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 But the solar bubble collapse in Spain, France and Germany(where subsidies were almost withdrawn) has put concerns on the very business model of solar(preferential feed in tariffs at peak hours(morning/noon)), as mentioned by First Solar in its 10K filing.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)

Indian Imports of Chinese Solar Cells to Continue despite Indian Panel Factory Closures

19 Jan, 2012
Energy,Solar Cells,Solar Energy

The Indian government is not going to impose any new duties on imports of Chinese solar cells. This is despite the petition by the Indian solar panel manufacturers to give a level playing field. Note Chinese solar panels have virtually destroyed the solar manufacturing industry in the West with big companies falling under the relentless price pressure where solar panel prices have gone down by 60% in one year. Only the Koreans seem to be standing up to the Chinese government backed top tier solar companies from China. The rest have mostly folded up and are facing survival questions including those from Taiwan. Indian solar companies were never that big and cost competitive anyway given the headstart and support of the Chinese backed companies. The price crash in 2011 has seen most of them close their factories as they can’t even cover their costs at the Gross Margin Level.

Indian Solar Panel Companies are asking for protection from cheap imports from China and other countries. Note the prices of solar panels have fallen by 60% in 2011 due to a number of reasons such as cheap raw material polysilicon prices,high competition between majormodule manufacturers, dropping processing costs. The biggest reason for the solar panel price crash has been the support of the Chinese and other Asian government to their respective domestic solar industries.

It is a fact that many of the major solar module companies would be bankrupt right now without government support. LDK is the prime example of a zombie company flourishing on the back of Chinese government support. Indian solar panel makers have got some protection with the federal subsidy policy JNNSM mandating that cell and modules be made in India.However thin film solar panel technlogy is exempt which means that they are not fully protected.Besides state government solar polices don’t protect them at all. The consequence has been that most of the solar panel companies are running at 0 to 20% utilization as orders dry up.

The Indian Solar Companies were hoping that like the US government , India too would impose some sort of  anti-dumping duty on imports of Chinese solar cells and panels. But the government seems in no mood to oblige. Note the import duties would hurt the powerful Indian utilities and developers who need the cheap solar panels. There is some protection for the solar players in the federal subsidy scheme JNNSM but nothing for the state subsidy programs. It looks likey that most of  the Indian solar cell and panel producers will be wiped out given the current state of affairs.

Read our previous stories on Domestic Content Controversies on Indian Solar Panels.

USA Opposes India’s Solar Energy Domestic Content Requirements

USA has opposed India’s Local Content Requirements for the Federal Solar Energy JNNSM program.Note according to the JNNSM rules,solar panels will have to be produced in India for the first year and solar cells will also have to produced from the second year.There is also a proposal that the local content requirements may be extended beyond 2013 and will also include solar inverters.US administration is opposed to these rules as it will lead to export hurdles for its solar companies Sunpower and First Solar.India installers and developers have also opposed the move as it will lead to lesser choice amongst suppliers and probably higher costs.

Why Germany could join USA, India in Anti Dumping Duty on Chinese Solar Panels Imports

Solar Trade Wars are becoming the norm in the globe these days with the major one between USA and China.The instigator is the German solar company Solarworld which helped started the ITC Case in the USA. India too is thinking of putting some kind of import duty to protect its domestic solar panel producers which are dropping like flies. Chinese solar panel producers have swamped the world with super cheap solar modules. though a part of their low prices can be explained by competitive advantage, another part is due to  the labor, capital subsidy given by the Chinese government. It would not take  a rocket scientist to say that some of the biggest Chinese solar companies are insolvent and would be dead within a month without Chinese state loans.

The government says it has no objections to Imports of low-priced Chinese solar cells as long as they meet prescribed quality standards. This comes as a setback to domestic manufacturers battling cheaper Chinese imports. Last week, the government rejected a plea of domestic players seeking imposition of import duty on finished solar equipment.

“The market will always bend towards the products which are low-priced. But, yes the quality matters,” said Tarun Kapoor, joint secretary, ministry of new and renewable energy. Kapoor, however, said, “We support what is legal, this is a case and we support WTO-accepted norms. It is not country specific, it’s rule specific.”

India’s National Solar Mission gives preference to domestic manufacturers. However, this is only at the central level and states are not obliged to follow this policy. “There’s only one scheme that offers this provision and it’s not a law,” Kapoor said. “We give the projects to developers who in turn are free to choose the products. If the prices are low and quality is good, then obviously, anyone would go for it.”

Reliance Media Powerhouse in Making Buys stakes in Cable,Broadband and Content

19 Jan, 2012
Energy,Telecommunications

Reliance Industries which is India’s biggest oil and gas company is set to become one of India’s largest media players as well. Reliance with its massive war chest of cash has been buying stakes in both content generation and delivery across the spectrum in India. The company recently bought controlling stakes in one of the largest TV broadcasters Network 18 coupled with its earlier stake in Eanadu . Reliance  earlier bought the broadband spectrum rights for broadband transmission in a deal with over $1 billion.

Reliance Industries the biggest private company in India with billions of dollars in free cash flow being generated by its oil and gas business,is set to make a  massive investment into the broadband business through 4G. Reliance which is primarily an oil and gas company is investing heavily into Retail, Financial Services and Media. The company is set to become a media behemoth after buying substantial chunks into the content business of NW18 and Eenadu network.

Reliance has a massive balance sheet which is has used strategically to acquire 4G spectrum (Infotel) and content.The company had revolutionized the telecom space through the Monsoon Hungama campaign when it had provided super cheap telecom  mobile plan with handsets. It could do the same in the Internet space through providing super cheap Tablets like Aakash with super cheap broadband plans on 4G. It already has content to provide its subscribers.Note broadband companies in India provide poor service at high rates, so Reliance can takeover the broadband space in India easily if it executes right.

With voice becoming a commodity with super low or free pricing,data is the only way to earn money for telecom companies in India. If Reliance executes its strategy right,then these telecom companies like Idea,Vodafone,Airtel would see their revenues and valuations crushed.

The company is planning to introduce a big bang plan for broadband  coupling a cheap tablet with a cheap monthly plan. This is on the lines of a mobile phone with a monthly connection. Reliance has a  good chance of winning the broadband market which remains under penetrated and high cost. It poses a direct existential threat to India’s telecom companies which have failed to compete on data effectively.

Reliance in continuation of its strategy in the media industry has bought a small stake in Den Networks one of India’s largest cable networks though one its subsidiaries. The company is slowly and methodically capturing the entire media development and delivery network  in the country. The stake in the cable companies will give it leverage to deliver its broadband and content.

Reliance Strategic Investments, a subsidiary of Reliance Industries, has bought a 1.14% stake in DEN Networks, one of the two listed cable distribution companies in India. As RIL has acquired interests in media firms dealing with content, it makes sense for the Mukesh Ambani-controlled group to invest in a distribution network now, several analysts told ET.

Indian Wind Energy Developers to focus on Electricity Production than Accounting Gimmicks with Depreciation Removal in new Tax Code

18 Jan, 2012
Energy,Wind Energy

Subsidies of different kinds are given to the Renewable Energy Industry around the world . These incentives or subsidies which they are better known as are in the form of

a) Capital Subsidies

b) Feed in Tariffs

c) Tax Breaks in form of Accelerated Depreciation

d) Renewable Energy Certificates

e) Carbon Credits.

Wind Power in India has been wildly successful and is the 5th biggest in the world because of substantial incentives from the government. One of them has been accelerated depreciation which has made hundreds of companies and rich individuals buy small wind farms. This helps them offset their tax liabilities providing a substantial 2 digit returns. However the big drawback in this from of green subsidy is that it does not incentivize the production of wind energy. Once the wind farm is set up, the incentive to produce lots of electricity is not there unlike the case of Feed in Tariff where your returns are solely based on the electricity generatino.

India is coming up with a new Direct Tax Code in April 2012 which will substantially overhaul the current tax system in the country. In this the accelerated depreciation given to wind power turbines in India will be done away with. This might lead to a dip in the wind power production addition in the country. However in the Long Term its a plus as it would force Indian Wind Energy Developers to focus more on Electricity Production than Accounting Gimmicks

Wind Energy Companies in India that will be Affected

1) Suzlon Energy – Suzlon Energy is the biggest Wind Energy Company by far with 4-5 Gigawatts of WTG Capacity per year.Its subsidiaries Hansen Transmission and RePower are also big players in the Wind Energy in Europe.The Company has seen its revenues and profits take a huge hit in recent times but has been recovering slowly.

2) RRB Energy – The company has a long history and manufactures Wind Turbines at its plants in Tamil Nadu.The Company has a capacity of 300 MW which it is expanding to 700 MW.The Company makes only 2 models with power rating of 600 Kw and 1.8 MW.Merill Lynch has made a small investment in this company.

3) NEPC India – This company was one of the wind energy heavyweights and a stock market darling earlier.However It no longer remains an active player in the Indian market .Heavy Debt and Bad Management drove to this company to the ground despite being a pioneer in the Indian Wind Power Market.

4) Auro Mira Energy – The company is more of a Green Utility rather than a full fledged WEG manufacturer.It has made plans to manufacture Wind Turbines in the future.It has attracted funds from Baring and IFC to push forward its Green Plans.Auro Mira Energy is a Tamil Nadu based Green Utility backed by a clutch of PE investors like IFC etc.It has 2 biomass plants of 7.5 MW and 10 MW and plans to build around 100 MW of hydro and biomass capacity over the next 2-3 years.

5) Regen Powertech - It is a small scale WTG Supplier like RRB Energy which recently set up a small 300 MW manufacturing facility in Tada,Andhra Pradesh recently.The company licenses technology from Vensys to manufacture 1.5 MW gear-less Wind Turbines.The company has managed to supply both big and small wind farms over the last 2 years.The company is supported by the PE arm of Future Group.

6) WinWind – The company is not exactly a domestic company rather one with a Finnish Origin.It is owned by the Abu Dhabi Masdar ,Siva Group and the government of Finland.It has recently established a 1000 MW capacity in Venga,Tamil Nadu and also has a 500 MW plant in Finland as well.The company plans to producer 3 MW Turbines at its Indian plant as well.

7) Pioneer Wincon – The company is a JV between the Pioneer Group and Wincon of Denmark.It makes small 250 KW Turbines and is a bit player with 30 years of operations in India.The Company remains a small static player in the Wind Energy Market of India.

8) Chiranjeevi Wind Energy – A Small bit player like Pioneer Wincon which engages mostly in the sale of small 250 KW Wind Turbines.Like Pioneer Wincon it has sold a number of these Turbines to small companies mainly in the Southern Part of India.

9) Lietnar Shriram Limited - The company is a 50:50 JV betwen the Shriram Group of India and Lietnar of Italy.The company makes gearless turbines of 1.5 MW capacity and has supplied to small farms in Maharashtra.The company has a major inhouse customer in the form of Orient Green Power which is building a 300 MW farm in Tamil Nadu using Lietnar Shriram Wind Turbines.

10) Kenersys - The company is part of the Baba Kalyani Group which is a major forgings manufacturer in India.It was bought over in 2007,when the Kalyani Group and PE firm First Reserve bought over the German company RSB Consult.The Company mainly  makes 2 and 2.5 MW turbines and has production facilities both in India and Germany.It has wind design capabilities between 1-3.6 MW and with a powerful parent, it could become a success in the future.Amongst the newer wind energy companies like Lietnar,RRB Energy,Regen and WinWind,it looks like the one with most potential

Source – http://www.bloomberg.com/news/2012-01-17/india-may-end-tax-break-for-wind-farms-this-year-official-says.html

India Engineering Conglomerates GMR and L&T Raise their Solar Ambitions

14 Jan, 2012
Energy,Solar Energy

The Indian Solar Power has been one bright spot in the gloomy infrastructure and engineering sectors in 2011. With share prices crashing with growing corruption, land acquisition and financing problems, Solar Energy has surged in India thanks to government support and subsidies . While a number of Green Technology companies have started up to capitalize on the growing renewable energy trend, the established construction companies in India have not been far behind . While utilities like Tata Power, Adani, Reliance Power, NTPC have already built or are setting up power plants based on solar panels , L&T has become a major solar EPC players . L&T is now raising debt with a $100 million issue to fund its solar expansion plans .

The travails of Indian Infrastructure Stocks

India’s Infrastructure Sector which was considered the ideal play on India’s fast growing GDP and its huge infrastructure requirements long commanded nosebleed valuations.While realty stocks which are closely related to the infra ones had long collapsed after the GFC in 2008 ,the infrastructure stocks had retained their preeminence in the stock market rally.However end 2010 and 2011 has seen a vicious change in their fortunes.Stocks like IVRCL,IRB,Punj Lloyd,L&T,Gammon etc have seen their stock prices nosedive.The stocks have corrected far more than the broader market which has itself fallen more than 15% in  2011. The problems related to the infrastructure stocks are varied and they have converged for investors to totally lose confidence in this sector something akin to the realty sector

The GMR Group which has its fingers in a number of sectors has also managed to complete a 25 MW solar pv plant and is looking to set up more . Note other industrial groups particular Mahindra Solar One has also become very aggressive in the solar energy area. With multiple entries into the Indian solar industry, one can only hope that overcompetition does not make solar energy another instanace of the larger electricity industry which is going through a sever downturn.

It plans to grow the installed capacity to 100 mw from 25 now, said the company.GMR has also commissioned its first 25 Mw solar power project Gujarat with a total investment of Rs 360 crore.The project was awarded in October 2010 under the Gujarat SolarPolicy. Power from this plant will be supplied to Gujarat Urja Vikas Nigam Ltd on a 25 year Power Purchase Agreement under the Gujarat State Solar Policy.

GMR Energy is currently operating 808 MW of power projects and is in the process of executing another 7500 mw. “Out of this, 2500 MW capacity will become operational in 2012 through commissioning of Projects at Vemagiri in AP, Kamalanga in Orissa and Warora in Maharashtra,” the company said.

L&T Infra Raising $100 million in External Commercial Borrowings

L&T Infra Finance, a subsidiary of L&T Finance Holdings on Thursday said it has raised close to $ 100 million through the External Commercial Borrowing (ECB) route this fiscal, largely to fund solar power projects.“We have raised $ 100 million through ECB route so far this fiscal, mostly to fund solar power projects,” L&T Head Financial Services, Mr Shiva Rajaraman, told PTI.

World’s Largest Energy Saving Certificate Trading Scheme to Start in India

12 Jan, 2012
Energy

The Indian government is going to set targets for large power users so that their energy usage is capped. The Bureau of Energy Efficiency (BEE) is going to supervise this program in which Energy Saving Certificates will be awarded . This certificates can be traded on the energy exchanges providing an incentive for large energy users to improve energy efficiency . Note Renewable Energy Certificates (REC) are already trading successfully on IEX since the last year . REC have promoted the usage of Renewable Energy by providing a market linked mechanism to find prices for green energy in India.

The energy consumption reported by plants will be based on audit by any of the BEE accredited agencies.The program will cover eight sectors -  steel, fertilizer, oil refineries, paper mills, thermal power plants etc. The process will start in 2012 and make it the world’s largest Energy Saving Certificate platform much bigger than what is followed in Germany and Netherlands. The scheme is known as The Perform, Achieve and Trade scheme

What is REC

The REC Scheme is a Policy whereby Renewable Energy Generators are granted a REC per MwH of Green Energy that they contribule to the Grid.These RECs can be traded on Exchanges whereby Green Energy Producers can sell them to Buyers.Energy Deficient Entities have to buy these RECs in order to meet their Renewable Energy Targets.Note each state in India has a Renewable Purchase Obligation(RPO) which is decided by the State Electricity Regulator (SERC).RPO means that the State has to compulsorily consume a fixed percentage of electricity from Renewable Energy Sources.Some states in India like Tamil Nadu,Gujarat are rich in Green Energy while others like Bihar,Delhi and Maharashtra are deficient.Power Exchanges in India have already set the ball rolling in terms of trading in RECs.

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