ACME Solar IPO review (May apply)

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Review By Dilip Davda on November 4, 2024

•    The company is engaged in all kind of renewable energy projects and power generation.
•    It posted almost static top line with inconsistency in its bottom lines for the reported periods. 
•    Turmoil in earnings for FY23 it attributed to accounting adjustments of sold projects and other amortisation provisions. 
•    The boost in bottom line for FY24 is attributed to boosted other income and exceptional items.
•    Based on FY25 annualized earnings, the issue appears aggressively priced. 
•    Well-informed investors may park moderate funds for long term. 

ABOUT COMPANY:
ACME Solar Holdings Ltd.  (ASHL) is a renewable energy company in India with a portfolio of solar, wind, hybrid and firm and dispatchable renewable energy ("FDRE") projects. It is one of the largest renewable energy independent power producers ("IPP") in India and among the top 10 renewable energy players in India in terms of operational capacity as of June 30, 2024 as disclosed on page 238 in the section "Industry Overview - Key Competitors" and over the years, it has diversified and expanded portfolio from solar power projects to become an integrated renewable energy company in India. The company develops, builds, owns, operates and maintains utility scale renewable energy projects (through in-house engineering, procurement and construction ("EPC") division and operation and maintenance ("O&M") team, and generate revenue through the sale of electricity to various off-takers including central and state government-backed entities. 

The Company was established in 2015 to consolidate the ACME Group's renewable energy business and to capitalize on the opportunities in the Indian renewable energy industry. The ACME Group is promoted by Manoj Kumar Upadhyay and ACME Cleantech was incorporated in 2003. It originally operated as a provider of energy management solutions to wireless telecommunications operators' in India and subsequently entered into the renewable energy generation business in 2009. The ACME Group has been one of the early entrants in the solar IPP business in India (Source: CRISIL Report) and commissioned its first solar power plant in Fiscal 2012. The ACME Group has a track record of developing, executing and commissioning a total of 2,719 MW (3,668 MWp) of solar power projects from inception until the date of this Red Herring Prospectus.

It has an aggregate Operational Project capacity of 1,340 MW (1,826 MWp) solar power projects; Under Construction Contracted Project capacity of 3,250 MW including solar power projects of 1,500 MW (2,192 MWp), wind power projects of 150 MW, hybrid projects of 1,030 MW and FDRE projects of 570 MW; and Under Construction Awarded Project capacity of 1,730 MW comprising 600 MW (870 MWp) of solar power projects, 450 MW hybrid power projects and 680 MW of FDRE power projects, as of the date of this Red Herring Prospectus. 

According to the CRISIL Report, FDRE projects offer firm power supply as per demand given by utilities and a higher capacity utilization factor ("CUF") compared to pure-play solar and wind projects. Further, according to the CRISIL Report, expected tariff ranges have resulted in being higher than the norm of Rs. 2.5 to Rs. 2.6 per unit, approaching the range of Rs. 3 to Rs.  5 per unit. (Source: CRISIL Report) With this expanding portfolio, it has enhanced capabilities and product offerings and emphasized its commitment to sustainable energy development. This ensures that it remains responsive to evolving market dynamics while maintaining presence as a key player in the renewable energy sector. It has also strategically divested certain solar power projects to investors delivering value to the shareholders, with a cumulative capacity of 1,379 MW (1,842 MWp) and used the proceeds from such sale to grow its business. As of June 30, 2024, it had 246 employees on its payroll, and additional 229 off-roll contract workers.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden combo book building route IPO of 100346020 equity shares of Rs. 2 each worth Rs. 2900.00 cr. (at the upper cap). The company has announced a price band of Rs. 275 - Rs. 289 per share. The issue constitutes 82871972 fresh equity shares (worth Rs. 2395.00 cr. at the upper cap), and an offer for sale (OFS) worth Rs. 505.00 cr., (approx. 17474048 shares at the upper cap).  The issue opens for subscription on November 06, 2024, and will close on November 08, 2024. The minimum application to be made is for 51 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The IPO constitutes 16.58% of the post-IPO paid-up equity capital of the company. From the net proceeds of the fresh equity issue, the company will utilize Rs. 1795.00 cr. for investment in subsidiaries for repayment/prepayment of certain borrowings., and the rest for general corporate purposes. 

The company has reserved equity shares worth Rs. 10.00 cr. for its eligible employees and offering them a discount of Rs. 27 per share, and from the rest, it has allocated not less than 75% for QIBs, not more than 15% for HNIs and not more than 10% for Retail investors. 

The joint Book Running Lead Managers (BRLMs) to this issue are Nuvama Wealth Management Ltd., ICICI Securities Ltd., JM Financial Ltd., Kotak Mahindra Capital Co. Ltd., and Motilal Oswal Investment Advisors Ltd., while KFin Technologies Ltd. is the registrar to the issue. Syndicate members for this issue are Nuvama Wealth Management Ltd., JM Financial Services Ltd., Kotak Securities Ltd., and Motilal Oswal Financial Services Ltd.

The company has issued initial equity capital at par value, and has issued/converted further equity shares in the price range of Rs. 191.49 - Rs. 194.20 between January 2016, and December 2017. It has issued bonus shares in the ratio of 95 for 1 in March 2017. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 28.31 per share. 

Post IPO, company's current paid-up equity capital of Rs. 104.44 cr. will stand enhanced to Rs. 121.02 cr. Based on the upper cap of IPO pricing, the company is looking for a market cap of Rs. 17486.81 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) posted a total income/net profit/ - (loss) of Rs. 1562.73 cr. / Rs. 62.01 cr. (FY22), Rs. 1361.37 cr. / Rs. - (3.15) cr. (FY23), and Rs. 1466.27 cr. / Rs. 697.78 cr. (FY24). For Q1 of FY25 ended on June 30, 2024, it posted a net profit of Rs. 1.39 cr. on a total income of Rs. 340.01 cr. Thanks to other income of Rs. 147.02 cr. and exceptional items worth Rs. 748.69 cr. for FY23, that boosted its bottom line for the said fiscal. 

For the last three fiscals, the company has reported an average EPS of Rs. 6.44, and an average RoNW of 13.95%. The issue is priced at a P/BV of 7.77 based on its NAV of Rs. 37.19 as of June 30, 2024, and is at a P/BV of 4.03 based on its post-IPO NAV of Rs. 71.67 per share (At upper cap). 

If we attribute annualized FY25 earnings to post-IPO fully diluted equity base, then the asking price is at a P/E of 3211.11 and based on FY24 earnings, the P/E stands at 25.06. FY24 appears to be the exceptional years with boosted profits, but otherwise it has marked inconsistency in its top and bottom lines for the reported periods. Its debt-equity ratio of 3.89 as of June 30, 2024, it pretty high and raises concern. Based on its financial parameters, the issue appears aggressively priced. 

The company reported PAT margins of 3.97% (FY22), - (0.23) % (FY23), 47.59% (FY24), 0.41 % (Q1-FY25), but RoCE margins data is missing from the offer document. 

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It adopted a dividend policy in June 2024, based on its financial performance and future prospects. 

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown Adani Green Energy, and ReNew Energy Global (unlisted), as their listed peers, they are trading at a P/E of 198, and NA (as of November 04, 2024). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
The five BRLMs associated with the offer have handled 123 public issues in the past three fiscals, out of which 29 issues have closed below the offer price on listing date.

Clarificationby the IPO Issuer Company

Date: 06/11/2024

There are two revenue streams for the company - one from sale of electricity and second from in-house EPC and O&M division for its own project SPVs. Revenue from sale of electricity gets reflected in consolidated level. However, from accounting perspective, EPC and O&M profits released gets eliminated at the consolidated financials because of inter group adjustments and corresponding EPC profits get reflected at the standalone level.

Consolidated revenue from sale of electricity for Fiscal 2024 was INR 1,319 crore. EBITDA for FY2024 was INR 1,089 crore representing an EBITDA margin of 83%. After accounting for depreciation and interest, consolidated profit before tax (PBT) for the year 2024 was INR 161 crore. Additionally, total EPC operating profit was INR 288 Crore comprising EPC profit of INR 31 crore at ACME Solar standalone & INR 257 Crore at parent Acme Cleantech level. Historically, EPC work was done by both parent Acme Cleantech and the Company. However, going forward, entire EPC work and the corresponding EPC profit would be realized at Acme Solar Holdings Ltd as per internal restructuring mentioned in RHP.

Similarly for June’24, company generated a revenue of INR 310 crore from sale of electricity with EBITDA of INR 272 crore resulting in EBITDA margin of 88%. Profit before tax for the quarter was INR 50 crore . Additionally, the company generated EPC operating profit of INR 237 crore in the quarter ending Jun’24.

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