Azure has exercised great discipline, in our view, and continued to remain focused on reducing cost and improving its PLFs: AZRE has been adding higher DC capacity to its existing plants and improving efficiency to ensure higher plant load factors (PLFs). This has resulted in its FY21 PLF being 20.9% vs. 19.5% in FY20 despite adverse isolation during the year. We have also seen the company exercise great restraint in bids where tariffs fell below Rs2/kWh. Our analysis of its historical bidding trends also highlight that it hasn’t been the lowest bidder most of the time and even when it wins bids, it hasn’t always been the lowest, demonstrating mature bidding.
But this is not enough, in our view, as issues typical of any nascent industry, regulatory issues, increasing competitive intensity, module price uncertainty, and delays in signing agreements are likely to keep returns limited and growth uncertain: We believe the industry is yet to sign PPAs for the letters of award to the extent of c22GW of capacity for want of demand from state discoms. Azure also has unsigned PPAs for 4GW of capacity and recent news reports suggest the potential of downward revisions in tariffs of 10-13% (Mercom India, 6 July 2021). Solar module prices, however, have gone up and module manufacturers that are unable to absorb increased costs are trying to renege from their signed contracts. This is likely to reduce the expected IRRs from already bid out projects. While uncertainty remains in the industry and some consolidation is taking place, the renewables industry continues to see new entrants. We now see listed entities that have so far shied away from the tight bidding and government-owned old energy firms with low costs of capital looking to add green credentials.
Maintain Hold rating; raise TP to $27.50 (from $27.00): While we do like the company’s approach to business, the environment remains tough and uncertainties continue to disturb the growth and profitability trajectory. We incorporate our new assumptions on solar module prices, capacity installation, tax assessment, and new tariff assumptions for 4GW of capacity. This results in changes in our earnings estimates for FY22e/23e of (-)374%/(+)19.9% as the base of earnings is very low. We introduce and incorporate our estimate for FY24e. We value the stock using a DCF methodology, assuming a cost of equity of 13% (unchanged) to arrive at our fair value for end-FY22E, which we discount by nine months to arrive at our new TP of $27.50 (previously $27.00), reflecting our estimate changes.