Anticipated Rate Cuts In India Will Lower Borrowing Costs And Boost Infrastructure Project Attractiveness

Key Takeaways

• Focus on solar plus battery storage systems and cost optimization boosts margins, enhancing competitive edge and future earnings.
  
• Increased operational capacity and internalized operations strengthen growth prospects through diversified revenue and improved cash flow.
  
• Operational challenges, currency fluctuation, and delays in project execution may impact ReNew's revenue, earnings, and market valuation amidst investor uncertainty.

Catalysts

Generates power through non-conventional and renewable energy sources in India.

• ReNew Energy Global's operational capacity has increased by 26% year-on-year to 10.8 gigawatts, with a contracted portfolio of 17.4 gigawatts, poised to impact future revenue positively.
  
• The company's focus on solar plus battery energy storage systems, amid declining battery prices, is expected to enhance its competitive edge and improve net margins through efficient grid balancing solutions.
  
• Strategic cost optimization and internalization of operations have led to a 500 basis points improvement in margins, suggesting potential future growth in earnings.
  
• The ramping up of manufacturing facilities with efficient high-capacity module and cell production is set to supplement cash flows and diversify revenue sources.
  
• Potential reductions in borrowing costs due to anticipated rate cuts in India could enhance net earnings by lowering financial expenses and boosting infrastructure project attractiveness.

ReNew Energy Global Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ReNew Energy Global's revenue will grow by 28.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.5% today to 15.9% in 3 years time.
• Analysts expect earnings to reach ₹29.1 billion (and earnings per share of ₹88.3) by about April 2028, up from ₹1.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.9x on those 2028 earnings, down from 143.0x today. This future PE is lower than the current PE for the US Renewable Energy industry at 31.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.01%, as per the Simply Wall St company report.

ReNew Energy Global Future Earnings Per Share Growth

Risks

• The decline in wind PLF (Plant Load Factor) has led to a reduction in the FY '25 EBITDA guidance, due to lower-than-expected wind performance, potentially impacting revenue and earnings.
  
• There are concerns over execution timelines, particularly with the ongoing administrative and last-mile connectivity issues in wind projects, which might delay project completion and affect revenue recognition.
  
• The company faces potential exposure to currency fluctuations with the depreciation of the Indian Rupee against the dollar, which could impact debt servicing costs and net margins.
  
• Transmission infrastructure development delays and regulatory approvals could impact the timely commissioning of new projects, potentially reducing future revenue streams.
  
• ReNew faces possible uncertainties related to its nonbinding offer by a consortium, impacting investor sentiment and possibly causing fluctuations in the company's market valuation and future earnings.

Valuation

• The analysts have a consensus price target of $8.373 for ReNew Energy Global based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $9.94, and the most bearish reporting a price target of just $7.1.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹183.5 billion, earnings will come to ₹29.1 billion, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 13.0%.
• Given the current share price of $6.08, the analyst price target of $8.37 is 27.4% 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.