Azure Power rating – Buy: Ebitda in Q1FY22 was 8% above estimate

Azure Power’s (Azure’s) Q1FY22 revenues rose 15% y-o-y and Ebitda rose 14% y-o-y to Rs 3.7 bn, 8% above expectations. 62-MW capacity has been added in the quarter and plans to reach 3 GW by end FY22e from 2 GW end FY21 is on track. Delays in the 4-GW SECI PPA and lower tariff have led to a reduction in our PT, apart from higher module costs. However, we believe Azure is best placed to profitably leverage India’s renewable energy theme as ROE focus remains. BUY.

SECI signs PSA for 800 MW of 12- GW tender: Azure won 4 GW of 12-GW manufacturing linked tender, which was long awaiting SEBs to come on board for the higher tariff. Solar Energy Corp. of India (SECI) finally signed Power Supply Agreement (PSA) with SEBs at Rs 2.54/ unit for 800 MW, implying 260-270 MW of Azure’s 4 GW should be set up over 12-18 months. Azure recently won 150 MW at SECI’s 1.2-GW auction at Rs 2.34/unit. Mgmt reiterated that it is patient and will be selective in bidding to ensure it builds a profitable pipeline.

Refinancing leads to 222 bps savings in interest costs: Azure successfully completed a bond issuance on 14th August 2021 at a 3.575% coupon for 611-MW operational projects. This is 27.5 bps lower than any offering by an Indian renewable energy player in the international markets. Including hedging, Azure has raised debt at 7.5-8%, which could further reduce post Omers (Canadian Pension Fund) acquiring a 19.4% stake.

Capacity to rise 3.5x, generation 4.5x during FY21-27e: Azure’s share price has corrected sharply between delays in the SECI PPA, rising module costs and concerns on capacity growth prospects. We believe India’s solar pipeline should be in 10-15 GW range annually over the next 3-5 years. We estimate Azure to grow at 21% Ebitda CAGR in FY21-27e with 13-15% long term ROE prospects based on current pipeline. We believe the current market price factors in only Azure’s 3-GW portfolio and no upside on the 4-GW SECI bid or new project wins. We reduce our PT to $44 from $57 as we account for lower tariffs and project delays. We have no terminal growth built in but have factored in incremental 15-GW commissioning between FY28e-35e.