Valuation of Welspun Renewables

Contents
1.0

An Overview of the Renewable Power Industry in India....................................3

1.1 Current Power Market Structure........................................................................3

1.2 Power Generation Mix....................................................................................... 3
1.3 Government Policy............................................................................................ 4
1.3 Changes to Regulatory Environment in this sector............................................4
2.0 Welspun Renewable Energy Pvt. Ltd (WREPL) Overview......................................6
3.0 Tata Power Renewable Energy (TPREL) Overview:................................................7
4.0 Description of Project Activity / About Deal..........................................................8
4.1 Deal Structure and Means of Finance................................................................8
5.0 Key Assumptions and Results of the Financial Model for the Project....................9
5.1 Assumptions...................................................................................................... 9
5.2 Results of the Financial Model.........................................................................11
6.0 Key risks involved and their mitigation measures..............................................11
6.1 Steeply falling Solar Tarif................................................................................ 12
6.2 Timely Payment by distribution companies.....................................................12
6.3 Availability of lower debt rates for refinancing................................................12
6.4 Lower plant load factor (PLF)...........................................................................12
6.5 Highly leveraged Tata Power Balance Sheet....................................................13
6.6 Overall Risk Summary..................................................................................... 13
7.0 Project specific questions................................................................................... 15
7.1 Justify Welspun 10,000 Cr. paid by Tata power................................................15
8.2 How TPRE Finance this deal.............................................................................16
7.3 What TPRE can earn in this deal......................................................................16
7.4 What should be TPRE Strategy to de-risk its acquisition.................................16
8.0 Bibliography....................................................................................................... 17

An Overview of the Renewable Power Industry in India

Renewable energy in India has overtaken nuclear power as the country seeks
carbon-free sources of energy to balance its reliance on coal.
Solar tender for 1200 MW, with plants spread over 45 diferent areas in Jharkhand,
saw winning tarifs in a range of 5.08 to 7.95 per KWh.
The Solar Energy Corporation of India's (SECI) latest tender for solar plants in Uttar
Pradesh set a base tarif of 4.43 per KWh.
Environmental clearance has been granted to 900 power and infrastructure projects
worth 6 lakh crore in the last 20 months.
Investment of 4,000 crore in wind energy projects is on the verge of becoming
non-performing assets, as over 550 MW of projects that are ready to generate
electricity are stranded.
Government is working on a scheme to provide electric cars on zero down payment
to make India 100% electric vehicle nation by 2030.
IL&FS has undertaken a feasibility study to examine the possibility of integrating
wind and solar power production along with energy storage at a single plant.

1.1 Current Power Market Structure

The Power market in India has multiple business models for sale and purchase of
bulk power as illustrated above.

1.2 Power Generation Mix

The power generation portfolio mix for India saw an increase in renewables based
capacities. As of 31st March 2016, power generation through renewable sources
contributed to 13% of the total capacity

India Generation Mix (in GW) and Share by Generation Source, as of 31st March
2016 (Source: MoP, GoI, CEA)

1.3 Government Policy

The Government of India has set a target of adding 175 GW of renewable capacity
by 2022, of which solar power will account for almost 100 GW, 60 GW through wind
power and 15 GW through Geo-Thermal and other renewable sources. Push towards
solar power is because of various reasons like India seeing close to 300 sunny days
a year. The first major push in this direction came with the launch of Jawaharlal
Nehru Solar Mission in 2010 and in the fiscal the target under JNSM was raised from
20 GW to 100 GW. What makes this sector all the more attractive is the facts that
this capacity addition has come with the tarifs being at their historical lows from 26
cents/kWh in 2010 they have reduced to 6 cents/kWh. This capacity addition and
reduction in tarifs have been made possible due to the launch of certain domestic
schemes.

1.3 Changes to Regulatory Environment in this sector

Electricity (Amendment) Bill, 2014
The Bill seeks to segregate the distribution network from the electricity supply
business and to introduce multiple supply licensees in the market. The Bill was
referred to Parliamentary Standing Committee on Energy which has submitted its
report.
National Tariff Policy Amended
Some of the key amendments to National Tarif Policy related to renewable power
sector are:

8% of total consumption of electricity, excluding hydro power, shall be from

solar energy by March 2022.
New coal/lignite based thermal plants after specified date to also
establish/procure/purchase renewable capacity as prescribed by Government
of India.
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No inter-State transmission charges and losses to be levied for renewable

power (solar/wind) till such period as notified by Government of India.

MERC Renewable Purchase Obligation (RPO)

Maharashtra Electricity Regulatory Commission issued its (Renewable Purchase
Obligation, its Compliance and Implementation of Renewable Energy Certificate
Framework) Regulations, 2016 where by MERC had increased the percentage
Renewable Purchase Obligation Target from Solar and Non Solar (other RE) in the
current review period over the last review period. The notification has raised the
renewable purchase obligation to 11% for FY17, 12.50% for FY18, 13.75% for FY19
and 15% for FY20.

2.0 Welspun Renewable Energy Pvt. Ltd (WREPL)

Overview
Welspun Renewable Energy Pvt. Ltd. (WREPL), a subsidiary of Welspun Energy
provides renewable energy generation services. Incorporated on 11 th November
2009. It is a leading wind and solar IPP in India (independent power producer),
owner and operator of renewable energy projects, focusing on solar and wind power.
WREPL has about 1,141 mw of renewable power projects comprising about 990 mw
solar power projects and about 150 mw of wind power projects.
Of the renewable portfolio, more than 1,000 mw of capacity is operational and the
balance capacity is under advanced stages of implementation. Located in high solar
irradiation and wind velocity sites, our power plants are spread across Gujarat,
Rajasthan, Madhya Pradesh, Maharashtra, Karnataka, Punjab, Tamil Nadu, and
Andhra Pradesh. Their 151 MW (DC) Neemuch solar power plant is one of the
world's largest projects. The companys renewable energy programme has been
registered with the United Nations Framework Convention on Climate Change
(UNFCCC) as a Clean Development Mechanism (CDM) Programme of Activities.
WREPL have received an A+ certificate from Care Credit Ratings. The agency has
rated the credit health of the Welspun Renewables projects as stable.
Financials:
i.
Consolidated FY 2016 Revenue: 768 cr.
ii.
Consolidated FY 2015 Revenue: 761 cr.
iii.
Consolidated FY 2014 Revenue: 228 cr.

3.0 Tata Power Renewable Energy (TPREL) Overview:

Tata Power Renewable Energy (TPREL) is a wholly owned subsidiary of Tata Power.
TPREL is Tata Powers primary investment vehicle for clean and renewable energy
based power generation capacity. TPREL is seeking to grow its renewable portfolio in
India and in selected international markets through organic and inorganic
opportunities.
TPREL currently operates 312 MW of Renewable power capacity and 500 MW of
Renewable assets are being carved out of Tata Power into TPREL through a court
process. In addition, about 400 MW of Solar and Wind power projects are under
implementation in the states of Gujarat, Andhra Pradesh, Madhya Pradesh and
Karnataka. The company is aiming to double its total generation capacity across
thermal, renewable and hydropower to 18,000 megawatts by 2022. With Welspun
Renewables Energy Private Limited (WREPL) acquisition, TPREL become one of the
largest Renewable Energy companies in India and will own capacity of 2,300
megawatts.
*Parent company, Tata power has objective of having 30-40% of its total
generating capacity based on non-fossil fuels.

Particulars
Generation Sales (MUs)
Net sales
PAT

Figures in crore
FY16
FY15
331
213
240
149
19
6

4.0 Description of Project Activity / About Deal

WREPL acquisition is being made at an enterprise value of 9,249 cr.
In US dollar terms, this single deal worth $1.4 billion is half the size of the
cumulative investments recorded by Indias wind and solar power sector in 2015,
through 31 deals.
This means Tata Power is paying around 8.11 crore per MW of power. The cost of
setting up 1 MW of clean energy capacity in the country, at present, stands between
5.5 crore to 6 crore.
TPREL is paying 3650 cr. as the equity component of the deal. The rest is the debt
in the WREPL which Tata would look to refinance with lender approvals.
This deal will add to the consolidated debt on Tata Powers balance sheet, which
stood at 37,251.88 cr. as of 31 March, 2016
TPREL would be able to generate about 2,000 million units of power per annum from
1,140MW and add 13 billion revenue per annum. Thus payback period would be
around 7 year

Deal Sweeteners
Nearly 1,000 MW (close to 88%) of capacity is operational, generating revenue
and profits.
Remaining 140 MW in advanced stages of implementation
Acquired assets of WREPL would be generating revenue from day one with no
construction risks involved, as most of the capacity is operational with power
purchase agreements in place.
Large Solar portfolio with PPAs contracted at healthy tarifs for a period of 25
years
WREPL infrastructure is a well-constructed project and having strong operating
track record
Diversified of-take, mitigates risks
Tata Power also gains access to surplus land in the vicinity of WREPLs projects,
to the tune of 550 acres, which can be utilized to scale up operations in line with
market demand.

4.1 Deal Structure and Means of Finance

Size of Deal
Total Project Cost
Total MW

9,249.00
1140

8.11 Cr. per

MW

5.0 Key Assumptions and Results of the Financial Model

for the Project
5.1 Assumptions

Description
Location
Project Capacity
Life of the Project

Project Basics
Solar PV Power Plant
Pan India
1140 MW
22 Yrs from COD

Project Timings
Acquisition Date
Acq : Financial Yr Beginning
Acq : Financial Qrt beginning
Acq: Qrtr Ending
First FY ending after Acq.
Project Life
Project Ends on
Final Financial Yr Ending
Time to Commissioning
Operation in 1st year

13-Sep-16
01-Apr-16
01-Apr-16
30-Jun-16
31-Mar-17
264 Months
12-Sep-38
31-Mar-39
0 Months
7 Months

Financing Assumption
Means of Finance
Project Cost

Tata Report
Tata Report

Tata Report
Assumed
Assumed
Assumed
Estimated

Operational

9,249.00

Debt
Debt Amount
Equity
Equity Amount
Upfront Equity

80.00%
7,399.20
20.00%
1,849.80
100%

Debt Assumption
Debt Equity Ratio
Moratorium Period
Repayment Period
Repayment Start Date
Repayment Start - Qrtr End
Repayment End - Qrtr End
Repayment End - FY End

HFDC for NCD

4.00
6 Months
48 Quarters
30-Mar-17
31-Mar-17
31-Dec-28
31-Mar-29

No. of months in last repayment year

9 Months

DSRA Assumptions
DSRA for first year of operations
Interest on DSRA

3 Months
6.00%

Project Assumptions
Project Cost
Assumptions
Project Contingencies
Financing Charges
Plant Technical
Assumptions
Plant Load Factor
Annual linear Derating
factor
PLA to increase from 2018
by

2.0% of Project Hard

Cost
2.50% of Project Debt

20.00%
0.50%

HDFC Bank

Assumed

Assumed
Assumed

Standard
Standard

Tata Report
Central Electricity Regulatory Commission
report

1%

Tariff Structure
Tarif for first 12 years

7.50 per unit

Carbon Credit Benefit

Credit per Unit
Carbon Credit Sales Rate
Exchange rate

NIL
NIL
NIL

Tata

Carbon Credit Sales Rate

CDM Benefits for 1st year

NIL
NIL

CDM benefit reduction for

next years
Minimum benefits
Operations &
Maintenance
O & M Cost
Inflation on O& M Cost

0.75% of Project Cost

5.72%

Inverter replacement cost in

13th month

0.00%

Working Capital
Assumptions
Receivables
Carbon Credit Receivables
O&M Expenses
Spares
Margin Money
Interest on WC Loan

2 Month
0 Month
1 Month
15.00% of O&M costs
30.00%
12%

Standard
Standard

Assumed
NA

Other Assumptions
HDFC Bank
rate

Discount rate

9.25%

Depreciation
As per GERC(SLM)
Upto the loan period
After loan period till project end

6.00%
2.00%

Standard

Taxes and others

Corporate Tax Rate
MAT

30.00%
20.00%

Standard
Standard

Max No. of years for which MAT Credit is

allowed

10 Years

Standard

General
No of Days in Year
No. of Months in a year
No. of days in a month
No of Hours in a Day

365 days
12 months
30 days
24 hours

10

5.2 Results of the Financial Model

Project IRR
NPV
Payback period

15.27%
3,997.28
6.92 Years

6.0 Key risks involved and their mitigation measures

6.1 Steeply falling Solar Tarif
Development of new technology and Increasing competition had resulted in steep
drop in tarifs. The Solar Energy Corporation of India's (SECI) latest tender for solar
plants in Uttar Pradesh set a base tarif of 4.43 per KWh. Developers are bidding
for such low tarifs under the influence of various assumptions such as reduction in
prices of modules, economies of scale with larger size of projects, lower cost of debt
etc. But these assumptions, primarily the reduction in module prices need to be
validated. Some of the steps that can be taken to appraise solar power projects
before investing in them could be
a. Benchmarking of hard cost of the project- As per the Central Electricity
Regulatory Commission of India, the benchmark cost for utility scale solar projects is
currently around 5.3 Cr/ MW for 2015-16 and 14.4 Cr/ MW in FY 2012.
b. Land acquisition Land acquisition policies difer from state to state and so does
the rate for land (some states prohibit acquisition of agricultural land for nonagricultural purposes.
Existing PPA is at the rate of 7.5/unit, which would be put stress on the power
purchasing company to re-negotiate the power purchase agreement.

6.2 Timely Payment by distribution companies

Due to the poor financial strength of the state distribution companies, timely
payment to the solar power developers is fraught with risk. Though the government
has taken steps to revive the state distribution companies with the launching of
FRP, UDAY schemes etc., but their impact has been encouraging but far from what
is desired. In addition to projects selling power to state distribution companies, a
significant portion of solar projects in India are being developed under JNNSM with
NTPC or Solar Energy Corporation of India as the main power purchasers. Such
counterparties are more creditworthy and garner greater interest from the
developers.

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6.3 Availability of lower debt rates for refinancing

Adding 100 GW of solar power will require debt of close to US $50 million. But with
banks reaching their exposure limits to the powers sector and with the rising levels
of NPAs, the banks are very conservative in lending more money. The lending
covenants demand a high project margin and debt service coverage ratio, and
therefore make it unviable for developers to arrange domestic debt at competitive
rates. This calls for opening the doors to foreign debt, dollar denominated PPAs by
identifying measures to efectively hedge foreign exchange risk.

6.4 Lower plant load factor (PLF)

Current plant load factor (PLF) is about 20% only. Assumption is that there would be
average 300 sunny days. Bad weather or low number of days of sunshine in a year
would reduce the production of the plants. However given the past experience of
Tata Power management with Tata-BP solar project, they would have taken this
factor into consideration and might have operational plans to alternatively
compensate for this. Tata-BP solar management team has a good reputation of
running solar projects

6.5 Highly leveraged Tata Power Balance Sheet

Tata Power will acquire Welspun Renewables at an enterprise valuation of 9,249
crore, including debt of 5,500 crore. This will add to the consolidated debt on Tata
Powers balance sheet, which already have debt of 37,251.88 crore as of 31 March
2016. This would reduce the credit rating of Tata Power and thus reducing the
chances of refinancing the existing debts at a lower costs. This could be serious
problem as refinancing of existing debts if Welspun renewables was one of the plans
Tata kept in mind which making this deal. Failure to refinance would reduce the
returns on this project to good extent.

6.6 Overall Risk Summary

Risk with creation of Pie Low
Nearly 1,000 MW (close to 88%) of capacity of WREPL is operational, generating
revenue and profits. Remaining 140 MW in advanced stages of implementation and
would become operation soon. Acquired assets of WREPL would be generating
revenue from day one with no construction risks involved.
Based on these factors risk of creating of pie for getting revenue is low in this
project

Risk with growth of Pie Medium

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Falling tarif prices will make the further growth of the acquired entity unattractive.
Acquiring of WERPL brought additional land of 550 acres which can be utilized for
further generation of electricity. Rapid changes in technology in solar power, is
reducing the cost of increasing new capacity but falling tarifs balance out that
factor. Also for new capacity creation would involve risk of delays in statutory
approvals and clearances from the authorities.
Overall looking at all the factors risk of growth of the pie is medium in this project

Risk with distribution of Pie Medium

Solar and other renewable power being variable in nature (solar available only
during the day with no storage capacity, wind depend on weather conditions) adds
additional strain on the transmission network. So far the grids supporting renewable
power generation are relatively low.
Most of the power projects in India need the developer to build the transmission
infrastructure from the power plant to the substation. But building such
transmission lines requires an evaluation of the capacity available at the substation,
transmission authority approval for evacuation at the selected substation as well as
for the route of the transmission line. Any delay in providing timely transmission
infrastructure would severely hamper the project growth. Therefore commensurate
investment in transmission and distribution lines in tandem with power generation
is importance.
Further to add financial condition of electricity distribution companies are very
weak, this would put a risk of payment for existing deliveries and further distribution
of power. Reducing tarif prices would put pressure on distribution companies to
look for low cost power providers.
Overall looking at all the factors risk of distribution of the pie is medium in this
project

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7.0 Project specific questions

7.1 Justify Welspun 10,000 Cr. paid by Tata power
1. No execution risk: Tata got 1140 MW Power plant ready made with no
execution hurdle or risk. The assets are revenue generating from day one.
These assets will take care of the existing debts but also fresh debts, which
would be raised. The assets do not have future construction or power oftakers risks.
2. Almost all projects of Welspun have extra land, which in time could be
exploited for additional generation of power, without incurring new capital
costs. Along with surplus land, the projects have substations and
transmission capacity, which could be used carrying additional power to the
consumers. This option would be explored based on the power requirements
of the states.
3. Deal Sweeteners: Apart from this operational assets, Tata also got land 550
Acres which is acquired for transmission line and switchyard building which
can generate some inorganic income in future
4. The projects are spread across 10 states, therefore, it is a de-risked portfolio
for Tata Power. Many of the wind projects are contiguous with existing
projects of Tata Power.
5. Higher PPA Tarif: This project was commissioned 3-5 year back with average
PPA Rates per unit 7.5 against a current rate of 4.5/ Unit.
6. 100% PPA Signed: with 100% PPA Signed, Revenue is guaranteed
7. All equipment install are of TIER -1 Manufacturer ensuring lesser O&M
Expenses
8. Another intangible synergy: It is not possible to get 1140 MW on books on
such a short period for TATA, It was a once a lifetime opportunity for Tata
power to become Asia largest renewable energy company and reaching
towards its goal to generate 30-40% generation from non-conventional fuels
9. Winning new projects through a competitive bidding process is very time
consuming and may not always be easy. Therefore buying ready, cashgenerating assets saves lot of time and overhead cost.
10.Tata Power Solar Systems Limited, Bengaluru, is into manufacturing and sale
of C-Si solar PV cells and modules and EPC services. For increasing the
additional capacity in available 550 acre land, Tata could provide some
business to its subsidiary Tata Power Solar Systems Limited. Further
14

maintenance of existing infrastructure could provide business to this

subsidiary.

8.2 How TPRE Finance this deal

1. For current takeover of 100% share of Welspun renewable energy, Tata
power is raising fund through debt and equity mix
2. With 20% equity and 80% debt. (NDF)
3. It will also refinance Welspun 5500 Cr. loan at lower cost of debt.
4. Going forward TPRE will look for innovative ways to finance which will
reduce the overall cost of financing this project.

7.3 What TPRE can earn in this deal.

1. Tata Power Renewable Energy Ltd would be able to generate about 2,000
million units of power per annum from 1,140MW and add 13 billion
revenue per annum (thus payback period would be around 7 years)
2. For Tata Power Renewable Energy Ltd this will be a cash-accretive deal
with internal rate of return of 15-16%
3. Apart from Tata Power Renewable Energy Ltd, this deal would also provide
business to Tata Power Solar Systems Limited, which is again a subsidiary
of Tata power and is in business of manufacturing and sale of C-Si solar PV
cells and modules and EPC services.

7.4 What should be TPRE Strategy to de-risk its acquisition

1. WREPL projects are spread across 10 states, therefore, it is already
quite de-risked portfolio for Tata Power. Many of the wind projects are
sharing a common border or touching with existing projects of Tata
Power.
2. Tata has tremendous experience in managing solar projects due to
Tata-BP solar business. They can rope in the management from Tata-BP
solar to reduce the operational risks involved with this acquisition.
Same experience could be used to Tata Power can use to bring
technological intervention to increase the power generation.
3. Consider raising fund by selling some stake in business, or through IPO
to bring overall cost down.
4. Using its subsidiary Tata Power Renewable Energy Ltd, it can get lower
cost spares and repair equipment. This reducing high cost operational
risk
15

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8.0 Bibliography
1. Tata Power Annual Report 2015-16
2. http://economictimes.indiatimes.com/industry/energy/power/tata-powercompletes-welspun-renewable-energy-acquisition-appoints-chetan-toliaas- ceo/articleshow/54332905.cms
3. http://www.recindia.nic.in/download/lpc_111013_int.pdf
4. https://www.hdfcbank.com/Hdfc/rates/base-rate.page
5. http://www.business-standard.com/article/companies/tata-sons-boardwas-aware-of-welspun-buy-mistry-116102900028_1.html
6. http://www.icra.in/Files/Reports/Rationale/The%20Tata%20Power%20-R02082016.pdf
7. http://www.thehindubusinessline.com/companies/tata-power-acquireswelspuns-renewable-energy-assets/article8723585.ece
8. http://www.business-standard.com/article/companies/tata-power-swelspun-deal-is-not-without-risks-116061500033_1.html
9. http://www.livemint.com/Companies/k3OCSo45jNUzJPlrm1vSRJ/AfterWelspun-deal-Tata-Power-at-No-2-in-renewable-energy.html
10.http://www.forbesindia.com/article/special/tata-powerwelspun-deal-maybecome-benchmark-for-clean-energy-deals/43509/1
11.http://www.tata.com/article/inside/tata-power-share-purchaseagreement-welspun-renewables-energy
12.PFI Report

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