Analyzing Why ReNew Energy (RNW) Crushed Earnings


Energy suppliers are poised to receive increased interest as we navigate various macroeconomic influences and geopolitical disruptions, each bearing significant relevance to energy supply costs and profitability. Renewables have an element of unpredictability to the scenario, potentially distinguishing themselves from conventional energy providers regarding pricing and core offerings.

Headquartered in London, United Kingdom, ReNew Energy Global Plc (RNW) has marked its footprint in the Indian market, emerging as a noteworthy player in the renewable energy sector. This renewable energy producer primarily focuses on wind and solar energies, illustrating a concerted effort towards sustainable solutions. As of September 2023, its clean energy portfolio stands at ~13.8 GW of capacity.

The company has showcased consistent and improved performance much to the satisfaction of its shareholders, such as displayed in its impressive second-quarter results that substantially surpassed top and bottom-line estimates.

Looking ahead, RNW plans to commission between 1.75 GW and 2.25 GW by the end of the fiscal year 2024. Management projects EBITDA growth of ~35%+ per share in the fiscal year 2025.

Despite contending with the adverse impacts of the pandemic, RNW has persevered unwaveringly towards its financial objectives. With a profit after tax of $45 million in the second quarter, the company recorded one of its highest profits.

India's renewable energy sector is thriving, propelled by a rising power demand, escalating renewable energy auctions, and shifting toward complex projects. Positioned at the vanguard of this transformative revolution, RNW maintains capital discipline while skillfully leveraging market opportunities.

The company thrives under the swift escalation in power demand and energy supply shortfalls. Softening solar module prices paints a promising backdrop for this renewable energy developer.

A critical trend identified within the industry is the escalating complexity of projects and customized solutions tailored to distribution companies' specifications. This evolution presents an advantageous opportunity for RNW, a pioneer with the most comprehensive wind development portfolio. Their leadership status empowers them to address the distinct electricity supply profiles required accurately.

RNW has attained important projects through power purchase agreements (PPAs) and letters of awards (LoAs). These include a PPA with GUVNL, Gujarat's Distribution Entity, for a 400-megawatt capacity and receipt of LoAs for an additional 2.9 gigawatts. Such undertakings will significantly bolster RNW's long-term earning potential upon successful completion.

RNW is proactively exploring opportunities to broaden its portfolio to meet the rising demand for renewable energy. The company remains dedicated to its capital allocation and strategies that foster value creation.

This commitment serves as testimony to the company's knack for attracting investments and strategic partnerships at beneficial valuations. In slightly above two years, RNW drew in an impressive $565 million via asset recycling, facilitating the use of these funds towards more lucrative opportunities.

However, not all seems well for the alternative energy company, and hence, investors could exercise caution moving forward.

RNW’s trailing-12-month Return on Common Equity (ROCE) of 2.75% is lower than the industry average of 9.10%. Also, the company resorts to substantial amounts of debt to finance its business operations. For the fiscal second quarter that ended September 30, 2023, its gross debt was $7.07 billion. This results in a strikingly high debt-to-equity ratio of 4.74.

A lower ROCE could imply that a company could still improve its returns through leverage, considering it has low debt levels. For a company like RNW, which pairs low ROCE with considerable gross debt, investors may want to proceed cautiously, given the heightened risk involved.

Another critical measure of a company's financial health is its current ratio, gauging its capability to meet short-term liabilities. RNW's ratio, which is at a low of 0.88, raises red flags about the company's short-term liquidity situation.

Institutions hold roughly 55.6% of RNW shares. Of the 96 institutional holders, 44 have decreased their positions in the stock. Moreover, 20 institutions have sold out their positions (1,628,328 shares).

However, Wall Street analysts expect the stock to reach $8.63 in the next 12 months, indicating a potential upside of 37.2%. The price target ranges from a low of $8 to a high of $9.25.

Street expects RNW’s revenue for the fiscal third quarter ending December 2023 to come at $188.79 million, while EPS is expected to be negative at $0.18.

Bottom Line

The imminent growth of the renewable energy sector presents a promising landscape, and RNW is strategically situated to capitalize on this burgeoning potential. With a robust pipeline of projects, a rigorous approach, and a dedication to innovative solutions, RNW spearheads the progressive shift toward renewable energy in India.

RNW is a high-margin, low-capital turnover business, demanding significant reinvestment to sustain its market competitiveness.

Business growth typically necessitates financial investment, which can originate from sources such as retained earnings, issuance of new shares, or procuring loans. The ROCE mirrors the use of investment capital in the first two scenarios. In the case of borrowing, the resultant debt will augment returns without affecting the shareholders' equity, thus artificially enhancing the perceived ROCE.

In RNW’s context, prospective investors could tread cautiously and wait for a better entry point in the stock, given the high debt levels and low ROCE. Furthermore, the alarming Net Operating Debt/Adjusted EBITDA (TTM) ratio of 6.21x serves as a “red flag” and signals potential financial strain in the corporation's future.