ReNew Energy Global Plc (NASDAQ:RNW) Q2 2023 Earnings Call Transcript

ReNew Energy Global Plc (NASDAQ:RNW) Q2 2023 Earnings Call Transcript November 16, 2022

ReNew Energy Global Plc misses on earnings expectations. Reported EPS is $-0.03 EPS, expectations were $0.08.

Operator: Thank you for standing by, and welcome to the ReNew Power Second Quarter 2023 Earnings Conference Call. . I would now like to hand the conference over to Mr. Nathan Judge. Please go ahead, sir.

Nathan Judge: Thank you, and good morning, everyone, and thank you very much for joining us today. On Tuesday evening, the company issued a press release announcing results for its fiscal second quarter 2023, ended September 30, 2022. A copy of the press release and the presentation are available on the Investor Relations section of ReNew’s website at www.renewpower.in. With me today are Sumant Sinha, Founder, Chairman and CEO; Kedar Upadhye, CFO; and Vaishali Sinha, Chief Sustainability Officer. Sumant will start the call by going through an overview of the company and recent key highlights. Kedar will then go through the results, followed by an update on ESG from Vaishali. And then we will wrap up the call with Sumant discussing our guidance for fiscal year 2023.

After this, we will open up 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 then to grow to all our remarks. There are risks and uncertainties that could cause our results to differ materially from those expressed or implied by 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 good morning, good afternoon or good evening, everybody, depending on where you are. Let me dive right into the presentation itself. Starting on Page 4 of the presentation. Our core operations fundamentally remain on track, and through the first half of fiscal year 2023, we are in line with our internal targets, excluding the contribution from the 528 megawatt acquisition, which is in process. For the first half of the year, revenues and EBITDA grew more than 20% year-on-year, in line with robust expansion in our commission capacities, bringing the total to 7.7 gigawatts of operating capacity. The total capacity under construction currently is 5.7 gigawatts, which is targeted to be operational by end of the next fiscal year, and that brings our total portfolio size to 13.4 gigawatts currently.

Our revenues from customers rose 28% year-on-year in the first half of fiscal 2023 and cash flow to equity increased by 48% in H1 from last year due to higher revenues from operating capacities and improving DSOs. We are making good progress on our accounts receivables and are seeing regular payments coming in from the state distribution companies that have the highest amount of overdues, and Kedar will cover this in greater detail in his section. On to signing of new PPAs on Page 5. We signed 1 gigawatt of new PPAs this quarter, and we have also derisked our growth as only less than 1.5% of our 13.4 gigawatt portfolio now has pending PPAs. That’s less than 1.5%. The corporate PPA portfolio itself grew 41% from Q1 and is now at 1.5 gigawatts, almost 247% higher than the prior year with many additional conversations occurring right now, which we would hope to convert to firm PPAs in the coming months.

We have signed more than 400 megawatts of corporate PPAs in the quarter ended September 30, and our customers include well-known companies such as Amazon, Suzuki, Mahindra and Toyota. And we believe that this shows our differentiated advantage in this business segment. Corporate PPAs offer higher returns than claim under our renewable energy projects given higher barriers of entry, our ability to partner with corporate customers and provide them energy sooner than our competitors are able to. We are currently having discussions with many corporate customers, and we do believe that ReNew will have a 4- to 5-gigawatt corporate PPA portfolio by 2025. Overall, the growth environment remains bullish as renewables continue to be the lowest cost option for new power capacity in India, and this can be seen on Page 6.

Increasingly, our customers are seeking complex power solutions that can be delivered consistently over the full year, and we have built this expertise by offering a full suite of renewable products overlaid with digitalization and a proprietary AI technology. We believe this is a truly differentiated offering in the renewable sector. Given the need for electricity to be delivered around the clock, we have seen increased interest in our intelligent energy solutions. We expect that over 5 gigawatts of auctions for complex projects will occur over the next several months, with another 8 gigawatts under discussion at SECI. And there is over 100 gigawatt opportunity by 2030. Now keep in mind very importantly that 1 megawatt of RTC Power actually requires more than 3 megawatts of renewable energy power.

The addition of 3E, which I’ll talk about, provide even greater differentiation to our offerings. Our operational expertise across the renewable energy technologies combined with a leading digital platform provides us capabilities that few have, and this can be seen in how few bidders are participating in the complex RD solution auction relative to the Plain Vanilla projects. This continues to present opportunities for higher-than-average returns and our most recent 300 megawatt hybrid win is evidence of this. In this context, I will now speak more about our new growth initiatives. We have signed definitive agreements to acquire shares of 3E, which is a leading European SaaS platform that enhances renewable energy asset performance through analytics and AI.

The transaction should be completed in two stages of 40% now and 40% in 2024. 3E currently already has about 20 gigawatts of assets under management. As we see the energy complex today, efficiencies through digitization will be key to continued differentiation and higher returns as IPPs increasingly require customized products. We have tremendous confidence in the company and have been using 3E’s state-of-the-art software for our own assets for the last 4 years. The 3E platform, along with our internally developed digital capabilities built over the years of experience, we believe will make 3E a worldwide leader in asset performance management for solar, wind and storage assets. There are many global opportunities for this digital platform that can enhance our returns for the incremental capital that we are putting into this investment.

We continue to pursue enhancing the returns on your capital that we deploy through capital recycling. We have recently entered into a partnership with Norfund, the Norwegian government investment fund, for developing countries; and with KLP, Norway’s largest pension company, to co-invest in our transmission projects, and they have signed definitive agreements to invest in the very first project. Our investment in transmission projects is synergistic to our renewable energy project development and further enables higher returns from our core renewable energy business. As we have built over 6,800 kilometers of transmission lines already over the past decade, long distance transmission is a natural extension of our core capabilities. By taking on the execution of transmission lines that connect with our own RE projects, we are able to bring on these renewable energy projects sooner with greater predictability, and allow us opportunities to capture additional revenues from our renewable energy projects in the power markets.

On our initiatives on green hydrogen, you may have seen our yesterday’s announcement on the signing of a framework agreement with the government of Egypt to set up a green hydrogen plant in the Swiss Canal economic zone. As per the agreement, a final investment decision will be made over the next 12 to 18 months. This project is scheduled to be implemented in phases, the first of which is a pilot phase to produce 20,000 tonnes of green hydrogen along with derivatives annually. In the next phase, the production of 200,000 tonnes per year of green hydrogen along with derivatives will be achieved, thereby bringing the project’s total green hydrogen production capacity to 220,000 tonnes per year. One risk that we are frequently asked about is inflation risk to CapEx as well as security of supply, which is discussed on Page 7.

We believe that we have managed this well, and there is limited risk to our CapEx budget at this point. We have locked in turbine prices, so there is essentially no material exposure on this front. We continue to build module and cell manufacturing facilities that ensure supply at an advantage cost relative to imports for future growth. Even if module prices were to rise by 10% from today’s level, our CapEx has only changed by about 3% to 4%. As most of our wind turbine prices are locked in, there is essentially no material exposure on this front. We continue to expect that our new projects — we will deliver project-level equity IRRs within our targeted range of 16% to 20%. If in the event that any additional new project has an expected IRR below our minimum thresholds, we will simply 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, over to you.

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Kedar Upadhye: Thank you, Sumant. Very good morning, good afternoon, and good evening to everybody on the call. Turning to Page 9. As we have highlighted many times over the past year, we have been focused on improving collections on the overdue receivables from the straight distribution companies, and we are pleased to announce that we have made significant progress in this regard. The quarter 2 FY ’23 DSO improved over a month compared to the end of Q2 last year as the DISCOMs that have been laid on payments, almost 50% of our receivables, have now been making up payments. Normally, there is a seasonal increase in DSO in the second quarter, but this year, DSO actually improved from quarter 1. The AP, the Andhra Pradesh DISCOM, which presented about 42% of our overdue receivables as on March 31, agreed in June 2022 to pay past due over the next 12 months in equal monthly installments, and they have made about 4 payments out of 12 so far.

The other states that were late have also been making payments. We continue to expect a substantial improvement in our DSO by year-end. Through November ’22, Andhra Pradesh, as I mentioned, have made 4 out of 12 payments to clear its past balances and other states, including Madhya Pradesh, Telangana, Karnataka and Maharashtra are also making up past due payments. In fact, we improved our cash position by $60 million in the second quarter through better collections in the quarter that normally sees higher accounts receivable balances. It is worth emphasizing that DSO should fundamentally improve over time as an increasing percentage of our sales will be to central government and central government owned SECI, which pays its bills probably around time.

Today, with 7.7 gigawatts operating, about 50% of our assets are with five DISCOMs that have relatively higher DSOs. As almost all of our committed projects are with SECI hence forth or with corporate customers, the exposure to these 5 DISCOMs will fall to about 33% by the time we complete our 13.4 gigawatt portfolio. This customer mix shift would itself represent an increment of 55 days in our overall DSO just by itself. I’ll now move to Slide 10, which provides highlights of the fiscal second quarter of 2023. We added 75 megawatts this quarter to bring the total to 7.7 gigawatts operating. We signed another 1 gigawatt of PPAs, which brings the total under construction to 5.7, most of which should be operational by end of the next year. Our revenues from customers rose 28% year-on-year in the first half and cash flow to equity increased 48% as compared to last year due to higher revenues from operating capacities and improving DSOs. Turning to Page 11, which provides a reconciliation of adjusted EBITDA in quarter 2, which stands at INR 18.2 billion.

The window source followed a different pattern this year, which — where there was more production in April and May this year related to normal, but plateaued at this level in quarter 2. We would also point out that there were some impacts of timing related to carbon credit sales and other items. We recorded revenues related to this in the second quarter of last year, but expect the majority of our carbon credit sales to get recorded in the second half of the current fiscal. If this had been taken out of 2Q of last year, EBITDA would have increased about 9% year-on-year. Turning to Slide 12. We continue to execute multiple initiatives on the financing front and repaid a $300 million bond this quarter. We had USD 1 billion of maturity in FY ’23, of which majority has already been repaid through various refinancing initiatives.

Slide 12 also provides a source and use reconciliation statement and our funding plans. We are in a very strong position with almost $780 million of cash on balance sheet and anticipate that we should raise a similar amount to internal cash flow, capital recycling and improvements in working capital by FY ’25. With regards to our CapEx, our internal accruals and capital recycling is more than the equity requirements of our planned 13.4 gigawatt CapEx that we are seeing from lenders. It also gives additional capacity to grow further without any need to issue new shares, which is not in our current plan. Given our ability to finance in projects with 75% debt combined with cash flow generation and capital recycling, we anticipate that we will have more cash on the balance sheet after the completion of the 13.4 gigawatts than we currently have.

With regard to interest rate risk on Page 13, it is worth noting that inflation in India is under control and well below levels seen in the U.S. Long-term interest rates in India are more competitive than what is generally seen globally. We have meaningful additional borrowing dry powder available, and we believe we can fund all our growth in our current plans domestically. We are currently being offered rates for refinancing of around 8.5% to 9% in INR terms, which is below the average interest rates on debt maturing over the next couple of years. Our interest rate risk is also limited with fixed rates on 73% of our debt and a 100 basis point increase only impacts our FY ’23 cash flow to equity by around 2%. Despite the increase in interest rates, we still expect to refinance the debt that is maturing at rates that are lower than our current prevailing interest rates.

We have been capitalizing on the refinancing saving opportunity this year, and we are on track to refinance more than $11 billion, which also shows our ready access to affordable capital. With that, I’ll turn it over to Vaishali to update everyone on our ESG initiatives. Thank you.

Vaishali Sinha: Thanks, Kedar. Hello, everybody, and thank you for joining us today for the earnings call. Can we go to Slide 15? This year has been an interesting year for us from an ESG perspective as we ramped up our efforts significantly, and we disclosed our efforts in our sustainability report for fiscal year 2022. As our community members are important stakeholders, I’m delighted to share that we released the report at one of our CSR sites at in the state of Rajasthan in the presence of the local community and ReNew’s Global Board. The sustainability report is aligned to GRI standards and TCFD guidelines. Given our NASDAQ listing, it is also aligned with SASB. The report has been titled Partnering for Transition, Progressing Sustainably, Prospering Together as we believe that this sums up our approach towards sustainability very aptly.

In line with the idea of progressing sustainably, we have restricted our carbon intensity of electricity generation to just 32.83 grams of carbon dioxide per kilowatt hours, which is 95% lower than the Indian power sector average and 94% lower than the global average. Through our clean energy operations, we have avoided 11 million tonnes of carbon dioxide and generated electricity, which is enough to power 4 million Indian households. We’ve deployed robotic dry cleaning, which has enabled us to save 216,000 kiloliters of water, which is enough to serve the daily consumption of 1.6 million Indians. With a view of partnering together with our employees, suppliers and communities for a carbon-free future, ReNew has taken up the following initiatives.

We have derisked our supply chain from sustainability-related risks and have released the sustainability code of conduct for suppliers, which is available on our website for you to see. Our employee strength has also grown by 38% as compared to last year, which reflects ReNew’s aim to be the employer of choice. ReNew has a target of achieving 30% women via multiple initiatives such as recruiter, mentoring sessions, awareness sessions with senior experts, including our Board members. Safety trainings conducted over the past year have increased by 41%. At ReNew, our mission is to contribute to addressing climate change through impactful, scalable and market-driven solutions to create a sustainable and equitable future. We are also in the process of finalizing a decarbonization plan for our operations, which will be disclosed in the coming months.

Apart from this, ReNew has disclosed Scope 3 emissions across all applicable categories for the first time in our sustainability report. With respect to community engagement, we aim to impact over 2.5 million lives by 2030 through various community development initiatives across women empowerment, youth engagement, providing access to clean electricity, climate literacy. And all of these are in alignment with various and a few others. ReNew is also a signatory to UNGC and UN Women Empowerment Principles. This takes me to the last but most important aspect of partnering for transition. ReNew has always believed in the power of collaboration and is building synergistic relationships with like-minded institutions like academia, think tanks and industry associations to serve a common purpose in the fight against climate change.

Can we go to Slide 16 now? Additionally, we have also disclosed our targets across ESG parameters like we have validated — as we have been validated as carbon neutral for Scope 1 and 2 emissions for the second consecutive year. We have achieved 30% diversity at the Board level. We have submitted our GHG reduction targets to SBTI for validation. We have impacted the lives of 650,000 people across 10 states and 250 villages through our social responsibility programs. We have rolled out human rights policy and approach notes on circular economy and biodiversity, which are all available on our website. We will be disclosing the progress across all these targets in the coming sustainability reports. I will now turn it back to Sumant for closing remarks and guidance.

Sumant Sinha: Thank you, Vaishali. With regard to our guidance outlined on Slide 18, the core operations of the company continue to execute as expected this year. As we mentioned earlier, weather has been a headwind year-to-date, but we provided for this in our initial FY ’23 guidance. In addition, we continue to work on closing the acquisition we announced, which has had some delays. We are reiterating our guidance at this point with the obvious caveat that our full year EBITDA will depend on normal weather for the remainder of the year and timely completion of the acquisition. Our FY ’23 EBITDA guidance is for between INR 66 billion and INR 69 billion, and our cash flow to equity guidance is INR 21 billion to INR 23 billion.

On the buyback, we have repurchased about 20 million shares since we implemented the program, which leaves about $120 million of authorization remaining under the program. We continue to see considerable value in our shares with an 11% cash flow to equity yield on our current portfolio. R&W also trades at a meaningful discount to what we can sell assets for. As our shares are one of the highest return investments of scale we can make, we have been actively buying back stock when we believe it will provide the highest return opportunity. I would also like to highlight that we have been added to about six indices this calendar year, including the most recent or . This not only helps average daily volume, but also increases the awareness of RNW to a broader audience.

With that, let me thank you for your patience, and we will be happy, of course, to take any questions. Thank you.

Q&A Session

Operator: . And the first question will come from Julien Dumoulin-Smith with Bank of America.

Unidentified Analyst: This is Morgan on for Julien. Congratulations on a nice quarter here. It seems like you’ve had some really healthy improvement in the DSO this quarter. Can you talk about your expectations for how this is going to evolve through the remainder of the year? And how does this increased headroom kind of maybe change your latitude for further investments? Any thoughts on that.

Sumant Sinha: Yes. Kedar, why don’t you take that?

Kedar Upadhye: Yes. Yes. So as we explained, the biggest state which accounted for highest over dues was Andhra Pradesh. And on the 30th September balance sheet, we have got two installments out of the 12 installments. After 30th September, you have got another two installments on day. And till 31st March, which is your question, we will get 6 more. So in total, in this year, we’ll get about 8 installments of substantial value and that will improve the DSOs to a level which will go back almost to pre-COVID days, and that will substantially contrast with the elevated levels of the DSOs we have seen for the past several quarters. So I’m a little hesitant to quote a precise number, but I’m confident the DSOs will go down to a level, which is around 175 days or so.

In fact, as at October, we have already seen the DSO at 270. So naturally this releases cash and to your point, this allows us to invest more equity to fund future growth, and all of that is part of the plan. So the slide on source and use of financing, which we have included in our debt this quarter, which we referred to during the initial commentary that factors improvement in the receivables as well.

Unidentified Analyst: And then, I guess, can you also talk about the co-investment that was announced this quarter in the transmission projects? And how you view these opportunities as a part of your broader capital recycling plan? Any plans to kind of continue these co-investment strategies or any comments there?

Kedar Upadhye: Sumant, do you want to take that question?

Sumant Sinha: Yes. Sure, sure. I’ll take it. Yes, look, Morgan, we have won a few transmission projects till now, which, as I mentioned in my remarks, are very strategic for us because they link into the renewable energy projects that we are doing, and so therefore, help us with commissioning those projects on time and make the whole project much more predictable from a timing standpoint. Now the investment that you’ve got from Norfund and the other company, KLP, is basically for partnering with us and to take a 49% stake in the first of those projects with a view that eventually, they will continue to partner with us for other projects as well. So we do have a broader understanding with them for coming into more of our transmission projects.

And as we win them and we get them to the point, the expectation would be for us to continue to get them to come in as coinvestors along with us right at the beginning itself. As far as recycling of assets is concerned, as we have stated in the past, that is going to be core to our strategy going forward. We do see recycling of assets as being a very important way for us to derive better value from our own capital invested in those projects and also get capital out, which we can then reinvest to further grow our portfolio. And it also allows us the opportunity of tweaking our portfolio in ways that we think eventually might be better for us from a capital hold standpoint in the longer run. So capital recycling is a fundamental part of our overall strategy.