Azure Power Global Limited (AZRE, Financial) is an independent sustainable energy solutions provider and renewable power producer in India. Azure developed India’s first utility scale solar project in 2009, and since then it has grown rapidly to become a leader in developing and operating large utility-scale renewable energy projects in the country.
The stock, which is listed on the New York Stock Exchange, is now down an astonishing 90% from its all-time highs.
Rather than selling off the stock, though, many of the gurus followed by GuruFocus have been taking advantage of the lower prices to buy more shares. Two Canadian pension funds that are Plus gurus, Caisse de dépôt et placement du Québec (CDPQ) and the Ontario Municipal Employees Retirement System (OMERS), own 75% of Azure Power as of their latest 13F updates. They have "lost" hundreds of millions from all-time highs, but both these pension plans are highly sophisticated institutional investors.
Several of the Premium gurus have also taken advantage of the lower prices to buy shares. Deep value investor Donald Smith & Company has recently taken a position in the company. Other gurus who have positions in the stock include Jeremy Grantham (Trades, Portfolio), Steven Cohen (Trades, Portfolio) and Caxton Associates (Trades, Portfolio). All these are small speculative "bottom fishing" positions. Could this be a stock worth bottom-fishing?
What happened?
Azure Power was billed as an attractive investment option for institutional investors due to its combination of renewable power and a base in electric power hungry India, one of the largest and fastest-growing economies. It installed India's first private utility-scale solar project in 2009, issued the country's first green bond and owns and operates one of the largest single-site solar projects in India. It was also the first Indian power company to list on the New York Stock Exchange, making it subject to U.S. securities law and regulation, which is appealing to major institutional investors.
A big part of the price spike in 2020 and 2021 was due to the bubble market that affected almost all stocks but mainly technology and renewable energy. A correction was necessary, but then in August 2022, the stock slumped even further to below pre-pandemic levels.
August 2022 was when the company announced the resignation of its CEO Harsh Shah after less than two months on the job. The company has not clarified why Shah resigned, citing personal and contractual reasons. It also disclosed the existence of whistleblower complaints alleging potential procedural irregularities and misconduct by certain employees at a plant belonging to one of its subsidiaries. The stock plummeted with these disclosures.
Investigations have revealed evidence of project data manipulation, weak controls over vendor payments and failures to provide accurate information. The company has also widened its investigation to review all projects commissioned in fiscal 2022 and 2023, identifying inconsistencies in project data in three other projects, potentially resulting in liabilities under contractual and tender documents. The company has taken actions, such as suspending the employees involved, implementing remedial measures and reporting the findings to the SEC and U.S. Department of Justice. Additionally, a Special Committee of the Board of Directors has been reviewing material projects and contracts over a three-year period for anti-corruption and related compliance issues, including a corruption allegation against certain former executives, and has reported its findings to the authorities.
The company said it has identified several weaknesses in its internal control over financial reporting. Management is taking remediation actions, such as creating a Management Assurance Service function, hiring additional accounting personnel and implementing process-level reviews to address the deficiencies.
The company's external borrowings require ratings by credit rating agencies. Due to the delay in filing the Form 20-F and audited consolidated financial statements, the credit rating agencies have announced a review of the company's credit ratings, which is a bad sign for its future ability to borrow funds at favorable rates.
Since Azure Power has not yet filed the Form 20-F nor has it released audited financial statements, in accordance with SEC rules, it is now unable to file new short-form Form F-3 registration statements (including shelf registration statements) for 12 months, which may limit financing options and could even result in the delisting of the company’s shares from the NYSE. (SEC Form 20-F is an annual report filing for non-U.S. and non-Canadian companies that have securities trading in the U.S.)
As a result of all this chaos, some of the company's projects are delayed, and it is facing a number of lawsuits in India and the U.S. Overall things are a complete mess and the stock deserves to trade cheap.
Unaudited financials
The company released an unaudited financial update recently in January but says it is still not ready to release audited financials yet. The unaudited numbers show that the company's operations are not in bad shape. Operating revenues in Indian Rupees increased by 19% in the six months ending Sept. 30, 2022 compared to the corresponding period in 2021, while electricity generated in Megawatts increased by 32%. The company is producing positive operating cash flow.
Operating revenues in U.S. dollars for the six months were $130 million. If the company manages this much for the second half of the year as well, full-year operating revenues could reach $260 million. This gives us a forward price-sales ratio of 0.93 (Azure's market cap its around $214 million).
The company also provided some unaudited numbers of its previous fiscal year which ended in March 2022.
| Fiscal year ending March 31, 2022 | $ millions | ||
| Operating Revenue | 243.8 | ||
| Cost of Operations | 21.4 | ||
| Gen & Admin | 27.2 | ||
| Interest exp. | 139.5 | ||
| My Estimated Cash Flow from Ops | 55.7 | ||
| My Estimated EBITDA | 195.2 |
Considering both last year and this year together, I estimated the book value of the company as follows:
| $ millions | note | ||
| Property Plant & Equipment | 1907.7 | 1 | |
| Accounts Receivables | 71.9 | 2 | |
| Cash | 262.4 | 2 | |
| Total debt | 1633.5 | 2 | |
| My Estimated Equity | 608.5 | ||
| My Enterprise Value | 1584.6 |
Note 1: As of March 31, 2022
Note 2: As of Sept. 30, 2022
Given the $214 market cap of the company, the price to tangible book value ratio works out to be around 0.35. This is very low versus comparable companies.
| Ticker | Company | Current Price | Market Cap ($M) | EnterpriseValue ($M) | Revenue($M) | Cash Flow from Operations | PB Ratio | PS Ratio | Price-to-Operating-Cash-Flow | EV-to-EBITDA | Price-to-Tangible-Book |
| NSE:ADANIGREEN | Adani Green Energy Ltd | 724.25 | 13,895 | 19,775 | 806.47 | 30,600 | 16.97 | 20.54 | 37 | 42.97 | 17.17 |
| CSIQ | Canadian Solar Inc | 40.32 | 2,591 | 5,489 | 7,025.73 | -408.25 | 1.45 | 0.40 | 0 | 14.50 | 1.52 |
| RNW | ReNew Energy Global PLC | 5.64 | 2,185 | 7619.51 | 881.63 | 766.92 | 1.56 | 2.57 | 2.95 | 10.74 | 2.38 |
| NSE:TATAPOWER | Tata Power Co Ltd | 204.80 | 7,930 | 13,315 | 6,500.96 | 66,927.30 | 2.55 | 1.20 | 9.79 | 9.07 | 2.91 |
The price-to-operating-cash-flow ratio is about 3.84. I estimate the enterprise-value-to-Ebitda ratio arond 8.11. This is the lowest in the selected cometitors above.
Overall the company appears to be exceptionally cheap on a price to book value basis and also on a cash flow basis, but there is a heightened risk of the equity getting wiped out if financing is not renewed. On the positive side, the company is producing decent cash flow from operations.
Conclusion
While Azure is an interesting investment opportunity at this stage, it is extremely high risk. The major risk stems from the non-release of audited financial statements and filing of 20-F. Unless the company releases this information, financing will be difficult to get, thus putting the equity at risk. At the same time, the company has some big insitutional equity investors who may have the resources, connections and motivation to ensure this does not happen. The company also has solid assets, is cash flow positive and is selling at close to a third of tangible book value.
