ReNew Energy Global plc - Quality of earnings

ReNew Energy Global plc (NASDAQ: RNW)

Date: 2025-06-17

Executive Summary

This Quality of Earnings (QoE) report provides an assessment of ReNew Energy Global plc ("ReNew" or "the Company"), a leading renewable energy Independent Power Producer (IPP) in India. The analysis covers the fiscal years ending March 31, 2022, 2023, and 2024, focusing on the sustainability and quality of its reported earnings, business model, and growth trajectory.

ReNew has demonstrated robust revenue growth, driven by consistent capacity additions in wind and solar energy. The Company's reported Adjusted EBITDA has also increased year-over-year. For FY2024, ReNew reported Total Income of INR 96,491 million and Adjusted EBITDA of INR 75,700 million.

Key strengths include a large and diversified operational portfolio, a significant pipeline of future projects, long-term Power Purchase Agreements (PPAs) providing revenue visibility, and a strong position in India's rapidly expanding renewable energy market. The company also turned to net profitability in FY2024 after previous losses.

Potential areas for further due diligence include the declining trend in Adjusted EBITDA margins (from 84.1% in FY2022 to 78.5% in FY2024), the specific nature and recurrence of items adjusted in the company's reported Adjusted EBITDA, counterparty credit risk associated with state-owned utilities, and execution risks related to its large development pipeline. Working capital management, particularly receivables, also warrants ongoing monitoring.

Overall, ReNew's earnings appear to be largely supported by its operational scale and long-term contracts. However, understanding the drivers of margin compression and a detailed review of EBITDA adjustments are crucial for a comprehensive valuation and risk assessment.

1. Data Analysis

1.1. Normalized EBITDA Calculation

The following table summarizes ReNew's key financial performance indicators for the fiscal years ended March 31, 2022, 2023, and 2024. The "Normalized EBITDA (QoE)" presented here is based on the Company's reported "Adjusted EBITDA". A full QoE analysis would typically involve an independent verification of these adjustments and potentially identify additional non-recurring or non-operational items.

*Normalized EBITDA for this report uses the Company's reported Adjusted EBITDA figures. A detailed QoE analysis would independently assess and quantify each adjustment based on its nature, frequency, and cash impact.

1.2. Revenue Recognition

ReNew's primary revenue stream is the sale of electricity generated from its wind and solar power projects. Revenue is typically recognized over time as electricity is supplied to customers, based on metered output and contractual rates stipulated in long-term PPAs (typically 20-25 years). These PPAs are primarily with central government-owned entities (e.g., NTPC, SECI) and state electricity distribution companies (Discoms).

The stability of revenue is high due to the long-term nature of these contracts. However, factors like plant availability, grid curtailment, and the financial health of Discoms can impact actual revenue realization.

1.3. Cost Structure

ReNew's cost structure is characteristic of an IPP:

• Operating and Maintenance (O&M) Expenses: Costs associated with running the power plants, including repairs, maintenance, security, and land lease costs.
• Employee Benefit Expenses: Salaries and benefits for operational, technical, and corporate staff.
• Depreciation and Amortization: Significant non-cash expense due to the capital-intensive nature of renewable energy assets.
• Finance Costs: Substantial interest expenses related to project finance debt and other borrowings used to fund capacity expansion.

The company aims to manage O&M costs through technology and scale. Finance costs are influenced by prevailing interest rates and the company's ability to refinance debt on favorable terms.

1.4. Margin Analysis

ReNew's Adjusted EBITDA margin has shown a declining trend, from 84.1% in FY2022 to 81.0% in FY2023, and further to 78.5% in FY2024. While still high, this compression warrants investigation. Potential drivers could include:

• Newly commissioned projects having lower PPA tariffs due to increased competition or declining technology costs.
• Increased O&M costs, possibly for aging assets or higher operational complexities.
• Changes in the mix of wind versus solar projects, or interstate versus intrastate projects, which may have different margin profiles.
• Increased transmission charges or other operational levies.

The company's Net Margin improved significantly, turning positive in FY2024 (4.5%) from negative figures in FY2022 (-23.3%) and FY2023 (-6.3%). This improvement is primarily driven by higher revenue, controlled operating expenses, and potentially lower one-off charges or better management of finance costs relative to scale.

1.5. Working Capital

Key components of working capital for ReNew include trade receivables, inventories (spares), and trade payables. Trade receivables are a critical area. Delays in payments from Discoms are a known risk in the Indian power sector. Monitoring the aging of receivables and provisions for doubtful debts is important. The company's cash conversion cycle can be impacted by these receivable patterns and payment terms with its suppliers. Effective working capital management is crucial for liquidity, especially given the ongoing capital expenditure for growth.

2. Business Model Assessment

2.1. Core Business and Revenue Streams

ReNew Energy Global plc operates as an Independent Power Producer (IPP) focused on renewable energy. Its core business involves developing, constructing, owning, and operating utility-scale wind energy projects, solar energy projects, and hydro projects. Recently, it has also focused on "firm power" projects combining generation from multiple sources with storage solutions. The primary revenue stream is the sale of electricity generated by its portfolio of assets. This is predominantly done through long-term (20-25 years) Power Purchase Agreements (PPAs) with central and state government utilities, as well as some corporate customers (C&I segment).

2.2. Cost Drivers

The main cost drivers for ReNew include:

• Capital Expenditures (Capex): Significant upfront investment for project development, including land acquisition, equipment (turbines, solar modules), and construction.
• Operating & Maintenance (O&M) Costs: Ongoing costs to maintain plant performance and availability.
• Financing Costs: Interest and other costs associated with debt raised to fund projects.
• Employee Costs: For project management, operations, and corporate functions.
• Transmission & Wheeling Charges: Costs for using the electricity grid.

2.3. Scalability and Sustainability

The business model is highly scalable, demonstrated by ReNew's rapid growth in operational capacity. Scalability is supported by:

• India's ambitious renewable energy targets and growing electricity demand.
• A large and active project development pipeline.
• Access to domestic and international capital markets for funding.
• Established relationships with equipment suppliers and EPC contractors.

The sustainability of the model relies on securing new PPAs at viable tariffs, efficient project execution, maintaining high operational availability of assets, and managing counterparty risks. The long-term nature of PPAs provides revenue predictability, contributing to sustainability.

2.4. Key Operational Risks and Dependencies

• PPA Counterparty Risk: Delays or defaults in payments from Discoms, particularly financially weaker state utilities.
• Execution Risk: Delays in project commissioning due to land acquisition issues, regulatory approvals, or supply chain disruptions.
• Resource Availability Risk: Variability in wind patterns and solar irradiation affecting actual generation.
• Grid Curtailment Risk: Interruption of power off-take by grid operators due to grid instability or insufficient transmission capacity.
• Interest Rate Risk: Impact of rising interest rates on funding costs for new projects and refinancing existing debt.
• Regulatory Risk: Changes in government policies, tariffs, or renewable energy incentives.
• Technology and Obsolescence Risk: Need to keep pace with evolving renewable technologies.
• Foreign Exchange Risk: Exposure to currency fluctuations for foreign currency denominated debt or imported equipment costs.

3. Growth Trajectory Evaluation

3.1. Historical Growth Rates and Drivers

ReNew has exhibited strong historical growth, primarily organic, through the development and commissioning of new renewable energy projects. Key growth metrics:

• Operating Capacity: Grew from 7.6 GW at the end of FY2022 to 9.52 GW at the end of FY2024. This represents a significant addition of nearly 2 GW in two years, with FY24 showing particularly strong capacity addition.
• Total Income (Revenue): Increased from INR 69,195 million in FY2022 to INR 96,491 million in FY2024, a CAGR of approximately 18.0%.
• Adjusted EBITDA: Grew from INR 58,162 million in FY2022 to INR 75,700 million in FY2024, a CAGR of approximately 14.1%.

This growth has been driven by successful project auctions, timely execution of projects, and supportive government policies for renewable energy in India.

3.2. Future Growth Potential

ReNew's future growth potential remains significant, underpinned by:

• Large Project Pipeline: The company maintains a substantial pipeline of projects under development or construction. As of early 2024, their total portfolio (including commissioned and committed projects) was around 13.9 GW, with a target to reach ~20 GW of operating capacity by FY2027.
• India's Renewable Energy Targets: India has a target of 500 GW of non-fossil fuel capacity by 2030, creating vast opportunities for IPPs like ReNew.
• Diversification: Expansion into newer areas like green hydrogen, energy storage solutions, and round-the-clock (RTC) power supply contracts.
• Corporate PPA Market: Increasing demand from commercial and industrial (C&I) customers for renewable energy.

However, future growth is contingent on continued access to competitive financing, securing land and permits, managing supply chains, and winning projects at tariffs that ensure adequate returns.

3.3. Benchmarking (Qualitative)

ReNew is one of the largest renewable energy IPPs in India. It competes with other major players such as Adani Green Energy, NTPC Renewable Energy Ltd, Tata Power Renewables, and Sembcorp Green Infra, as well as several international developers and private equity-backed platforms.

Compared to peers, ReNew has a diversified portfolio across wind and solar and a strong track record of project execution. Key differentiating factors in the industry include access to low-cost capital, project development expertise, technological prowess, and relationships with state utilities and government bodies. The competitive landscape is intense, particularly in project auctions, which can put pressure on tariffs.

4. Report Summary: Strengths, Risks, and Further Due Diligence

4.1. Key Strengths

• Market Leadership: One of the largest renewable IPPs in India with a significant operational portfolio.
• Revenue Visibility: Long-term PPAs (20-25 years) provide predictable revenue streams.
• Strong Growth Track Record: Consistent capacity additions and revenue growth.
• Diversified Portfolio: Presence in wind, solar, and increasingly in hydro and innovative solutions like RTC power.
• Supportive Macro Environment: Strong government backing for renewable energy in India.
• Access to Capital: Demonstrated ability to raise capital from diverse sources.

4.2. Key Risks and Red Flags

• Declining EBITDA Margins: Trend of margin compression needs further investigation into underlying causes (tariffs, O&M, project mix).
• Counterparty Credit Risk: Exposure to financially stressed state Discoms leading to potential payment delays.
• Execution Risk: Challenges in land acquisition, regulatory approvals, and timely project completion for its large pipeline.
• Interest Rate Sensitivity: High capital intensity makes profitability sensitive to interest rate fluctuations.
• Nature of EBITDA Adjustments: Scrutiny of items excluded from reported profit to arrive at Adjusted EBITDA is important to assess underlying cash earnings quality.
• Grid Availability and Curtailment: Potential for lost generation due to grid issues.
• Intense Competition: Aggressive bidding in auctions may impact future project returns.

4.3. Areas Requiring Further Due Diligence

• Detailed analysis of the drivers behind the observed EBITDA margin compression.
• Thorough review of all non-recurring items and adjustments made by the company in its calculation of Adjusted EBITDA to arrive at a truly normalized QoE figure.
• Assessment of the aging of trade receivables, collection efficiency from various Discoms, and adequacy of provisions for doubtful debts.
• Evaluation of the terms and conditions of key PPAs, including tariff structures, off-take guarantees, and termination clauses.
• Sensitivity analysis on project returns based on variations in plant load factors (PLF), O&M costs, and interest rates.
• Review of project pipeline viability, funding plans, and potential execution timelines and bottlenecks.
• Understanding of foreign exchange risk management strategies, especially for debt and capex.

5. Charts and Tables

Financial Performance Trend (FY2022 - FY2024)

The table presented in Section 1.1 provides detailed financial figures.

Citations and Sources

• ReNew Energy Global plc, Q4 & Full Year FY2024 Earnings Press Release (May 29, 2024). Retrieved from ReNew's Investor Relations website.
• ReNew Energy Global plc, Q4 & Full Year FY2024 Earnings Presentation (May 29, 2024). Retrieved from ReNew's Investor Relations website.
• ReNew Power Private Limited (now ReNew Energy Global plc), Annual Report (Form 20-F) for the fiscal year ended March 31, 2023. Filed with the U.S. Securities and Exchange Commission.
• ReNew Energy Global plc, Q4 & Full Year FY2022 Earnings Presentation (May 25, 2022). Retrieved from ReNew's Investor Relations website archives (if available) or public financial data providers.
• ReNew Energy Global plc, Corporate Website (investors.renew.com and renew.com).

Specific URLs for filings can be found on the SEC EDGAR database or ReNew's Investor Relations portal. Data used is based on publicly available information as of the latest practicable date for this report.

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