Bernstein has initiated coverage on Waaree Energies Ltd and Premier Energies Ltd with 'Underperform' ratings, saying the two companies do not have a big right to win. The foreign brokerage said eventually solar PV will be a place for big players such as Reliance and Adani Enterprises with backward integration.
While Waaree Energies showed the potential to join this league, and is rightly exploring avenues beyond the module-cell, the key competitors have much bigger wallets to compete, against whom Waaree and Premier do not have a big right to win, Bernstein said.
"We see their returns normalise to teens from 40 per cent. There are additional risks as well, as they give a 30-year warranty for performance, for a product which has never seen 30 years, and their returns are heavily dependent on import regulations in India and US," the brokerage said.
Bernstein said both Waaree Energies and Premier Energies have done an excellent job investing in the right place at the right time. It does not doubt the earnings potential of the two companies in the coming quarters and also appreciates that some of them are cognizant that these supernormal returns will not sustain perpetually and are trying to diversify along the value chain or to new areas related to energy transition.
"However, we still initiate at under-perform considering where we are in the cycle, our expectation of deterioration in returns and their rich valuations. One cannot give the same multiple to a business built on the premise of a regulatory arbitrage. On entry into new business areas, it is too early to give credible value, especially considering the big conglomerates eyeing this space," it said.
Bernstein said solar PV manufacturing has struggled to make investor returns globally. Despite this, they are an important space to track with large companies targeting an entry, India’s solar heavy renewable ambition and government intent to push manufacturing in India. "Energy transition is very capex intensive, and we expect more listings in this space," it said.
Indian PV exports jumped from $0.1 billion in FY22 to $2 billion in FY24, as US pivoted away from China. Bernstein said the spread between US and global prices is too big to sustain. US now has 52 GW of module manufacturing capacity and another 19 GW under construction, against 54 GW of expected demand in 2025.
"Given short commissioning timeline of 1-2 years and low capex- there is high propensity for over-supply. Globally against demand of 600 GW, manufacturing capacity is in excess of 1200 GW. No wonder many of the biggest players in modules 15 years back are now bankrupt or have exited the business," it said.
Bernstein suggested a target of Rs 1,902 on Waaree Energies and Rs 693 on Premier Energies, suggesting 21-26 per cent downside. If one has to choose between the two, Bernstein said it would prefer Waaree.
Premier Energies has higher cell capacity but, overtime, Bernstein sees Waaree Energies with higher likelihood of integrating backwards to ingot-wafer. Also, the large international order book of Waaree gives it better visibility on realization-spreads, which is missing in Premier, Bernstein explained.
"We see earnings growth moderate for these companies post FY27 once their capacity comes online and supply glut hits. We initiate with 21 per cent downside on Waaree and 26 per cent on Premier based on 11-12 times FY27 EV/Ebitda multiple, valuing them at $6 billion and $4 billion, respectively," it said.