Holding This Scorching Solar Stock Is Highly Risky
Moneylife Digital Team 15 March 2024
India possesses the greatest solar energy potential among all commercially available renewable energy sources. According to assessments from the National Institute of Solar Energy (NISE) and reports from the ministry of new and renewable energy (MNRE), the top-4 states with the highest solar photovoltaic (PV) potential are: Rajasthan, Maharashtra, Madhya Pradesh and Andhra Pradesh. MNRE has identified 3% of wasteland within a state for potential use in ground-mounted solar PV projects. Additionally, it has considered utilising 2%-25% of rooftop space (ranging from 1kWp to 100kWp) across various buildings such as offices, shops, hospitals and government buildings for the implementation of rooftop solar PV projects. Moreover, there is substantial untapped potential for solar energy across various states in India.
 
Source: Sterling & Wilson qualified institutional placement (QIP) document
 
All this is of great benefit to a company like Waaree Renewable Technologies Limited (WRTL) which is in the business of solar engineering, procurement and construction (EPC) and also service, operation and maintenance (O&M) of solar power projects. It also works as a solar developer - generation of power. It is the part of Waaree group and it is the subsidiary company of Waaree Energies. It has installed over 1GW (gigawatt) of solar projects and executed more than 10,000 solar projects. It offers ground-mounted solar, rooftop solar and floating solar EPC services.
 
It has executed over 600MW (megawatt) of ground-mounted solar projects globally. It has installed over 100,000 rooftop solar projects across India. It has installed two floating solar projects of 1.2MW for National Thermal Power Corporation (NTPC) and NLC India Limited.
 
WRTL’s revenue-mix for FY22-23 was: solar EPC business - 90% and O&M – 10%. Its geography-wise revenue-mix was: India – 31%, USA and Latin America – 26%, Australia – 40%, the Middle East and North Africa – 3% and others – 1%.
 
Industry Overview
The energy sector comprises conventional power, renewable energy (RE), petroleum and natural gas. The estimated total capital expenditure (capex) in infrastructure sectors in India over FY19-20 to FY24-25 is around Rs111 lakh crore, of which 24% (or around Rs26.9 lakh crore) is expected to be the estimated capex in energy sectors.
 
 
Under the national infrastructure pipeline (NIP), an estimated capex of Rs9.29 lakh crore is allocated to the RE sector with a target to create installed capacity of 266.73GW by December 2025. Around 56% of the installed capacity 149.70GW is expected to be created from solar with a capex of Rs4.72 lakh crore. 
 
Source: Sterling & Wilson QIP document
 
As of March 2023, RE capacity has reached 173GW (which also includes large hydro power plants). The majority of growth in the RE sector is led by solar power which rose from 0.9GW in 2012 to 67GW in 2023. The remarkable expansion of solar and wind energy has been propelled by fiscal and regulatory incentives, viability gap funding (VGF) and assistance in terms of land and evacuation infrastructure.
 
The enhanced accessibility of affordable financing through diverse instruments and sources is expected to further facilitate the addition of RE capacity. Specifically in solar power, ongoing reductions in capital costs and, consequently, tariffs, have been instrumental in driving increased capacity additions. The government wants to further reduce its dependence on coal, with an estimated installed capacity of 200GW solar power by FY27-28. 
 
Source: Sterling & Wilson QIP document
 
Despite such strong capacity addition, there is huge untapped potential for RE installations in India.
 
 
As India's economy is developing, urbanisation expands, and access to electricity improves, energy consumption is rising. Industrial consumers represent the largest electricity consumers, in absolute terms. Their consumption is growing in line with strong economic growth. There are multiple policy measures to support the demand and growth of RE: 24x7 power availability for all, implementing the ‘Sahaj Bijli Har Ghar Yojana’ (SAUBHAGYA) to connect electricity to every household, establishing a green energy corridor for efficient RE power transmission, launching a green city scheme to encourage sustainable urban development.
 
The effect of government investments in infrastructure through the NIP, the implementation of dedicated freight corridors, are crucial macroeconomic factors contributing to the demand for power. Policy initiatives like the production linked incentive (PLI) schemes and reduced corporate tax rates have supported large-scale manufacturing in India, further bolstering the country's power demand. In fact, various sectors such as automobiles, mobile handsets and tablets, solar, lithium-ion batteries, foods & beverages, and defence are expected to attract new investments, including foreign direct investments (FDI) from global major players.
 
Solar Power Demand
A sharp decline in solar module prices will act as a growth driver for the solar sector in India. Over the 2015-2020 period, solar module prices had declined around 70% due to innovation. In 2021, module prices rose sharply due to the disruption in the global supply chain and forced shutdown of manufacturing facilities. Module prices also increased because of rising input cost due to shortage of labour and raw materials price increase such as on silver, copper, aluminium and steel which had abnormally high price level during the COVID-19 period. 
 
 
Source: Sterling & Wilson QIP document
 
As the effects of COVID subsided, module prices have started declining due to stabilisation of raw materials prices and logistics costs, leaving a high inventory of upstream components such as wafers and cells. More capacities coming up in China have made it worse. 
 
Source: Competitor - Sterling & Wilson QIP document
 
Solar power plants usually require large land tracts—usually 10x the land parcel of a thermal power plant. This becomes particularly difficult as India has low average landholding per person in India (1.16 hectare). Even after land acquisition, the conversion from farm land to commercial land and other regulatory approval takes time in the entire implementation schedule of the solar power project. One of the crucial initiatives undertaken by the government of India (GoI), to deal with this, involves the establishment of solar parks across the country.
 
In solar parks, the land is already acquired by the government for solar developers with all the necessary regulatory approvals. Solar parks provide solar power project developers with a plug & play model due to ready land availability, shared infrastructure—high voltage/extra high voltage substation connecting to state grid substation—and other essential ancillary infrastructure and utilities, including roads, water and drainage. The solar park policy, introduced in September 2014, aimed to create land banks for 20,000MW of solar projects spanning 25 states. In March 2017, the scheme's capacity was doubled to 40,000MW, with the goal of establishing at least 50 solar parks by fiscal 2022.
 
Currently, 25 states, such as Andhra Pradesh, Madhya Pradesh, Gujarat, Rajasthan, Uttar Pradesh, Karnataka, Telangana, West Bengal, Chhattisgarh, Tamil Nadu and several north-eastern states, have initiated the creation of land banks for solar parks, either independently or through joint ventures with the Solar Energy Corporation of India (SECI).
 
 
As of February 2023, GoI has approved 57 solar parks with an aggregate capacity of 39.28GW. Among these, nine are fully completed, and eight are partially complete, contributing to a cumulative commissioned capacity of 10,117MW. As of December 2023, WRTL has executed eight projects under the ground-mounted solar projects of more than 270MW under independent power producers (IPP) and solar scheme.
 
In January 2024, prime minister (PM) Narendra Modi announced PM Surya Ghar Muft Bijli Yojana, an initiative to generate electricity through solar energy with the target of installing rooftop solar on 10mn (million) houses. With a total estimated cost of about Rs75,000 crore, the programme intends to supply up to 300 units of free power to 10mn houses. Under this scheme, private contractors will submit their proposals for implementation of project and MNRE will approve the projects. It will further help government’s goal of achieving 40GW of rooftop solar capacity by March 2026.
 
Subsidy Structure
 
Source: PM surya ghar national portal
 
WRLT has executed more than 400 solar rooftop-mounted projects with a capacity of more than 50MW. In Q3FY23-24, the management said its focus always has been securing orders in MW range. Since the rooftop projects under the new scheme are low kilowatt (KW) orders, the company has not formed a plan for executing such orders and it believes that there could be other areas within the supply chain where the company could derive benefits. The management believes there's a need for the company to deliberate and strategise on how to approach these lower KW opportunities and explore avenues within the supply chain that offer promising returns.
 
Business Outlook 
WRLT operates its solar EPC business in the capex mode and RESCO (renewable energy service company) operational expenditure (opex) mode. 
 
Source: Google, Bluebird Solar website
 
In the capex model, the customer holds ownership of the asset and spends the upfront investment - capital expenditure for installing the solar power plant on the space or land owned by its customers. 
 
Source: Company’s website
 
In the RESCO opex model, the company develops, installs, finances, operates and owns the rooftop solar power project and supplies power generated from the project to the consumer on whose premises the project is set up or to the grid through virtual net-metering.  
 
Source: Google, Bluebird Solar website
 
RESCO works as a zero investment model as it does not require capital investment to install a solar plant. In this solar financing model, a third-party service-provider—RESCO—owns, installs, operates and maintains the solar system on behalf of the customer. The RESCO model is often structured as a long-term agreement, typically ranging from 10 to 25 years. The RESCO or BOOT (build, own, operate, transfer) solar model operates on a ‘pay as you consume’ principle, where consumers pay for the electricity they use. Customers availing the service do not possess ownership of the solar power plant. Instead, they enter into a power purchase agreement (PPA) with the actual investor at a tariff and tenure mutually agreed upon. 
 
Under this arrangement, the customer is charged based on the electricity consumed, with a per unit price for the power used. WRTL as a RESCO developer takes responsibility for the annual O&M of the solar power plant. Any surplus power generated by the solar power plant is sold to the DISCOM, benefiting the RESCO developer in terms of revenue from the excess energy sales. 
 
Source: Company’s Website
 
Under the RESCO model, developers receive up to 70% subsidy for installation solar on government buildings in some special category states. The government through its new programme PM Surya Ghar Muft Bijli Yojana has increased rooftop solar subsidy for residential up to 60%.
 
India has a target of net zero carbon emissions by 2070 and decarbonisation of grid operations will lead to 2TW (2,000GW) of grid scale RE (wind + solar) and another 1TW of RE for green hydrogen production requirement which translates into capacity addition of 50GW/year of RE in future from a historical average of 15GW-20GW annually. Such capacity additions in the future provide a good outlook for renewable energy EPC companies in India. 
 
Source: News articles, Graphic –Moneylife
 
Indian solar industry was estimated at US$38bn (billion) in 2021 and is anticipated to reach around US$238bn by 2030, increasing at a compounded annual growth rate (CAGR) of 40% between 2022 and 2030. The India power EPC market size was valued at US$13bn in 2022 and is likely to reach US$84bn by 2031, witnessing CAGR of 22.7% between 2023 and 2031. According to the management, India solar capacity is expected to reach around 206GW up from 70GE currently, by 2027.
 
EPC companies play a crucial role in ensuring the accessibility of solar energy. Solar EPC industry in India has experienced remarkable growth, driven by technological advancements, decreasing costs and government support. Solar EPC is a highly competitive market, where numerous players vie for projects, leading to intense bidding wars. Aggressive bidding can often result in narrow profit margins, leaving EPC companies with little room to cover unexpected costs or invest in research & development (R&D). Moreover, the pressure to offer competitive prices can lead to compromises on quality. Some EPC companies might cut corners to reduce costs, jeopardising the long-term performance and reliability of solar power plants. Ensuring high-quality components and installations, thus, becomes a critical balancing act in the pursuit of affordability and efficiency.
 
WRTL, currently, has the market share of around 1.4% in the EPC market. Sterling and Wilson (SW) solar has the highest market share of solar EPC business in India with a portfolio size of more than 17GW. Other power players, including Adani Energy, L&T, Tata Power, have built massive capacity and are now bidding aggressively for upcoming solar projects. 
 
 
In Q3FY23-24, the management said it has a solar EPC pipeline of 9GW and the conversion of bid applied vs received is around 30%-40%. 
 
Source: Sterling and Wilson Solar (Competitor)
 
With easing of supply-chain pressures, India solar EPC bid pipeline for the company is expected to increase further, with public sector undertakings (PSUs) contributing around 67.5% to the domestic order pipeline. Orders flows from private independent power producers (IPPs) is also strong with a 13GW EPC pipeline. IPPs are private non-utility generators (NUGs) that are typically not owned by the national electricity company or public utility. According to management of WRTL, most of its business comes from the private sector, especially the utility IPP projects and commercial and industrial segment (C&I) segment. But the management noted that there is a shift and the order pipeline is tilting more towards PSU segment. 
 
In IPP and C&I segment, the payment terms are favourable for WRTL as it provides bank guarantees for projects, allowing them to operate with minimal capital investment. They mobilise only 10% of the project funds, using this to activate the supply chain and the payments for supply of materials are received within 15 to 20 days, sometimes with the help of credit periods provided by letters of credit (LC).
 
In government or public sector contracts, there might be a slightly higher capital requirement due to longer payment cycles; but this doesn't usually result in a loss of funds. Payment eventually arrives, although there might be a working capital cycle involved. Since WRTL mostly deals with private utility and IPP projects, working capital needs are minimal.
 
WRTL has announced collaboration with 5B Industries based in Australia to accelerate the deployment of utility-grade solar power locally in India as well as in international markets with a US-compliant supply chain. The collaboration will open avenues for the commercialisation of the innovative 5B Maverick solar product, allowing for localisation, scalable production and competitive deployment in India, with the aim of supplying to local as well as international developers and EPC companies. 
 
Source: Website of 5B Industries
 
The primary objective of WRTL and 5B, in terms of developing the supply chain, is to reduce the build cost of Maverick blocks , aiming for an economically competitive price point in India. The 5B Maverick technology, which is currently under trial, is aimed at revolutionising the solar landscape, making installations 10 times faster, more cost-effective and easier to maintain. In Q3FY23-24, the management said that 5B Industries has to set up their manufacturing in India so that WRTL can showcase the technology to its customers and it may take around six months to receive client approval.
 
Solar projects usually have a long gestation period and signing projects itself takes nine months in lead time. According to the management, investment in solar is in the range of Rs3.5 crore - Rs3.75 crore per MW. 
 
WRTL has also had entered into power generation business under its RESCO model and it already has 44MW of solar power assets and has generated a revenue of Rs10.89 crore in 9MFY23-24. These solar projects usually have a debt of 75% and equity of 25% of project cost. For 1GW or 1000MW if the project cost about Rs3,750 crore, it will need equity of around Rs900 crore (25% of the project cost). 
 
The company has also ventured into green hydrogen and is currently setting up 1MW green hydrogen project in Maharashtra as a pilot project from Mahatma Phule Renewable Energy & Infrastructure Technology on a BOT basis. The management wants to participate in the energy transition and expects to work on more green hydrogen EPC projects in future.
 
It has a strong parentage with Waaree Energies which was founded in 1989. It is engaged in the manufacturing of solar modules and has India's largest aggregate installed capacity of 12GW as of 30 June 2023 at its plants in Chikhli, Surat, Tumb and Nandigram in Gujarat and is a top player in the solar module export for FY22-23. It has supplied more than 6GW of solar modules and commissioned more than 1.1GW solar EPC projects.
 
Source: Corporate brochure of Waaree Energies
 
Financials
 
 
In the past five years, its revenue increased at an impressive CAGR of 119%. Its operating profit witnessed CAGR of 92% and, although its operating profit has grown 26x, its operating profit margin has halved. It has turned profitable and has grown its net profit more than six times over FY21-22. 
 
 
In Q3FY23-24, sales increased by 339% year-on-year (y-o-y) to Rs324 crore. Operating profit was Rs88 crore, increasing 145% y-o-y. WRTL declared its highest-ever quarterly sales, operating profit and net profit in this quarter.
 
In February 2024, it bagged an order worth Rs 990.60 crore for a 980MWp solar EPC project on turnkey basis.
 
In March 2024, it received order a letter of intent (LOI) for the execution of EPC work with land development of ISTS connected ground-mounted solar PV project of 300MW AC capacity on turnkey basis along with three years of O&M service. It is scheduled to be completed in FY25-26, in various tranches as per the terms of the order.
 
With the above-mentioned orders, WRTL currently has an unexecuted order-book of more than 2GW peak (MWp) (MWp measures the maximum power output of a solar PV system under ideal conditions, While MW is used to describe the actual power output of a system, rather than a theoretical maximum) and it executed 473MWp in 9MFY23-24. Its O&M revenues were around Rs10.89 crore in 9MFY23-24.
 
According to the management, the sustainable operating profit margin of the company will be around 15%-20%. As the EPC contracts are long duration contracts, especially those beyond 100MW as they don’t get over in one quarter, they usually spill over to the next three to six quarters and, in general, the margins hover around 15%-20%. It also depends on land availability. If the customer provides the land, execution can be done in one year and, if WRTL has to provide land, it can take around two years. PSU orders normally come with the land.
 
WRTL has higher operating profit margin, at 15%-20%, compared to that of its peers, while its competitors struggle to achieve margins of 9%-10%. According to the management, it is completely dependent on its positioning in the market. While government tenders often involve fierce competition and shrinking margins, WRTL’s negligible presence in this segment allows it to focus on more lucrative opportunities in the private sector. Here, clients prioritise its expertise and track record over competitive pricing, claims WRTL, allowing it the leeway to maintain higher margins to deliver customised facilities.
 
However, WRTL’s increased bidding for PSU orders to increase volumes, will impact margins, although economies of scale could partially offset this effect. 
 
 
Its fixed asset turnover ratio, RoCE and RoE has improved sharply over the past five years. It has also reduced its debt which peaked from Rs117 crore in FY20-21 to Rs39 crore in FY22-23. 
 
Cash-flows
Comparing cumulative PAT (profit after tax) against adjusted cash-flow from operations (ACFO) gives us as an idea of whether the company is able to convert its accounting profit into actual cash.
 
 
The cumulative ACFO amounts to Rs72 crore and cumulative PAT amounts to Rs56.77 crore.
 
Management
Pujan Pankaj Doshi is the managing director of RWTL. He has a Bachelor of Engineering degree in Instrumentation from Mumbai University. He has a decade of experience in this industry. In FY22-23, the salary of key management personnel was Rs31.5 lakh which was 0.57% of its net profit. 
 
Risks
Changes in government policies, regulations, or subsidies related to solar energy can significantly impact the business environment. Uncertainties in policies regarding tariffs, land acquisition, taxes and import duties can affect project viability and profitability. 
 
Intense competition within the solar EPC sector can lead to pricing pressures, reducing profit margins. Competing with established players and new entrants may require continuous innovation and cost-effective solutions to win contracts. 
 
Dependency on imported components, such as solar panels, inverters and batteries, exposes EPC companies to supply-chain risks. Disruptions in the supply chain, due to geopolitical tensions, trade restrictions, or natural disasters can lead to delays in project execution and cost overruns.
 
Rapid advancements in solar technology require it to stay updated with the latest innovations and invest in R&D. Failure to adopt cost-effective and efficient technologies may lead to reduced competitiveness and project delays.
 
Delays or disruptions during the construction phase, such as labour shortages, regulatory approvals, land acquisition issues, or adverse weather conditions, can impact project timelines and increase costs.
 
Once projects are commissioned, operational risks such as equipment malfunction, performance degradation, maintenance requirements, and grid connectivity issues can affect energy generation and revenue streams. Proactive maintenance and monitoring strategies are essential to mitigate these risks. 
 
Valuation
The stock has moved a lot recently after the announcement of initial public offer (IPO) of its parent company Waaree Energies Limited. WRTL has announced a 1:5 stock split and the record date for the split is 16 March 2024. The stock currently trades at a price-to-earnings (P/E) ratio of 132x. It, currently, has an order-book of around unexecuted order-book of 2GW or 2,000MW. If it is able to execute around 1.2GW of orders in FY24-25, assuming Rs1.27 crore/MW, its revenue would touch around Rs1,440 crore. Assuming a net profit margin around 14%, and at a P/E of 60, the market-capitalisation could be around Rs12,100 crore, implying no upside from the current market-capitalisation. Indeed, the stock has become so richly valued that any small negative news could lead to a massive selling.
 
Disclaimer: Moneylife s various services may have recommended, or invested, and its staff may have invested, or planning to invest, in companies discussed in the stocks section. The staff members are subjected to SEBI-mandated internal disclosure guidelines. The analysis here is for information purpose only and not investment recommendation.
 
Comments
gvgandhi28
4 weeks ago
Please provide in your analysis the next few players in the industry with some insight so that investors can watch those stocks. Often your analysis after two three pages read conclude about over valuation of the stock which serves no purpose . Focus on stocks where investors can gain by investing in those stocks . I hope I have conveyed my message correctly
pokkalimanoj
1 month ago
Broadly agree that stock is overvalued at the moment and one should not be buying at this valuation. One the positive note, the company has positioned itself very well among the private IPP players, where it has great margins and lean WC and I don't see any dearth in demand for private for next few years. The Market leader SWSolar has not won any orders this quarter, despite having 9 GW pipeline and 30%win rate, leads me to think whether WRTL has started bidding aggressively for Government orders too , case in point the recent NEPCO order , which could have lesser margins.
Key things to monitor would be order wins, type of order wins and margins. They have few options which could play out on the partnership with Maverick and their foray into Green Energy EPC .The strong parent in Waaree Energies is another key strength
Disclosure:Invested and Nervous on the valuations
ajeya
Replied to pokkalimanoj comment 1 month ago
Thanks for the comment, invested and nervous on the valuation . . . :)
I don't know how people identify trend early. If invested at 100-500 level then one can sit happily for many more years.
pokkalimanoj
Replied to ajeya comment 4 weeks ago
I was pretty late to identify it too????..Started accumulating at 1400 and bought last tranche at 2800
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