ACME Solar Holdings IPO analysis

ACME Solar Holdings IPO (initial public offering) will open for subscription on November 6, 2024 and close on November 8, 2024. Below is a breakdown of the renewable power producer's strengths, weaknesses and growth prospects to help investors make an informed decision.

ACME Solar Holdings IPO in a nutshell

• Quality: Between FY22-24, ACME Solar Holdings reported a three-year average ROE and ROCE of nearly 11 and 7 per cent, respectively.
  
• Growth: During FY22-24, its revenue declined around 6 per cent per annum while net profit jumped over two times during this period as a result of exceptional items.
  
• Valuation: After listing, the stock will trade at a P/E and P/B ratio of 28 and 4 times, respectively.
  
• Overview: A global transition to clean energy sources is driving demand for renewable energy solutions, which should help the company scale up. However, intense competition and lack of pricing power in the industry remain key challenges for the company.

About ACME Solar Holdings

Established in 2015, ACME Solar Holdings is a power generation company that primarily deals in renewable energy sources. Its portfolio consists of solar, wind, and hybrid renewable energy projects and it has an operational capacity of 1,340 MW.

The company currently has under-construction projects with a capacity of 5,020 MW. Its projects are located in 11 states including Gujarat, Rajasthan, Madhya Pradesh, Andhra Pradesh, Karnataka, and Tamil Nadu, among others.

Strengths of ACME Solar Holdings

• Integrated operations: The company's operations are vertically integrated as it has in-house engineering, procurement, and construction (EPC), and operation and maintenance (O&M) teams, which ensures cost savings.

Weaknesses of ACME Solar Holdings

• Recurring losses: The company has incurred losses in FY22 and FY23. On the books, it reported profits in FY22 due to exceptional items of Rs 330 crore. Against its reported return on equity (ROE) of 30 per cent in FY24, the ROE actually works out to be less than 10 per cent on excluding exceptional items from the profit figure.

Risk report

Company and business

• Were ACME Solar Holdings earnings before tax more than Rs 50 crore in the last 12 months?
  Yes. Its earnings before tax was Rs 161 crore in FY24.
  
• Will ACME Solar Holdings be able to scale up its business?
  Yes. The global transition to clean energy sources is driving demand for renewable energy solutions. Moreover, the government's growing focus to increase the domestic share of renewable energy for power generation will help the company scale up its business.
  
• Does ACME Solar Holdings have recognisable brands with client stickiness?
  Yes. The tenure of its projects is generally long term and clients are less likely to switch to other players.
  
• Does the company have a credible moat?
  No. The company operates in an intensely competitive industry where price-based bidding is used for awarding contracts or projects.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters have over 25 per cent stake in the company?
  Yes. Post the IPO, the promoters' stake will be 83.4 per cent.
  
• Do the top three managers have over 15 years of combined leadership at ACME Solar Holdings?
  Yes. Its Managing Director, CEO and Vice-Chairman have over 15 years of combined leadership in the company.
  
• Is the company's management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. There is no information to suggest otherwise.
  
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
  
• Is ACME Solar Holdings free of promoters pledging their shares?
  Yes. The company is free of promoters pledging their shares.

Financials

• Did the company generate a current and three-year average ROE of more than 15 per cent and an ROCE of more than 18 per cent?
  No. The company's three-year average ROE and ROCE were around 11 and 7 per cent, respectively. In FY24, it reported an ROE and ROCE of 31 and 7 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  Yes. The company reported positive cash flow from operations (CFO) in the last three years.
  
• Is ACME Solar Holdings net debt-to-equity ratio less than one?
  No. Its net debt-to-equity ratio was 4.1 as of Q1 FY25.
  
• Is ACME Solar Holdings free from reliance on significant working capital for day-to-day affairs?
  No. The company's working capital requirement is very high due to the nature of long-term projects. As of FY24, it had high trade receivable days of 116 days.
  
• Can the company operate its business without relying on external funding in the next three years?
  No. The business is capital-intensive. The company has taken debt in the past to meet its capital requirements. As a result, its debt-to-equity ratio has been very high consistently. It would further require high working capital to execute its order book. These factors will necessitate raising funds.
  
• Is ACME Solar Holdings free from meaningful contingent liabilities?
  No. As of FY24, its contingent liabilities as a percentage of equity was around 23.6 per cent.

Valuations

• Does the company's stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock offers an operating earnings yield of 3 per cent.
  
• Is the stock's P/E ratio less than its peers' median level?
  Yes. After listing, it will be valued at a P/E ratio of around 28 times compared to its only listed peer's (Adani Green) 226 times.
  
• Is the stock's P/B value less than its peers' average level?
  Yes. After listing, it will be valued at a P/B ratio of 4 times compared to its only listed peer's (Adani Green) 24 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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