Why D-Street optimism on Waaree Energies, Premier Energies needs a rethink

Waaree Energies stock popped 55 per cent on its Monday debut (October 28, 2024), taking its valuation multiple to 54 times. Premier Energies , another peer that listed two months ago, has more than doubled since then, stretching its P/E ratio to an astounding 190 times! The two are now the only publicly-listed solar module or solar panel manufacturers in India.

The euphoric rally in these stocks is not without cause. The duo together caters to the majority of domestic solar panel demand. The two have been effectively capitalising on sectoral tailwinds, including growing local renewable energy needs, with an assist from government incentives. Their profit growth, as a result, has been on a tear in the last two years, leaping three to four times annually.

However, the gobsmacking share price gains should raise alarm bells, given the catastrophic challenges that the global industry is mired in, which can soon transcend to the domestic market, too. While global investors have timely taken note of these issues, Dalal Street is yet to price them in:

1. Chinese supply glut and price erosion: China, the largest solar panel supplier globally, meets more than 80 per cent of the global demand. It accounts for 43 per cent of the global installed capacity and is adding a gigantic 200 GW capacity by 2025, leading to a glut of raw material or components like polysilicon and causing global prices to fall sharply. Solar component and polysilicon prices crashed 25 and 40 per cent, respectively, in 2023 and continue to slide.

The oversupply has also triggered a price war globally, denting profits of large Chinese firms while pushing smaller companies on the brink of bankruptcy. Global markets have aptly reacted to the development. Shares of global solar panel giants such as Canadian Solar, Trina Solar, and LONGi Green have declined six to 35 per cent in the last one year. Their valuation averages around a sober 22 times when compared against the sky-high levels of their Indian peers.

2. Impact on India: Indian solar panel makers have so far not experienced a severe price decline or a hit on profitability like their global counterparts. Local prices, at $0.18 per watt, continue to be at a 63 per cent premium to global prices at $0.11 per watt. This is in particular due to the government support that's helping domestic players stay competitive. The Approved List of Models and Manufacturers (ALMM) policy, which requires government projects to source solar modules from a list of local manufacturers only, has provided protection against Chinese imports, enabling domestic players to keep their prices higher.

However, as lower prices globally continue to be lucrative, the government backing is not guaranteed to last. Like the FAME subsidies for electric vehicles, which were slashed by over 40 per cent this year as industry penetration increased, the solar panel incentives could also be reversed any time, leaving local manufacturers vulnerable to the global glut of cheap Chinese modules. The withdrawal of support will be severely detrimental to the industry.

Investors' corner

It would serve investors of Waaree Energies and Premier Energies well to remember the cautionary tale of Borosil Renewables , India's leading solar glass manufacturer. The company, once a consistent profit maker, turned loss-making after the government withdrew anti-dumping duty on Chinese imports in 2022, leading to lower selling prices. Its story highlights the pitfalls solar industry players are vulnerable to due to the reliance on government protections.

We are not doubtful about the long-term outlook of the solar energy industry. With domestic demand only expected to rise, the growth opportunities remain promising. However, solar panel manufacturers are commanding lofty valuations in the current bull market despite impending threats of raw material oversupply, price competition, and the potential removal of government support in favour of cheaper Chinese supply. Like global investors, Dalal Street, too, needs to temper its optimism. Price correction remains inevitable. To change that, local players must achieve cost-competitiveness and reduce reliance on government backing.

Also read: Zomato QIP is IPO 2.0 but not much has changed in terms of fundamentals