India’s Solar Powered IPO’s. Why Success Will Matter?

We look at two recent IPOs from the Indian solar giants. At a time when financing is being flagged as a major challenge, successful IPO’s by these contrasting firms will give them a significant advantage over peers who are struggling to raise adequate financing.
Recent weeks have brought news of two IPO’s from firms in the sector. First is, of course, Sterling and Wilson’s plans for a billion dollar IPO, with almost $650 million being the shares offered by key promoters Shapoorji Pallonji and Co and Chairman Khurshed Yazdi Daruvala for sale. The firm, which clocked a top line of Rs 6871 crores in 2017-18, has grown well, especially building a strong global reputation for its EPC and O&M work.

Sterling and Wilson, of course, is a shining success story for the sector in India, where a small solar venture, backed by the financial might and experience of a construction conglomerate has grown to become one of the world’s largest EPC firms in the sector. In fact, so visible has been its success that even L&T, the country’s most well known and visible engineering conglomerate, has rushed to open up a division focused on the solar sector, a clear sign if any that the sector has arrived.  To that extent, the listing of Sterling and Wilson, when it happens, will go a long way in giving both insiders and external players in the sector a better view of the sector as a whole. Unlike say, Azure Power, which went for an NYSE listing, the decision by Sterling and Wilson to go for a domestic market listing is welcome, as it will hopefully give domestic investors exposure to the fast emerging sector, while also helping build awareness and understanding of the sector’s challenges and opportunities. With the extensive experience and background of its promoters, besides its own understanding of the sector, it seems safe to predict bigger times ahead for Sterling and Wilson.

A second listing which is well worth tracking is the IPO plans of Ahmedabad based Gensol Engineering Limited, a classic entrepreneur-driven ‘startup’ story by all means, where its two promoters, brothers Anmol and Puneet Jaggi. The company, like any startup, had its share of challenges, before the founders decided to go all in with renewables. Today, Gensol provides concept to commissioning solar advisory, execution and operation services for solar projects in India and abroad. It is present in 18 Indian states and has ongoing projects in Africa, the Middle East, and South East Asia. With a top line of Rs 80 crore + and annual growth of over 260% for the past three years, the firm is profitable to boot. Gensol is going for a rs 20 crore IPO, making it eligible for the BSE SME platform. Of course, that also means a much more limited coverage and retail participation. At a price band of RS 82 -84, the firm is offering equity at a PE range of 8-10, which seems fair considering potential growth rate, and its own extensive experience with the solar market.

Testing the Public Markets

From an industry perspective, both the IPO’s offer up some instructive lessons, for investors as well as the government, which has a stranglehold on the sector’s prospects with the way policies impact growth. One, it is very difficult for a completely domestic market focused firm to really make money, with virtually every successful firm in the sector looking at exports to grow and make money. Thus, the Indian market absolutely must offer better margins. Pointing to success stories like Amplus Energy (which recently negotiated a buyout by Malaysia’s Petronas) or even Renew power, which, while unable to conclude its IPO journey yet, does have a strong record of fundraising thanks to Sumant Sinha’s experience in the financial sector, will be unfair. Both these firms have had exceptional fundraising ability, besides the good fortune of getting in early, when the market was still offering quality projects with decent returns.  Very few firms in the sector, entrepreneur-driven as they are, have the same advantages.

A second factor is that firms in renewables continue to have to seek traditional funding, missing out on the VC and PE led funding options. This has not been for any lack of interest. But more because of the many challenges government policy (again) throws up, for a higher risk investor to consider these firms. No movement on resolving the issue of sick discoms, or even a clear policy on retiring older thermal plants to create space for fresh renewables capacity is critical. Gensol is a classic example in that scenario. A firm with a similar track record in many other sectors would have easily raised private funding, and delayed going public possibly.

At a time when financing is being flagged as a major challenge, successful IPO’s by these contrasting firms will give them a significant advantage over peers who are struggling to raise adequate financing.

It is said, that a firm usually goes for a public issue today when it settles down to a more predictable growth trajectory, as that is what public markets love and reward the most. It is too early for that in solar, and let us hope these firms open up the gates for many to follow with their track record in the months to follow. India’s renewables market needs it.

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