Is ACME Solar’s IPO a Bright Spot in Renewables?

Just a couple of days back, we had an IPO from a giant in the Indian renewable energy sector, Waaree Energies. After its stellar performance on the market on listing day, we now have another stock from this emerging sector gearing up for its IPO: ACME Solar. A key reason we are seeing a spate of solar energy IPOs in the market is the central government’s massive target of 500 GW of renewable energy capacity by 2030.

It’s important to note that ACME Solar is one of the notable players in this field. But with the renewable sector’s potential come complexities, and ACME’s financials, valuation, and strategy offer a mixed picture worth exploring.

Founded in 2015, ACME Solar has carved out a solid position in India’s solar space and recently branched out into other renewable avenues.

The company’s business model leans heavily on long-term Power Purchase Agreements (PPAs), primarily with government-backed clients. A Power Purchase Agreement (PPA) is a long-term contract between an energy producer (like a renewable energy company) and a buyer (often a utility, government entity, or large corporation).

This structure provides ACME with revenue stability but also creates dependencies on state-backed contracts.

With this ₹2,900 crore IPO, the company aims to pay down debt and fuel future growth. It’s a practical move, given the capital-intensive nature of the sector, where managing debt levels can provide greater flexibility.

Yet, debt management will remain an ongoing challenge as ACME expands.

When we dig into their financials, it’s clear the path hasn’t been entirely smooth.

Revenue has been largely flat over the past few years, indicating limited top-line growth, which is not unusual in a sector where project development can take years to show results.

When it comes to profits, they have been far more volatile. In FY23, ACME reported a dip in earnings due to accounting adjustments tied to sold projects and amortisation.

While FY24 showed improvement, the boost in profitability was largely due to “other income” and exceptional items.

These aren’t recurring revenue sources, so while the numbers look favourable at a glance, they don’t necessarily indicate steady growth going forward.

The valuations in this IPO reflect optimism around India’s renewable sector but may be challenging for more conservative investors.

Based on annualised FY25 earnings, the issue appears aggressively priced, especially when compared to other players in the renewable space.

Competitors like Tata Power Renewable Energy and Adani Green have stronger capacities and often broader revenue diversification, which can make them more resilient in the long term.

ACME’s smaller capacity and reliance on government clients may limit its flexibility, yet the company’s cautious, debt-conscious approach helps balance its growth strategy.

So despite the sector’s robust growth potential, this IPO comes with its share of risks.

A heavy reliance on government contracts means ACME’s revenue is vulnerable to policy changes and payment delays.

Any shifts in tariffs or regulatory frameworks could impact the company’s earnings. Moreover, while ACME intends to use a substantial portion of the IPO proceeds to reduce debt, future capital needs will continue to pressure their balance sheet, given the costs associated with renewable projects.

The company’s approach to debt management thus far has been cautious, but they will need to maintain this discipline if they aim to grow sustainably.

So, what does all this mean for potential investors?

Investing in ACME Solar’s IPO isn’t merely a financial decision; it’s about backing a vision for India’s renewable future.

The sector is rich with opportunity, but it’s a path marked by both bright prospects and significant challenges.

For investors drawn to the potential of renewable energy and prepared for the volatility that can come with it, ACME’s cautious approach may be appealing.

However, the aggressive pricing and dependency on government contracts makes this a choice that requires careful consideration.

In the end, this IPO offers a stake in India’s clean energy journey—an investment in both progress and possibility.

For those comfortable with a bit of uncertainty, it’s an opportunity to be part of the transformation.

As always, weighing both the strengths and risks is key to making an informed decision

Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

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