so in the last couple of months, which allows us to streamline construction schedules for our 5.4 gigawatts under development and potentially bring in plants earlier to capture market sales, which could materially improve the returns on our pipeline. We are planning to update the market in the next couple of months but broadly, we do expect that the adjustments will be moderate, and all the projects in our pipeline will be executed as they are all expected to earn return above our threshold minimums. We are making good progress on our accounts receivables and are seeing regular payments from the stake — from the state distribution companies that has the highest amount of over dues.

Also during the quarter, we added another 300 megawatts of corporate PPAs, bringing that portfolio to 1.8 gigawatts or about 13% of our total portfolio. Separately, we also received some strong ESG ratings from Refinitiv, Sustainalytics, and Carbon Disclosure Project. Refinitiv recently updated their ESG rating on ReNew and we are now ranked as the second highest of any electric utility or IPP globally. Sustainalytics ranked us as a top ESG-rated company. We also received the highest rating by the Carbon Disclosure Project among all Indian renewable companies. On to signing of new PPAs on Page 5, as I said we have signed another 300 megawatts of PPAs this quarter, and we have also de-risked our growth as only 1% of our 13.4 gigawatt portfolio as pending PPAs. The corporate PPA portfolio has nearly tripled from the same time last year and as I said, it’s now 1.8 gigawatts with a growing backlog.

We estimate that we have the largest market share by a significant measure in this market, which show that differentiated advantage in this business segment. Corporate PPAs offer higher returns than plain renewable energy projects, given higher barriers to entry, our ability to partner with corporate customers and provide them energy solutions sooner than our competitors. We continue to believe that ReNew will have a 4 to 5 gigawatt corporate PPA portfolio by 2025. The volume of auctions for complex projects, such as round the clock and peak power continues to be robust. At the moment, there is about 12 gigawatts of auctions for these complex projects under process and given our differentiated platform that provides us cost and revenue advantages, we remain bullish that we will be able to capitalize on these at returns that are above our minimum return thresholds.

With regard to CAPEX, the prices of materials, modules which go into our CAPEX has moved in our favor since our last earnings call last November, and this is discussed on Page 6. On this front, we have seen around a 20% reduction in prices for modules compared to levels in November. Falling prices for wafer and cell prices are likely to also make the delivered prices from our captive manufacturing even more competitive. From where we stand today, we are even more confident about delivering returns within our targeted 16% to 20% equity IRR range at the project level. We believe there is further opportunity to improve returns through capital recycling, further implementation of proprietary digitalization, and continued pursuit of operational excellence.

As a reminder, we have locked in wind turbine prices so there is essentially no material exposure on this front. If in the event that any additional new project has an expected IRR below our minimum thresholds, as you know, we will not proceed. We will remain disciplined with your capital. With that, I would like to turn it over to Kedar to go over the latest quarter’s financials.

Kedar Upadhye: Thank you, Sumant. I’ll now move to Slide 8, which provides the highlights of the fiscal third quarter of 2023. We added 66 megawatts this quarter to bringing the total 7.8 gigawatts operating. We signed another 282 megawatts of PPAs, which brings the total amount under construction to 5.4 gigawatts. Our revenues from customers rose 24% year-on-year in the first nine months of fiscal 2023. EBITDA increased 18% in the nine months of fiscal 2023 when compared to the same period in the prior year, and our cash flow to equity increased 11%. While solar generation was better than last year, the wind PLF was about 200 basis points lower than the prior year, which was in keeping with the lower production from wind sites recorded across all of India.

Turning to Page 9, which provides a reconciliation of adjusted EBITDA in Q3, which stands at INR 11.628 million. The wind resource continues to be below normal albeit above the lows witnessed several years ago and carbon trade sales were below last year, although we expect this will come in the next fiscal. EBITDA through the nine months ended about 98% of our internal budget and for our core operations excluding the impact of weather and the timing impact of carbon related sales, the full year looks like it will end up around the same. With regards to our cash flow generation on a nine months basis, our cash flow to equity was 11% higher than the prior year, although CAP this quarter was impacted by the timing of interest payments after refinancing the green bond, that paid the interest biannually with domestic debt which pays the interest monthly.

Also worth noting is the strong cash generation from our cash flow statement. Cash flow from operations for the third quarter of FY 2023, nearly doubled to $261 million for the same period in the prior year as one of the largest positive contributors was a $122 million reduction in our receivables from the second fiscal of 2023. Turning on to Page 10, as we have highlighted many times over the past year, we have been focused on improving collections on the past due receivables from the state distribution companies, and we are pleased to announce that we have made a sizable progress. The Q3 DSO improved by over two and half months compared to the end of Q3 in the prior fiscal, and that contributed about $122 million to our cash position as the discounts that have been laid on payments have now been making up payments.

As a reminder, the AP DISCOM, which represented about 42% of our current past due receivables in March 31, agreed in June to pay past dues over the next 12 months in equal monthly installments, and has made about six to seven payments out of 12 so far. The other states that were late have also been making payments on past dues. At this point, we are expecting to end the fiscal with further improvement in the DSOs, which would represent a release of cash from working capital of approximately INR 6 billion or more from the prior year. We continue to expect further improvement in our DSOs over time as an increasing percentage of our sales will be to the central government owned SECI, which pays its bills promptly and on time. Today, with 7.8 gigawatts operating about 50% of our assets are with the five DISCOMs that have high DSOs as almost all of our committed projects are with SECI or with corporate customers who pay on time.

The exposure to these five DISCOMs will fall to about 32% by the time we complete the exhibition of the portfolio. This customer mix shift would represent an improvement of 55 days in our overall DSO just by itself. With that, I will turn it back to Sumant for a comment on our ESG and guidance.

Sumant Sinha: Yeah, thank you, Kedar. I’m taking up ESG on behalf of our Sustainability Head, Vaishali. Turning to Page 12, continuing our momentum from last year, we are committed to setting new benchmarks in all fronts of ESG performance and transparency. Our latest ESG rating scores are testimonials to our endeavor on this front. As a validation of our ESG commitment and performance, we recently received a score of 81/100 from Refinitiv, a global provider of financial market data. This score positions ReNew as number one in India in the electric utilities and IPP category and as I said earlier, number two globally in the same category. Furthermore, ReNew has been recently included in the top-rated ESG companies list released by Morningstar Sustainalytics for the year 2022, 2023.

We believe this is a validation of ReNew’s ability to identify and manage ESG risk that can impact our operations. CDP has rated ReNew as B for climate change, which is the best rating among the renewable energy companies in India and higher than the Asia average, which is a C. A B rating from CDP for ReNew reflects that the company is taking coordinated actions for climate change mitigations. To drive collaborative impact towards a fossil-free future, we continue to work with our employees, communities, and partners. Towards this end, ReNew has undertaken the following initiatives. We have pledged to plant 1 million trees by 2030 under World Economy Forum’s 1 trillion trees initiative. Our corporate office in Gurugram in India has been recognized as one of the best existing green buildings by GRIHA, which stands for green rating for integrated habitat assessment, India’s green building rating agency equivalent to the U.S. GBC, United States Green Building Council.

Our annual program called Gift Want has benefited 275,000 people across 11 states in India this year. One of our other initiatives, Project Surya, focusing on job training and entrepreneurship development of women’s salt pan workers, was showcased in COP 27 in the India Pavilion and the G20 Power Inception event. Turning to Slide 13, we continue our efforts to achieve our ESG targets with specific initiatives. Earlier last year, we submitted our science-based GAG reduction targets, which have now reached a validation stage by SBTI. Working towards our target to achieve water neutrality by 2030, a feasibility study is currently underway, near our site to identify community-based initiatives to offset our water footprint from our operations. We also, I should say, have achieved a 12% women representation in our workforce by the end of Q3, and we are working on increasing it substantially to 30% in the next two years.

We would be disclosing progress across our targets in our forthcoming sustainability reports. I invite you all to engage with our sustainability report 2021-2022, which was released in October 2022. Moving on, with regard to our guidance, this is now beyond the sustainability section. With regard to our guidance outlined on Slide 16, we are shifting our FY 2023 adjusted EBITDA guidance, as I said earlier, to a range of INR 61 billion to INR 63 billion, which reflects the absence of the expected EBITDA contribution from our acquisition and the process; the deployment of carbon credit sales; and some impact of weather, which is deferring some of our EBITDA. Again, we are not revising our portfolio run rate EBITDA, which is about 50% above expected levels this fiscal year and which is essentially fully contracted and should be reached over the next couple of years.

On the buyback front, as I said, we have repurchased about 25 million shares since we implemented the program, which still leaves us about $90 million of authorization remaining. $90 million represents approximately 20% of the currency float at today’s share price. We continue to see considerable value in our shares. As we have evidenced by numerous asset sales over the past year, RNW trades at a meaningful discount to what we can sell assets for. As our shares are one of the highest return investments of scale that we can make, we have been actively buying back stock when we believe that it would provide the highest return opportunity for our shareholders. With that, we will be happy to take any questions. Nathan, back to you.

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Q&A Session

Operator: . The first question comes from Julien Dumoulin-Smith from Bank of America. Please go ahead.

Morgan Reid: Hi, thanks for taking the question. This is actually Morgan Reed on for Julien. Can you first talk about the execution on the corporate PPAs this quarter, it seems like this is clearly an increasingly relevant portion of the pipeline, we’ll be interested to understand what proportion of the portfolio you think this can kind of become in the next year, I think kind of trying to understand where you are focusing your growth, clearly, you’ve talked about this opportunity quite a lot?

Sumant Sinha: Yes. In terms of — we signed a lot of our corporate PPAs in the last six to nine months and less than that. So a lot of these projects have been under execution. But I think the important thing to note is that we signed most of this 1.8 gigawatts in the last 12 months and that gives you a sense that the momentum in that part of the market is pretty good and it’s picking up. We have also stated earlier that we expect almost about 25% of our future PPAs to come from the corporate market. We have a pretty healthy backlog at this point in time and so I suspect that, that is something that we should be able to achieve in the near term.

Morgan Reid: Got it, thank you. And then can you also kind of elaborate on the value that you’re associating with the decline in module prices, it seems like maybe there’s some accelerated development opportunities and certainly some decrease in CAPEX. Can you just talk about how we should think about that as we’re looking at the current development opportunities?

Sumant Sinha: Yes, Kedar, do you want to take that?

Kedar Upadhye: Yes. So I think we spoke about the 20% decline in the module prices from November until now and the new POs that we are placing are at a level which makes us pretty comfortable. If we wait for some more time, there might be a little bit of a further decline as well, although some of these things are not fully predictable. And yes, I think this allows us to manage the CAPEX well, this allows us to get the IRRs back in shape because the prices, especially during June to November period, were quite elevated as we know. So we are — we continue to track and we continue to stagger the orders and deliveries in a manner in which we stay very close to our target range of the IRRs.

Morgan Reid: Great, thank you. I will get off. Bye.

Operator: Our next question comes from Nikhil Nigania from Bernstein. Please go ahead.

Nikhil Nigania: Hi, thank you for taking the question. On the acquisition front, the quantum of 528 megawatts last time we see is lower this time, any reason for that? And also on time lines on completion of that acquisition, if you could give some guidance?

Kedar Upadhye: Yes. So Nikhil, this acquisition was another slumps in route, which means you have to change the titles to the underlying assets, you have to transfer the PPA, you have to transfer the lease, you have to transfer the title of all other assets. And that’s a little — relatively a little more time involving process compared to a pure share purchase agreement. And this has given us a lot of learning but as we said, the lockbox date is already agreed from beginning of this year. So the cash flow for those PPAs will get to a balance sheet as a reduction from the CAPEX. What this has also done is this has allowed us to reflect in terms of the quality of the assets that we are pursuing. And in the next few months, we will make judgment as to what’s the right proportion of these assets that we should be finally acquiring.