Indian Renewable Energy Stocks – Bubble Bursting or Investor Panic

26 Jan, 2012
Energy,Orient Green Power,Renewable Energy,Solar Energy,Suzlon,Wind Energy

Quick quiz. What is common to Suzlon, Moser Baer, Indo Solar, Websol Energy systems and Orient Green Power? All these stocks had successful runs on the stock market and hyped as the next game changers in wind energy, semi conductors, solar power and hydel/geo thermal power. Valuations were more on growth stories than through an hard nosed DCF spreadsheet. But now, they trade at record lows(like other stocks but what is different is the pressing fundamental concerns in each case). Is this a bubble finally bursting, or are investors panicking?

  1. Suzlon cherishes an ambitious vision of being the technology leader in the wind sector, and among the top three wind companies in all the key markets of the world. It expects that by 2015, total worldwide installation of wind energy would cross 442 GW which is almost 2.3 times of the current installation. This will cover about 7.5% of the global electricity supply by then, as opposed to just 4% now. But the solar bubble collapse in Spain, France and Germany(where subsidies were almost withdrawn) has put concerns on the very business model of solar(preferential feed in tariffs at peak hours(morning/noon)), as mentioned by First Solar in its 10K filing. So with gradual withdrawal of subsidies to wind energy generators, will Suzlon be able to regain pricing power for its equipment? Even in India, the most recent round of wind energy purchase tenders, saw bidders discount the CERC approved tariffs of Rs 17.91 by nearly 30%-35%, indicating that new players are willing to slash prices to gain market share. This would impact supplier pricing as well.
  2. Moser Baer, Indo Solar and Websol Energy systems, wanted to capitalize on the boom in demand for solar photovoltaic cells. Indo Solar wanted to take benefit of the 25% capital subsidy scheme for project capex over Rs 1,000 crores( as per the Special Incentive Package scheme announced by the Ministry of Communications and Information Technology, Government of India). But the global over supply(especially from China) backed by costs increases in key raw materials, led to EBITDA margin compressions, and short of domestic protectionism, I do not see a bright future for these stocks. While they are all trying vertical integration, entering into adjacent industries etc, the core business model is facing challenges due to global supply scenario, and price driven market.
  3. Orient Green Power is a slightly different proposition though. In 1H’12(Sep11 half year) alone, it added 80MW of wind energy, and had 300MW generation capacity(250MW wind+50MW biomass) in operation. However, with 250MW capacity wholly in Tamil Nadu and that State Electricity Board being in financial distress, investors seem to have discounted the stock which trades at P/BV of 0.5, despite its aggressive growth plans to reach 550MW capacity by Jun’12! At market cap of Rs 610 crores(with debt of Rs 190crores), the company had an EV of Rs 800 crores(assuming the Rs 170 crores of cash offset the current liabilities of Rs 195 crores, as the loans and advances of Rs 808 crores would presumably not be liquid), which would imply an EV of Rs 2.67 crores/MW, nearly half the estimated Rs 5.3cr/MW replacement cost of that capacity.

So have the factors affecting thermal power stocks(bankruptcy like status of SEBs, increased fuel costs, project execution delays) rubbed off disproportionately on these stocks as investors blindly herd together to sell power stocks? Or is it that the favourable economics may change? For export oriented equipment manufacturers like Suzon, the subsidy withdrawal story may play out, but for domestic generators, the national solar mission and other such plans would seem to give a secure price floor and assured market to sell the generated power.  These stocks are worth tracking though, as a hedge against the general power sector decline.

The paragraphs below features previous GWI takes on the above Green Stocks and is not part of Anand’s article

You can read about the GWI List of Green Companies in India

Previous GWI take on whether Suzlon is a falling Knife

Suzlon History

Suzlon,the Indian Wind Turbine making company has languished in red ink since the beginning of the Global Financial Crisis in 2008.The company started by Tulsi Tanti in 1995 was a shining example of Asian CleanTech with a 10% global marketshare and ranking amongst the top 5 Wind Turbine Makers .Suzlon buoyed by its success had bought controlling equity stakes in Turbine Gears producer Hansen Transmission and European Wind Turbine producer Repower.Suzlon wanted to leverage Repower’s technological expertise to enhance its own product offering.Like other Indian companies with global ambitions like Hindalco,Tata Steel and Tata Motors,it took on a lot of debt to buy these companies at the peak of the global economic cycle.The GFC resulted in a twin whammy for Suzlon.On one hand its end markets collapsed as project financing disappeared and on the other hand its huge debt burden became unsustainable.The company has failed to recover from the GFC as competition in the Wind Turbine industry has increased with the rise of Chinese players like Sinovel,Goldwind and A-Power.With the 2 biggest markets of USA and China dominated by domestic players,Suzlon has become a shadow of its former self.While other Indian companies have recovered strongly with the Global Economy,Suzlon continues to lose huge amounts of money.Its recent 2Q10 results were quite bad resulting in the share shedding 6% to Rs 50.This is almost 90% below its peak price in the heady days of 2008 .So is Suzlon a Fallen Angel which could turnaround to become a multibagger or a Falling Knife luring investors into further losses.Here are the pros and cons of the argument.

Orient Green Power IPO Analysis

Orient Green Power Ltd (OGPL) is India’s Largest Green Utility and is one of the areas that is a good way to invest in India’s Green Energy Sector.The company is owned by the Shriram Group and a couple of PE Players will issue around Rs 900 crores (~$180mm) which will result in a market cap of $450mm.OGPL is a relatively new company setting up and acquiring most of its 200 MW capacity in the last year which comprised of 152 MW of Wind Energy and the rest is Biomass Energy.The company plans to increase this capacity 4 fold to around 1000 MW in the next couple of years with Power Plants in  India,Europe and Sri Lanka.The centerpiece of this expansion will be a 300 MW Wind Energy Plant in Tamil Nadu for which $10 million has been already been spent.The company’s past profits and cash flow have been negative which is not exactly a concern given that most of the capacity was set up in the last year or so.I like the company’s growth plans and the sector in which it operates.India suffers from a huge power deficit and Renewable Energy is being heavily promoted through Government Subsides and Renewable Energy Mandates by the CERC.Trading of Renewable Energy Certificates (RECs) should start in a year or so giving additional revenue streams to Green Energy Producers.Here are the pros and cons of the issue

 

(The author Anandh Sundar is from the IIM Ahmedabad 2010-12 batch, and a ranker in CA/CS/CWA exams. He blogs at http://financeandcapitalmarkets.blogspot.com/, and http://specialsituationsindia.blogspot.com/  and has a keen interest in investing)

China’s Hot Money Outflows , Reduction in Forex Reserves May Indicate Coming Slowdown

14 Jan, 2012
China

China has reported the first decrease in its forex reserves in a qtr since the 1998 crisis. The Chinese Foreign Exchange Reserves which are humongous at over $4 trillion has shown a $100 billion decrease in Nov and Dec 2012 .While the sharp decrease in the Euro may account for some change , there is also anecdotal evidence that the hot money is flowing out of China . Note earlier Hot Money was pouring into China given the potential of yuan appreciation but with the potential of a Chinese Hard Landing ,the opposite may be happening . China has a distorted economy heavily dependent on exports and investment for growth . However changed macro economic conditions make this model unsustainable . How China manages to transition out of this investment export fueled condition is an open question . That they must is in no doubt nor the fact that China’s 10% GDP growth days are definitely over.

Chinese Trade Partners USA and Europe can no longer manage the massive deficits and strains are rising with some goods already facing disputes .Most famous is the Solar Panels while other Goods like Wind Turbines, Cars etc. have also seen signs of a Trade War. China under huge pressure appreciated the yuan by around 8% in 2011 from the US. In the current scenario when the profit margins of the small industries in China evaporting and potential for unreset (already happening ) , the situation remains dangerous . A Hard Landing not out of the question and people betting on it have already made money in 2011 without any serious decline happening till now.

China also faces a major change in 2012 with the top leadership of the country going to new leaders and the old set will go away.This means new policies and directions amidst major challenges to the Chinse economy and society.

China faces multiple challenges in 2012

1) Slowdown in Europe and USA means that their exports are sputtering and manufacturing has already started contracting

2) Protests in cities and villages grows against rampant corruption and land grabbing by Communist officials.Lack of democracy means violent protests at times.

3) Debt is becoming a huge problem with local government vehicles facing trouble as they can no longer raise money from real estate sales which has fallen by 20-25%

4) Massive industrial overcapacity is being exported outside.This has made the other trading nations put duties and curbs.A big trade war with USA cannot be ruled out.Chinese solar and wind products faced countervailing duties and dumping charges.China has already imposed high duties on US car imports.


China will take measure to stabilize its exports and imports as slowing global growth creates a “grim situation” for trade, said Zhang Xiaoqiang, a vice chairman at the nation’s top economic planning agency.

“Downward risks for the global economy are increasing,” the National Development and Reform Commission’s Zhang said at a forum in Beijing today. “The difficult situation will make competition for product exports among countries fiercer.” China will take steps to stabilize and improve trade policy, including the lowering of import taxes for some consumer goods, helping smaller businesses get financing and keeping its currency “basically stable,” he said.

China FE reduction

China’s foreign-exchange holdings reached a record $3.27 trillion in October and then fell in the following two months, the central bank data showed, indicating a decrease of $92.6 billion in November and December.

Much of the decline may be due to a lower value of the reserves held in currencies other than the U.S. dollar, said Cui Li, a Hong Kong-based economist at Royal Bank of Scotland Plc who previously worked at the International Monetary Fund.

Chinese Challenges in 2012 and What China Intends to do about it (Nothing Much)

2 Jan, 2012
China

China faces a major change in 2012 with the top leadership of the country going to new leaders and the old set will go away.This means new policies and directions amidst major challenges to the Chinse economy and society.

China faces multiple challenges

1) Slowdown in Europe and USA means that their exports are sputtering and manufacturing has already started contracting

2) Protests in cities and villages grows against rampant corruption and land grabbing by Communist officials.Lack of democracy means violent protests at times.

3) Debt is becoming a huge problem with local government vehicles facing trouble as they can no longer raise money from real estate sales which has fallen by 20-25%

4) Massive industrial overcapacity is being exported outside.This has made the other trading nations put duties and curbs.A big trade war with USA cannot be ruled out.Chinese solar and wind products faced countervailing duties and dumping charges.China has already imposed high duties on US car imports.

What China intends to do

a) China will balance “relatively quick” economic growth with inflation control in 2012 (don’t know what that means and how will they do it)

b) Country would maintain a “prudent” monetary stance and ensure that policy remains stable in 2012.

c) the 25-member Politburo affirmed an unchanged “proactive” fiscal stance for 2012 in December, a Nov. 30 cut in banks’ reserve requirements indicated a shift toward a bigger emphasis on supporting growth.

Here is what I wrote in 2010 on why Chinese economy might be slowing down

China has been called the “savior” of the world’s economy as its massive $586 billion  Government Stimulus and Easy Money policies sustained over 10% GDP growth in 2009 even as the world GDP was contracting for the first time in recent history.However China’s huge stimulus has created problems of inflation and asset bubbles which threaten to slow down the world’s “Growth Engine” . This combined with the Greek Contagion has raised the fears that a “double dip” world recession could be just around the corner.China’s leadership is also wary of a second global downturn. However a bubble in the real estate  has forced the hand of Chinese authorities which are trying to cool down the red hot “real estate” sector.The reasons that China’s economy which has averaged around 7-8% GDP growth in the last 30 years might be slowing down are listed here

  1. Real Estate is a Bubble - The Chinese real estate is in a bubble with real estate prices growing far in excess of Chinese income levels.Though the real estate is not driven by a debt fueled boom like the US and other developed countries , nonetheless avg real estate prices / average income levels would suggest that the real estate prices are poised to come down sharply.Chinese authorities are using both monetary and non-monetary tools to bring sanity to this market
  2. US  and European Export markets are slowing down – China’s growth has been a export driven growth like those of other Asian Tigers.However its main export markets of Europe and US are going to see sub-par growth in the next few years due to a debt driven excess.Europe’s Austerity measures and a low Euro is not an ideal situation for China’s export industries .
  3. Pressures on Yuan growing – China is facing an ever increasing chorus from countries around the world to appreciate the yuan which is artificially suppressed through currency controls.Some think tanks suggest that the yuan is 40% undervalued to its fair value against the dollar.With countries seeing their domestic markets shrink,everyone wants to export more and import less to repower their economies.An undervalued yuan is a trigger for trade wars.
  4. Foreign MNCs feeling discriminated against – China’s protectionist policies has led to an alienation amongst the foreign companies doing business in the country.Rio Tinto’s much publicized China corruption case and the Google abandonment of China has brought this issue into the limelight.Foreign countries are reevaluating whether China’s huge market is worth the discrimination they face vis-a-vis domestic companies
  5. Banks and Local Government have huge unaccounted liabilities - China’s corporate structure runs large based on patronage networks of government owned banks , state owned companies and provincial authorities.This frequently leads to misallocation in capital which shows up in the forms of NPAs.Local governments compete with each other for projects giving out huge subsidies and incentives which are funded mainly through local land sales.With real estate prices crashing and profits of export industries being pressurized , this is another bubble that may crack.
  6. Chinese Stock Market is down the most among major markets in 2010 – The Chinese stock market has been the worst performer among major economies with the interest rate increases and real estate bubbles making investors wary.Note this by itself is a poor indicator of economic health as stock markets are generally poor predictors of economy in the short run
  7. Chinese wages are going up – There has been a lot of social unrest and suicides in China as wages fail to keep in sync with the rising productivity.Recent suicides at Electronics Giant Foxconn and strikes at Honda are indicative of this trend .Low  wages which are China’s biggest competitive advantages may no longer remain one for much longer.

China to Balance ‘Quick’ Growth With Inflation in 2012, Hu Says

China will balance “relatively quick” economic growth with inflation control in 2012, amid rising uncertainty about the world economic recovery, President Hu Jintao said in a speech yesterday.The government will speed up economic structural adjustment and give priority to improving people’s well-being, Hu said in the five-minute New Year’s Eve speech carried on state television and radio.China’s manufacturing contracted for a second month in December as Europe’s debt crisis cut export demand, fueling speculation that the central bank may cut lenders’ reserve requirements within days.Earlier yesterday, the head of China’s central bank, Zhou Xiaochuan, said the country would maintain a “prudent” monetary stance and ensure that policy remains stable in 2012.

Summary

From the above it seems that the Chinese government still does not know exactly what to do.Controlling inflation with high growth seems a bit difficult.The problems are too big and the economy will slow down substantially.

Greece Referendum on European Bailout – 5 Points you Want to Know

6 Jul, 2011
World Economy and Markets

Greece Referendum is set to become the hottest media topic related to the European Debt  Crisis in the coming months.In a totally surprising move Greek Prime Minister George Papandreou called a referendum and a parliamentary confidence vote on 31st October just a week after  the European leaders had agreed on a package to .Papandreou’s personal and government popularity have plunged amid fresh austerity measures that sparked a wave of social unrest.The PM is calling this vote probably to bolster his government as it loses support of the masses.Mr Papandreou, whose ruling Socialist party has suffered several defections as it pushes waves of austerity measures through parliament while protesters rally outside, said he needed wider political backing for the fiscal measures and structural reforms demanded by international lenders.

a) Recapitalize the Eurozone Banks

b) Agreed on a €100bn loan to Athens and Offered a 50% haircut on Greek Debt

c) Promised to increased the size of EFSF to almsot 1 Trilion Euros

This new Referednum promises to set the cat amongst the piegons once again and set off a new wave of crisis.

Here are some points that you need to keep in mind with this referendum

1)  The confidence vote will conclude late on Nov. 4, while the referendum will likely be held after the details of the European accord are tied up.The Referendum is supposed to occur early next year.It will be only Greece’s second in almost 40 years,the first being to oust the Monarchy.Referendum Legality is also being questioned since it can be only held for matters of national importance and not for Economic Matters.

2) The chances of the referendum passing are low as Most Greeks oppose last week’s European deal to address the country’s debt crisis.According to the poll, 58.9% of Greeks judge the new European deal as “negative” or “probably negative” for Greece, while nearly two-thirds said they felt unease, fear or rage at the decisions reached by European leaders.54.2% of Greeks thought a national referendum should be called to approve the new aid deal, compared with 40% who said Parliament should decide.

3) Total Default on Greek Bonds could occur if the Bailout Referendum Occures resulting in a Lehman style Event though probability of that happening is low.What is certain is that till the Referendum happens the Global Financial Markets will be plunged in Volatility

4) The popularity of all major political parties is low with 14-22% approval ratings.Nobody knows whether such unpopular politicians can convince the public of anything let alone a complex referendum which will be decided by emotional appeals rather than a logical cost benefit analysis

5) European Leaders were blindsided by this sudden decision of the Greek government and many consider it a betrayal after going through such painstaking negotiations over the past few months to hammer out a deal.Some consider it as Blackmail by Greece to the whole European Union.Sarkozy is “dismayed” by the Greek plan, Le Monde newspaper reported, citing unnamed people close to Sarkozy.

 

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Greek Debt Deal – Bondholders take 50% Loss- Who Wins and Loses

5 Jul, 2011
Europe,Italy,Spain

According to reports coming from Europe where the summit of major European leaders took place to resolve the growing debt crisis,a deal has been reached on Greek debt.The Euro 350 billion debt which dwarfs the size of the negatively growing Greek economy has been a major source of instability in the last 2 years.The private holders of the Greek government bonds have agreed to take a  50% writeoff on their holdings.This means that if they hold Euro 100 of bonds they have become Euro 50 now as the rest has been written off as bad debt.Not that it was not apparent as Greek CDS and Greek bonds were touching all times lows in the secondary market.In fact the only buyers of Greece bonds were the European Central Bank and the Greek banks.The capital markets had been going up in the last month in the hope of some sort of resolution.The deal does not look like a win win as there will be some big losers in this deal (though they were already losing for some time).Nicolas Sarkozy announced the deal which would be voluntary in nature so that the CDS would not be invoked.Here are the winners and losers from this deal

Losers

1) Greek CDS Holders – They would be one of the biggest losing part as ISDA will not invoke that this is a credit event in which the Greek bonds have defaulted despite the 50% haircut

2) Greek Citizens – They would have been better off if a more sustainable path had been paved since the estimates still call for Greece to have 120% debt to GDP ratio by 2020.This means that they will have to live in a generation of austerity and poverty

3) Greece Pension Funds and French Banks – The French Banks like BNP Paribas,Credit Agricole have the biggest holdings of the debt.So also Pension Funds in Greece and other places which will be suddenly seeing a big hole in their assets column

Winners

1) Euro – The currency has managed to survive this phase of the crisis and has managed to surge at least till now.

2) Italy,Spain and Portugal – The contagion to the bonds of these countries will be contained since Greece has not done a messy default.The yeilds on the bonds of these countries might go down at least temporarily

 

Greek bondholders to take 50% haircut – Marketwatch

French President Nicolas Sarkozy said at a press conference in Brussels that the 50% haircut will be a voluntary agreement.An involuntary writedown could have potentially constituted a “credit event” that would have required the payout on billions of euros in credit default swaps, instruments used to insure debt against non-payment.

Thursday’s deal means that Greece’s debt burden will fall by around €100 billion ($140 billion). Media reports earlier this week had put a possible haircut on Greek government bonds at between 40% and 60%.Sarkozy also announced that the European Financial Stability Facility will see an increase in firepower by four- or five-fold.

An expanded bailout fund is seen as crucial in ensuring that the debt crisis doesn’t engulf Spain and Italy.

Why did it take Spain 3 years to stops/changes subsidies to Solar Power Plants getting Feed in Tariff through Fraud

15 Apr, 2011
Solar Energy,Spain

Spain has started cracking down on Solar Power Plants which are making huge profits through illegal Feed in Tariffs which they should not get.Note Spain had seen a massive boom in solar installations in 2008 due to unusually large ROI driven by high Feed in Tariffs.FIT are electricity rates which are higher than wholesale electricity rates paid to renewable energy power plants in order to make them competitive with cheaper fossil fuel power plants.Seeing a huge increase in the subsidy burden Spain has pretty much killed the solar market in 2009,however the problems of Fiscal Deficit has made Spain reconsider the tariffs being given to even older solar power plants.After a lot of controversy,Spain changed the FIT rules in the middle of the game through a retroactive FIT Law drawing howls of protest from solar investors like pension funds which have sued the government.

Spain is now also pursuing the solar industry by cracking down on power plants which connected after 2008 but got the FIT for 2008 power plants.Almost 304 solar power plants have been deemed illegal.Spain is reviewing the all the 9000 plants and till now almost 30% of the plants being reviewed have had their subsidies stopped or FIT changed.Don’t know why it took Spain 3 years to crack down on subsidy fraud when everyone knew that massive solar fraud had taken place during the boom as everyone rushed to put up a solar power plant during the solar gold rush.

Spain watchdog halts premiums for 304 solar plants

Spain’s energy watchdog ruled on Thursday to provisionally suspend paying premiums to 304 solar plants which failed to show they were up and running before subsidies were capped in 2008.

The National Energy Commission (CNE) recalled in a statement that it had provisionally suspended another 347 solar plants on March 29.Last year the CNE began investigating 9,041 photovoltaic plants, of which 840 have waived a premium of 475 euros ($683.9) per megawatt-hour and accepted one of 326 euros/MWh.Spain’s benchmark wholesale power market price on Thursday was 44.43 euros/MWh.Of the remainder, 2,021 plants have been examined and 651 suspended. The government has the final say on suspensions.

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