Public Capital and Solar Firms- Made For Each Other?

What a difference four years can make! It was just over four years ago in September 2020 when SaurEnergy wrote about how access to capital markets was a glaring disadvantage for India’s aspiring solar firms vis-a-vis China. Highlighting the contrasting performances of the few listed firms then, namely, Adani Green (Developer), Sterling and Wilson Solar (EPC), the article highlighted how the financial world was still coming to grips with understanding the economics of the business. This was in addition to the almost complete absence of solar manufacturing companies on the main stock markets. At the same time, in China, there was a solar rush on, and presently, over 100 firms and counting are listed on the country’s two main exchanges in Shanghai and Shenzhen.

Four years on, famine looks set to turn to a glut in India as well, as investors have a menu of solar firms to pick from. Be it on the SME exchanges, or the main boards at BSE and NSE, the period since 2022 has witnessed a record number of solar companies make a beeline for a public listing. And what’s more, the rush is just starting, if we go by plans we heard at the industry’s biggest annual event in India–the REI Exhibition held in NCR every October.

Of course, even those plans are the first of many required steps for the industry in India, as wider market and public scrutiny force its own demands and changes on the sector. It remains a moot point whether many of the firms rushing to market are prepared for that. We will delve into that, but first, just what caused this transition? Quite a lot of things actually.

The Expert View

Analysts we spoke to at leading investment, and merchant banks were all in agreement that there is froth building up, but the consensus view is that there is enough growth momentum to allow for a gradual transition to normalcy, hopefully. In fact, these analysts did not want to be named as their organisations were either handling, or pitching to handle upcoming IPOs from solar developers and manufacturers.

We believe the solar targets are no longer the north star for the growth of the sector. It has enough momentum, and the existing pipeline of projects and upcoming tender pipeline of 23 GW in FY24 itself demonstrate the strong momentum for the sector, be it developers, EPCs or manufacturers”, says one.

“While there is an apparent dichotomy in the same government offering tariff protection and then imposing reverse bidding on solar auctions, the tolerance for higher rates is more now,” says another, referring to utility scale projects where most attention is usually focused in India.

“Yes, state discoms shied away from buying solar power even from SECI at Rs 2.90/unit levels as recently as 18 months ago. But remember, the price of other alternatives has gone up in the meantime, which means, even if prices were to rise further from current levels, there is a buffer till at least Rs 3.1- 3.20 per unit in our view before resistance to buying comes up again”.

Manufacturers, on the other hand indicate that while current differences with global prices are a factor of supply and demand, with order books full till even June next year in many cases, eventually they expect prices to get closer to global benchmarks. “ In areas like cell manufacturing, there is a learning curve involved, shortage of skill sets, so Indian prices will be truly competitive only after a couple of years or more, as our scale and expertise are not even comparable to China presently”, avers one cell manufacturing CEO.

The takeaway we get is that the high growth will continue till at least FY26, before the changes at ground level like high domestic capacity and resultant competition, any impact of lower exports, and even the consolidation in the Chinese market impacts India in a big way.

What Could go wrong beyond these risks?

An interesting issue highlighted by the two analysts we spoke to was the small matter of corporate governance. “Firms in the sector have seen a relatively unexpected opportunity open up, in the form of this opportunity to go public”, says one.

“With the new cohort of firms being led by relatively young entrepreneurs with limited experience of running a business at scale, most do not have strong boards, for instance. That increases the risk of financial mistakes, besides other issues of managing growth”.

Highlighting the ‘people issue’ being faced by many firms, they point out that it is much more than a matter of skills shortage in a suddenly booming sector. “Investment in training is limited, and that too by the top 3-4 entrants like Reliance, or large corporate groups like Adani or Waaree. The rest have been forced to poach, or seek to lift a person at a tier 3 level to tier 1, or basically internal growth”.

“As they are discovering, this is tougher than it seems, and has caused friction at many workplaces between the incumbent employees and new joinees who come with a completely different mindset”, he adds.

Firms are also expanding capacities and announcing ambitious plans with the assumption that the funding tap will stay open, and remain as generous as now. That doesn’t really happen as predictably as they imagine, cautions another analyst. However, it is the same entrepreneurship spirit and struggle in the initial years that have made many firms experts at keeping costs low as well and conservative with cash, a habit the same analysts wish they should not let go of completely.

The Valuation Conundrum

When asked about valuation, what we have regularly got over the past few months from industry players has either been a smile, a simple shrug of the shoulders, or the caveat that the person being asked is no financial expert. Sometimes all of these together. And it is no surprise why. India’s solar firms are enjoying the sort of valuations that have been seen only for IT firms at the height of the dotcom boom in 1999-2000. It is pertinent to note that while that bubble did eventually fizzle out, it left in its wake a very strong and globally competitive IT sector that continues to fire strongly today.

Beyond the firms that are already listed or on their way to getting listed in FY25, there is a whole set of firms that have announced plans and hopes to get listed by FY26 end, for instance. One wonders if they would retain the same enthusiasm for public markets if expected valuations were to come down to even half (which would still be a very healthy level when compared to the broader market level) of present valuations. Financial metrics like PE ratios or Price to Book Value are being conveniently junked, with the familiar assurance of all bull markets before they run out of breath. “This time it is different”. Unfortunately, we see no reason to believe it this time as well.

“Module manufacturing is a fairly commoditize business, as it remains a fundamentally assembly business. To expect the kind of margins we have seen in the past 12 months to sustain for any length of time is simply not possible”, adds the analyst. This is where scale, backward integration, and professional management will make a difference in due course.

Kickers to growth like the drop in energy storage costs, or even Green Hydrogen production, which will add to the demand for solar energy, are acknowledged, but will probably come after the current cycle of growth has played out over the next two years in the refrain.

Indian Energy Firm Listings

Conclusion

There is little doubt that access to public markets for solar firms and renewable firms in general is a much needed, and welcome opportunity for the still fledgling industry to grow up. Forced to compete against a giant like China, India’s solar entrepreneurs have done well to survive, and now, thrive when given the opportunity.

However, expectations need to be tempered with the knowledge that many risk factors remain, and these are real challenges unlike the many listed in offer documents. The sector is part of a bigger sector (Power) where price sensitivity remains very high at both consumer, government and by default, regulator level.

As solar capacity matures, challenges linked to poor quality and performance of some plants, employee expectations, and of course investor expectations will emerge to take up more time from entrepreneurs who were extremely hands-on with the business until now. Developing stronger organisation structures to manage larger balance sheets, and retaining the flexibility of the startups that many of these firms are at heart, will be key to their sustainable growth.

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The Case of Waaree Energies And Its Long-Delayed IPO

In many ways, India’s solar manufacturing prowess today is synonymous with Waaree Energies. The country’s largest module maker and now also the largest cell manufacturer, had endured a long and patient wait for its IPO finally. Previous forays which ended at the filing of DRHP or Draft Prospectus reportedly ended due to less than favourable market conditions or valuations on offer. In many ways, one could say that if Waaree finally found the market good enough for an IPO, then it must be a really good time.

Established in 1989 and headquartered in Mumbai, Waaree boasts India’s largest aggregate installed capacity of around 13GW across its plants in Gujarat and Noida as of Sep 30, 2024. With a notable presence in the global solar module export market for Fiscal 2024 (mostly the US), the company has demonstrated its competitiveness and commitment to delivering high-quality renewable energy solutions worldwide.

At the time of writing this, its Rs 4,321 crore fundraise has sailed through with a record number of applications ever seen in India, placing the prospects for solar firmly in the spotlight.

But even for Waaree, it has been anything but an easy journey. The IPO was long in coming, after at least two false starts since 2020. In fact, if we compare Waaree’s Sep 2021 offer letter with the October 2024 offer letter, the differences make for very interesting reading, beyond the amount being raised, which has been bumped up a thousand crore in three years. While risk factors in 2021 carried the long shadow of the still prevalent Covid pandemic, the 2024 risk factors move on to more global issues like the high share of exports, concentration among top 10 clients, or even the risk of liquidation damages due to non-delivery of modules on time.

The issue proceeds, which were to be used for a cell-making facility and expanding module-making facility, are now earmarked for a 6 GW cell, wafer and ingot facility in Odisha, thanks to the allotment under the government’s PLI scheme, which had just been launched in 2021, and where Waaree had missed out in the Phase 1 allotment. It came back with a bank when Phase 2 happened of course, collecting 6 GW out of the 39.6 GW allotted.

An interesting factor going in its favour is the stellar returns its EPC arm, Waaree Renewable Technologies Limited has delivered, from being just Rs 10 per share back in 2020, to Rs 1600 odd currently, and this itself is an almost 25% retreat from its all-time highs from just a couple of months back. Waree Renewable is just one of the solar EPCs enjoying a dream run on the bourses or was enjoying it at least till August this year since the markets have been a lot more tentative, forcing price corrections in most of these firms.