Ujaas Energy - Value Migration to Solar Power

Stock Opportunities Untested - but worth a good look
1

M & B Switchgears Ltd. was set up in 1976 by Mr. Shyam Sunder Mundra. It’s business was manufacturing transformers and inverters. Subsequently his two sons, Mr. Vikalp Mundra & Anurag Mundra joined the board of directors in 90s. The company was listed in 2011. As part of backward integration and to take advantage of tax holiday, the co. set up a captive solar plant. They faced many bureaucratic hassles and came up with the idea of a one stop solution for setting up solar power plants. In 2013 their major revenue was already from solar power and reflecting this, they changed the name to Ujaas Energy. They don’t manufacture solar cells, but purchase (mainly import from China) such cells, make modules and install them.

Background of Renewable (mainly Solar) Energy Industry in India

Swanson’s Law (analogous to Moore’s Law) states that the price of solar PV (photovoltaic modules) tends to drop by 20% when the cumulative installed capacity doubles. Of course this is not a law of physics, but a general trend and if this trend continues, there will be a huge value migration from conventional energy sources to solar energy in the coming 5 to 7 years. Already in states like Maharashtra (particularly Mumbai), solar energy is cheaper at Rs. 6.5/unit (using standard discount rates) than conventional power at Rs. 7/unit

India is ideally suited for harnessing solar energy, receiving 300+ sunny days annually in many areas.
To ensure the energy independence of the country, the govt. provides incentives for solar power installation.
In addition to tax advantages, the main incentives to put solar & wind (also hydro) on equal footing with brown power is that discomms/SERCs have a Renewable Purchase Obligation (RPO) of producing/purchasing x% of their total units from green sources (with sub targets for solar). This requirement will be increased in a stepwise fashion to 3% by 2022. An obligated agency can fulfill its obligation in 3 ways:

  1. Captive Production
  2. Purchasing ‘green’ power, generally by long term PPAs (at above market rates) with the green power producer.
  3. REC(Renewable Energy Certificate) mechanism: Producers of solar power get a credit of 1 REC for every 1000 units (1 MWh) of ‘green’ energy produced (in this case the PPA is done at market rates & does not fulfill any requirements as in 2 above). There are 2 types of RECS:
    i) Solar RECs: are traded on Energy Exchanges with a floor price of Rs. 3500 and forbearance price of Rs. 5800
    ii) Non-Solar RECs: (wind, hydro, etc.) are traded on Energy Exchanges with a floor price of Rs. 1500 and forbearance price of Rs. 3300

Enforcement of RPOs has been and remains by far the biggest impediment to this industry.

UPA-II had set an ambitious target of 30 GW (30,000 MW) of solar capacity by 2022 and the above mentioned RPO mechanism. However, the floorprice for solar RECs was Rs. 9,300 and there was very little compliance with the rules. The solar PV manufacturing capcity in India (250 MW p.a.) is less than the demand (2000 MW at least). Most of the solar cells are imported from China and integrated into modules here. In May 2014, when the new govt. was taking office, there was an antidumping duty order under consideration which could ruin the market by increase in cost. People stopped placing orders and the growth of the last 2 years came to a stop. In August 2014 it was made clear by NDA-II that we cannot afford to pass this law. NDA-II also increased the already ambitious target to 100GW (current installed solar capacity is 3 GW) by 2022. However, enforcement of RPOs still remains the big unknown. The good thing is that the govt. is committed to achieving the above target. It is no coincidence that Modi made Gujarat the largest solar energy producer in India (Rajasthan’s deserts are the ideal location for installation). The Supreme Court has ruled for strict compliance of RPOs. Since the ruling in December, there has been record trading of RECs.

About Ujaas Energy

Achievements & Accolades:

  1. Forbes Asias 200 Best under a Billion: One of 8 Indian companies on the list (incl. Ajanta, Suven, ADI Finechem).
  2. Installed India’s first solar plant under REC mechanism and sold India’s first REC.
  3. Installed India’s first solar plant under Net-metering policy: Net-metering does away with the need of a battery like Tesla powerwall - one can sell (and of course buy) power to (from) the grid.

The main services/products offered by the company are:

  1. Ujaas Park (0.5 MW and more): A complete turnkey solution (not just EPC) - procurement of land, licenses, setting up the solar plant, establishing PPAs or sale of RECs, and operation and maintenance for 20 years. With current technology, the PV cells produce > 80% energy after 25 years. The revenue for 1 MW is 6.5-7 cr. The O&M revenue for 1 MW is 0.1cr with 5% annual increase.
  2. Ujaas MySite (25-500 KW generally): For small-scale industries this provides an off-grid solution by installing the panels on rooftop e.g.
  3. Ujaas Home (0.5-25 KW): Installation on rooftops of individual homes, or collectively for a society on co-ownership basis.

Currently, Ujaas Park provides the major revenue to the company. Over the coming years Ujaas MySite would start contributing a larger fraction (energy is costlier for industry than residence) of revenue
and the mangement says that after 5 years Ujaas Home would form major source of revenue.

Currently, company has around 15 MW (2 MW + 13 MW) of installed captive capacity mainly for tax advantage. They have stated that they would be looking to sell this capacity at a premium but are in no
hurry to do so. The replacement cost for this would be ~100cr. Going forward they have insisted that they will follow asset light model. Cumulative installed capacity is 115MW (about 4% of the installed capacity in India).

Valuation:
At CMP of 17.85, the market cap is 363cr. The P/E is 30.8 and P/B is 2.06 post FY15 results.
The sales in last 3 years was 243, 526 & 113 cr.
The profit in last 3 years was 27, 37 & 11.7 cr.

Bearish Viewpoints:

  1. Enforcement of RPOs remains a concern in the short to medium term. In general this is a regulated sector and could throw surprises (negative or positive) from time to time.
  2. Negligible manufacturing capacity of solar cells in India means that US/China policies could have an impact on prices. Any threat to oil is a threat to the petrodollar and US govt. has done everything it could in last 3-4 decades to prevent solar from gaining widespread acceptance. Shale fracking and Arctic drilling are just recent examples. On the flip side if ever there were people in the last 7 decades who are strong and shrewd enough to take on the petrodollar, they are Communist Party of China, Putin and Modi.
  3. Earnings will remain lumpy due to policies, and financial calendar (rush to install in FY end for tax incentives).
  4. Power fluctuation: As solar power is only produced during day, there could be more stress on the grid. The fact that more power is consumed during the day mitigates this to some extent. Off-grid solutions like Ujaas Home (with battery backup for night usage - like Tesla powerwall) also help.

Bullish Viewpoints:

  1. Decreasing cost of solar and increasing cost of brown energy. We are at an inflection point.
  2. Solar radiation is very favourable in India. Surprisingly, Germany has the largest installed solar capacity inspite of much worse radiation.
  3. Commitment of government to energy independence.
  4. Large scale of opportunity.
  5. Less risk of technological obsolescence since the company does not manufacture its own solar cells.

Views invited.

P.S.: I have kept this article short and avoided detailed discussions on individual points to give an overview. Please ask questions.
***Discl.***: This is not a buy or sell recommendation, just some information about a sector and company. Please do your own due diligence before making any buy/sell decisions.
Forms ~25% of my portfolio.

9 Likes
2

@chintan
Nice post.
After a cursory look at Screener, have some doubts, can you clarify on below points.

  • what is your view about quality and integrity of management. The company doesn’t have much track record of dividend payout. This is the biggest concern in such companies.
  • Why has the revenue fallen from 545 to 111 cr. is it just because of REC RPO
  • Why is there a steep rise in debt
  • What will be the triggers going forward. The govt is giving major push and the scale of opportunity seems to be huge but the company will be facing competition from international players also.
  • in your opinion what will be the moat of the company
3

Hi Manish,

I have not come across any red flags regarding the management. In my view, the management is quite frank and dynamic. However, this view is formed mainly by going through concalls, interviews, media reports, etc. No feedback from other industry players or third persons. Since listing in 2011, the co. paid 0.05 (2012, split adjusted), 0.1 (2013), 0.2 (2014) and 0.05 (2015, announced) Rs. dividend.

Revenue has fallen due to: Since FY15 beginning, there was a pending proposal from the Ministry of Commerce in the Finance Ministry for an antidumping duty of 110% on imported solar panels. If passed, this law would have been effective immediately and considering the lack of manufacturing capacity for PV modules in India, people stopped giving orders out of fear of installation costs doubling; in fact quite a few orders were cancelled. Clarity emerged in August/September that this proposed antidumping duty will not be levied. By this time there was a proposal under consideration for changing floor price of Solar RECs from Rs. 9.3k to Rs. 3.5k. The difference between solar power cost and conventional energy cost is less than Rs. 3.5/unit, so this law made much more sense, and 9.3/unit is too high a cost for compliance with RPO. So interested parties had been deferring their orders hoping that the lower floor price would provide incentive to discoms for purchasing RECs. On the flip side even the entities which were purchasing RECs deferred their purchases to take advantage of prospective lower price. In last week of December 2014, Rs. 3.5k was officially set as floor price. The trading of RECs takes place on last Wednesday of each month. From Jan to Mar '15 there has been average monthly trading of about Rs. 8 crore worth of solar RECs, which is much higher than previous years. However, considering that there is an inventory of about 500 cr. worth of solar RECs, I guess the interested parties are still waiting for better compliance with RPOs.

As far as I know, the long term debt has decreased in this FY from 111 cr. to 99 cr.

There could be 2 types of triggers: industry wide and company specific.

  1. Compliance with RPOs/ Trading of RECs - this is just an enforcement issue - the current REC inventory is peanuts compared to obligations of the discoms. There are rumours that the 3% RPO requirement by 2022 could be revised upward to 8 or 10%. If this happens and the RPOs are enforced, we could see a fifth gear. Fall in Remnibi could also act as a trigger, conversely rise in remnibi could hurt.
  2. Ujaas getting a large order. Currently Ujaas is L1 for a 50MW project from NHPC. Generally 1MW translates to Rs. 1 cr in PAT. However for this particular tender, margins could be less as the land is already acquired. MP is the home turf of Ujaas and there is a tender for 300MW from the state gov.

I don’t see Ujaas having any enduring moat. One advantage for larger players would be that its easier to trust them to be around after 15-20 years to carry out O&M. This is not a company I plan to hold for 10-15 years, rather sell after 5-7 years (or much earlier if mgmt. does not deliver) as Peter Lynch gave example of the electronic security systems installation company. Ujaas definitely has a first mover advantage though. It only helps that the management is dynamic in this rapidly changing sector. There are many international players looking at the Indian market. Many are in talks for setting up manufacturing plants in India in JVs or doing technology transfer and earning royalty. But this is primarily for manufacturing solar PVs, not for installing the systems as a one stop solution provider. Tata-BP Solar is one strong competitor (mainly in home rooftops). There will be other new competitors also, no doubt; but I think if the government gets its act together, the pie is big enough for everyone to have their share. It would be more a question of how fast Ujaas can grow without spoiling the balance sheet.

3 Likes
4

This article might add new perspective for further discussion.

Checkout.

5

This company is into thin film technology. Crystalline silicon is the mainstream technology, which is also the technology Ujaas uses. This particular company does not worry me, as the stock went up 6x in a year, the Chairman went short some shares (he had a larger long position ofcourse) just before results and did not attend AGM. Seems more like a case of manipulation. The larger point however is a concern - if the Chinese firms have cost advantage due to cheap money, prices could rise in short/medium term before the sheer scale (Swanson’s Law) brings prices down.

6

An update: Today solar RECs worth Rs. 28.3 cr. were traded.

7

Excellent write up Chintan. I am in the same boat and have similar views. Holding very large quantity in Ujaas and still continuing to accumulate. Had attended conference call post FY15 results. I believe things should be back on track from October this year. Confirmation of NHPC 50 MW order and getting a pie of MP Govt 300 MW order is important.

1 Like
8

Thanks for the encouragement Manish and Aseem.

Aseem, please share your views where they differ from the above discussion and where you have a new perspective.

Manish, another trigger (in short term) could be value unlocking from sale of 15MW solar park - it doesn’t change much in the long term but would give us more confidence in terms of the management walking the talk about asset light model.

I am also hoping that Q1/Q2 results form a base and the earnings catch up soon after, in any case by FY16 results. Yes, from what they said about the 300 MW order it seems there would surely be something up for grabs; remains to be seen how large an order they get. Proactiveness of MP govt. with solar policies has helped Ujaas a lot. The recent SC ordering Hindustan Zinc to fulfill RPOs citing that every Indian citizen has a right to live in pollution free environment, has been giving much limelight. It could well be the reason for good trading of RECs this Wednesday.

9

Probable reason for the big jump -

The high numbers have been generally attributed to last week’s judgment
of the Supreme Court in a case filed by Hindustan Zinc. The judgment
said that companies that had captive power plants were not exempted from
the renewable purchase obligations.

Since the judgment clarifies a legal point, it affects many companies
who now have to shell out money to buy either green power or, if they
are not able to do so, buy RECs from the market instead. “The jump in
trading appears to be a direct result of the Supreme Court judgement,”
says Vishal Pandya, Director, REConnect Energy, a consultancy whose
clients accounted for 35 per cent and 76 per cent respectively of non
solar and solar RECs traded on Wednesday.

10

Hi Chintan, I have no major difference in opinion. I continue to accumulate and bought another 2000 shares yesterday. My key worry though is order book. Without some large orders in hand, there will be a risk. We need to carefully watch next three months and see whether Ujaas is able to get new orders. The whole year will depend on next few months. Management is good. They are strategically located with an advantage of MP and Rajasthan govt. pushing for solar energy. I am myself from Indore and had my own factory in the same sector where Ujaas is located. I have seen the plant from outside. I am personally not that keen about Ujaas Home and find it with more overheads. I would rather recommend the management to focus mainly on Ujaas Park then Ujaas MySite and then Ujaas Home. I have high holding in the company and if there is no major negative like negative govt. policies or company is unable to get decent size orders or any other news, I am planning to hold the stock until 2022. I strongly believe that this company with sound management is in an excellent space and see stock price in three digits by then. I am also trading in tiny lots to reduce cost price, but it is not significant amount. I have cash reserve kept for Ujaas and will accumulate further if goes down by another 20-30%. Just keeping a close watch on news flow and company performance. Wishing you good luck and hope that we are able to get solid returns with stock.

4 Likes
11

Aseem, it’s interesting that your factory is so close to Ujaas’ factory. Your views of the mangement and their reputation are very important for us.

Came across this news article saying that Ujaas plans to setup a solar panel plant in Bhopal with 300 cr capex in JV with a Chinese firm. Anyone have any information?

12

Hi Chintan,
I checked with the company, its a false news. It was for some other company and it was incorrectly mentioned for Ujaas.
Regards,
Aseem

1 Like
13

An update: Today solar RECs worth 8 cr. were traded which is less than the average for the 6 months in this year.

14

Good inputs - https://in.finance.yahoo.com/news/harvesting-sun-043637698.html

15

Management met MP CM Shivraj Ji Chauhan for setting up solar cell and module manufacturing unit for 600cr…

1 Like
16

@aseem
like stock at very attractive valuations and seems that the upcoming quater should be good

2 Likes
17

@aseem Interesting developments taking place. The earlier article seems to be correct after all. There was a tweet from MP CMO which shows Vikalp Mundra, Shivraj Chouhan, and some foreigner (mostly Chinese) amongst others. If the total investment is 600 cr., and its a 50:50 JV with a Chinese firm, 300 cr would come from Ujaas. Does anyone have any idea how much capex equates to how much capacity? Rough estimates show me that this could be for around 30MW (20 cr = 1 MW), but I could be hugely off track. There are pros and cons.

Pros:

  • Recently, some solar parks have been tendered in lots e.g. 300MW in 6 lots of 50 MW, of which 1 lot requires domestically manufactured cells. Prices would be higher for such a lot (about 2cr/MW higher). There could also be tenders where some % of cells need to be domestically manufactured.
  • Backward integration could help margins.

Cons:

  • Funding for capex. Hopefully 100cr. is raised by selling the 14/15 MW farm. This could keep debt in check.
  • Risk of technological obsolescence.

As aseem pointed out, it seems Ujaas bagged the 50MW NHPC order, and 30MW elsewhere in order books.
@gauravgzp87 Hopefully next quarter is good, but I would expect the 50 MW to be executable over 12-18 months. As pointed out in the link by aseem, margins would also decrease.

1 Like
18

if i remember correctly, 1 MW of power is approx 6 cr
that is a company having capacity of 100 MW should get a valuation of abt 600 cr.
So 300 cr capex should imply at least 50 MW power.

1 Like
19

Manish,

The cost Ujaas charges for installing 1 MW solar farm is 6+ crores Rs. (roughly).
They do this by procuring panels from other parties, lets say at 6 crores.

Now, Ujaas seems to be getting into manufacturing panels also.
So, what would be the capex for a plant which manufactures 1MW of panels annually?

My earlier calculations were wrong. The following link suggests 600cr ($100 m) capex could be used for building 400MW p.a. facility. Of course, there would be variable cost for manufacturing the modules.

20

Hi Chintan,
Post the news on Yahoo Finance (the one I posted link earlier), which confirmed that 50 MW NHPC order is with Ujaas, the same day I checked with the company for the same; their investor relations assured and confirmed me that the tender is not yet awarded and still being pursued. This was similar to instance earlier where based on your inputs I checked with company for the Solar cell and module manufacturing unit setup in MP; where again when I had pointed the TimesofIndia news link shared by you, the company confirmed that there is no such plan and its a false news and meant for some other company. The point I am making is what is coming up in media is not backed by company investor relations, which confuses a lot. When i double checked with company for the NHPC order they still said that it is not yet awarded. So am not sure which version to believe the one from media or the one from company. As you rightly pointed out now based on Shivraj Ji Chauhan’s tweet company cannot deny that they have plans to setup solar cell and module manufacturing unit; which they refused earlier. Just sharing my thoughts.
Although, this doesn’t change my view that Ujaas is a goldmine and will give superior returns in next 5-7 years. It will be super multi-bagger. I am continuing to accumulate whenever getting an opportunity. Slowly am shedding all other stocks as expecting a big crash in near term in Indian markets and focusing only on handful stocks with Ujaas now having majority stake in my portfolio. I have kept aside some fund for panic selling which might happen and will capitalize on lapping up more… purely for longer term.
Regards,
Aseem Jain

1 Like