This is a classic case of yet another sector gone down the drain due to wrong government policies. This is exactly going down the way of Telecom sector and things are going to get worse here before they get any better. This has personally been a very disappointing investment for me (not because I bought it at 15 and booked out at 17) but because of the messed up government policies. For a government, which prides itself so much on ease of doing business, Make in India and providing a great environment for investments, I would say that the government is solely responsible for killing this sector with very bleak chances of recovery in the short term.
The problem is not so much the rock bottom rates, but the refusal of some of the key states to honor the old PPAs. I expected the central government to categorically state here that all the old PPAs ( even if signed at Rs.15/ Unit) need to be honored. This is what stable investment policy is all about. But most of the key state governments are behaving like school kids and saying that everything needs to be renegotiated, or else, they are not going to fulfill the promised renewable purchases. This is both hilarious and disappointing. I can still understand states like Karnataka and Tamil Nadu doing it as they are ruled by Non NDA parties. However, when states like Madhya Pradesh and Rajasthan (with strong and stable BJP governments) do it, what kind of message are you sending to investors and corporates. If the PMO steps in and says that you have to honour these commitments, no matter what, I don’t think any of these states would have renegotiated. On top of that, the power minister has changed. So, everything will be brushed under the carpet now and new policies will be framed. Back in the good old business school days, the finance profs used to teach us that we have to assign something called country risks in our valuation models. Being naive, I used to bullshit such theories. But, as my investing career progressed, I have come to really appreciate these theories.
Ok, so technically, we need to reach 60GWs by 2022 to honour our commitments, right? So that still leaves a deficit of 28 GW. And, how much have we done this financial year, 1GW, is it? The point is, if your cost of capital is extremely low and you keep extending the repayment and payback period, your NPV can theorotically be positive at even Rs.1.5/ unit. You couple this with technological advancements in module manufacturing and then , it becomes practically impossible to put a lower cap on Tarrif prices.But, Hey!! Guess what, last I checked , India did not have the lowest cost of funds in the world and India did not have the lowest cost of manufacturing in the world. So, even if we assume that the renewables party will restart next year, you can bet on who is going to make the money by funding these projects. Foreigners, off course. Its such a traversity for a country which is supposedly trying to encourage “Make in India”.
Anyways, this investment has been a costly lesson for me (in terms of opportunity cost involved) and this again reinforces that you should not go against your basic investment mental framework, no matter how attractive the opportunity. I don’t think any of us was naive enough to not foresee the fact that traiffs will decline by 30% YoY due to the factors mentioned above. However, the big bet was around explosive market growth, stable government policy and the obviously huge untapped potential. One wished that the technological advancements and an oligopolistic market structure would leave enough in the table for shareholders.
Learnings, learnings, learnings, even after spending 1 decade in this business, the markets have a funny way of kicking you so hard that makes you realise how little you know about the world.
