Expanding Renewable Horizons Powering Exceptional Growth And Profitability

Key Takeaways

• Significant capacity growth and new PPAs could drive future revenue increases by expanding ReNew's renewable energy portfolio.
  
• In-house production capacities and strategic manufacturing aim to enhance cost efficiency, stabilize operations, and improve profitability through reduced supplier dependency.
  
• Heavy debt and reliance on in-house solar manufacturing, combined with fluctuating wind performance and legacy PPA issues, pose significant financial risks.

Catalysts

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

• ReNew Energy Global's commissioning of 860 megawatts to date in the fiscal year, along with an expected 350 to 400 megawatts in the third quarter, indicates significant capacity growth that could drive future revenue, as the operational capacity grows by approximately 30%.
  
• The company has secured PPAs for 2.9 gigawatts of renewable energy capacity, expanding the portfolio from 13.8 to 16.3 gigawatts, potentially increasing future revenues as new contracts are fulfilled.
  
• ReNew's new 6.4-gigawatt solar module manufacturing facilities, along with trial production of cells, could stabilize operations, enhance cost efficiency, and boost earnings by reducing dependency on external suppliers.
  
• Strategic manufacturing and in-house EPC capabilities, ensuring access to materials and infrastructure, may improve net margins through increased operational efficiency and reduced supply chain disruptions.
  
• ReNew's targeted levered returns of 16% to 20% on 1.4 gigawatts of additional capacity may drive future profitability and boost earnings, by focusing on high-return projects and capital discipline.

ReNew Energy Global Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ReNew Energy Global's revenue will grow by 27.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.4% today to 26.7% in 3 years time.
• Analysts expect earnings to reach ₹46.3 billion (and earnings per share of ₹67.88) by about November 2027, up from ₹2.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹53.6 billion in earnings, and the most bearish expecting ₹12.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 0.2x on those 2027 earnings, down from 84.7x today. This future PE is lower than the current PE for the US Renewable Energy industry at 25.0x.
• Analysts expect the number of shares outstanding to grow by 23.4% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

ReNew Energy Global Future Earnings Per Share Growth

Risks

• The company's significant reliance on in-house solar module and cell manufacturing poses risks if production costs increase or market demand decreases, potentially impacting net margins and earnings.
  
• Despite expanding capacity, a 300-basis point reduction in wind PLFs, affected by poor wind performance, could lead to lower than expected revenues and affect profitability.
  
• There is concern over the unsolved transmission readiness of the RTC project, which might result in delays and impact the company's ability to meet expected revenue targets.
  
• The significant proportion of debt relative to EBITDA could pose financial risks, particularly if interest rates rise or if there are currency fluctuations, affecting overall earnings stability.
  
• Potential delays or reevaluation of legacy PPAs with lower tariffs, in comparison to current market tariffs, may lead to suboptimal returns on investments, affecting revenue stability in future quarters.

Valuation

• The analysts have a consensus price target of ₹8.77 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 ₹9.97, and the most bearish reporting a price target of just ₹7.24.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹173.1 billion, earnings will come to ₹46.3 billion, and it would be trading on a PE ratio of 0.2x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of ₹5.49, the analyst's price target of ₹8.77 is 37.4% 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.