Renewable Targets And Battery Storage Will Drive Stronger Long Term Earnings Quality

Catalysts

About ACME Solar Holdings

ACME Solar Holdings develops, owns and operates large scale renewable power and battery energy storage projects across India.

What are the underlying business or industry changes driving this perspective?

• Acceleration in India’s renewable consumption targets, including a mandated step up to at least 43 percent of energy from renewables by 2030, is expected to support sustained PPA signing at what are viewed as attractive tariffs and drive multi year revenue growth.
• Rapid build out of grid scale battery energy storage, with 13.5 gigawatt hour in the portfolio and 5.1 gigawatt hour already ordered, positions ACME to monetize peak power price spreads from Q4 FY 26 onward, which could lift EBITDA and earnings quality.
• Policy support for non solar grid access and the ability to use existing substations for merchant storage operations increases utilization of commissioned assets. This is expected to improve CUF, stabilize cash flows and expand project level EBITDA margins.
• Falling equipment costs, lower GST on key components and scale driven procurement for solar plus storage projects should offset higher configuration complexity. This may help ACME sustain 14 to 15 percent returns on capital and support margin expansion over time.
• Ongoing credit rating upgrades to AA minus and successful refinancing at about 8 percent interest reduce the cost of debt on a growing asset base, directly enhancing net margins and free cash flow available to fund equity for future growth.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming ACME Solar Holdings's revenue will grow by 59.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 26.5% today to 22.7% in 3 years time.
• Analysts expect earnings to reach ₹16.6 billion (and earnings per share of ₹25.28) by about December 2028, up from ₹4.8 billion today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 24.3x on those 2028 earnings, down from 27.3x today. This future PE is greater than the current PE for the IN Renewable Energy industry at 23.7x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.39%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A large portion of industry awards still lack signed PPAs, and regulators are openly considering canceling and rebidding legacy capacities. If any of ACME Solar Holdings projects without firm PPAs are delayed or canceled, expected growth in contracted capacity and future revenue could fall short of current expectations, putting pressure on earnings.
• The business model depends heavily on transmission build out and timely connectivity, and management already highlights temporary open access arrangements and line delays. If grid bottlenecks persist or worsen, more plants could operate below full evacuation, lowering realized CUF, dampening revenue and compressing EBITDA margins.
• Tariffs on newer projects are higher than the operational portfolio because of complex FDRE and BESS configurations, but sector competition and policy preference for storage based bids may drive tariff compression over time. This could force ACME to accept lower bid prices or weaker returns, ultimately weighing on net margins and long term earnings growth.
• The strategy relies on large scale, debt funded CapEx in batteries and solar with high leverage and floating interest rates. Any sustained rise in funding costs, refinancing challenges or underperformance of BESS merchant spreads would erode return on capital employed and reduce free cash flows, increasing risk to net profit and balance sheet strength.
• Key regulatory changes like GST cuts and change in law clauses require ACME to pass through some cost benefits to Discoms, while court mandated clean up of Discom regulatory assets may push regulators to keep end user tariffs contained. Together, these factors could limit upside from future pricing and constrain revenue growth even as operating and financing costs remain elevated, pressuring long term earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of ₹354.29 for ACME Solar Holdings based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be ₹73.2 billion, earnings will come to ₹16.6 billion, and it would be trading on a PE ratio of 24.3x, assuming you use a discount rate of 15.4%.
  
• Given the current share price of ₹217.19, the analyst price target of ₹354.29 is 38.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.