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:
- Captive Production
- Purchasing ‘green’ power, generally by long term PPAs (at above market rates) with the green power producer.
- 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:
- Forbes Asias 200 Best under a Billion: One of 8 Indian companies on the list (incl. Ajanta, Suven, ADI Finechem).
- Installed India’s first solar plant under REC mechanism and sold India’s first REC.
- 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:
- 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.
- Ujaas MySite (25-500 KW generally): For small-scale industries this provides an off-grid solution by installing the panels on rooftop e.g.
- 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).
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.
- 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.
- 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.
- Earnings will remain lumpy due to policies, and financial calendar (rush to install in FY end for tax incentives).
- 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.
- Decreasing cost of solar and increasing cost of brown energy. We are at an inflection point.
- Solar radiation is very favourable in India. Surprisingly, Germany has the largest installed solar capacity inspite of much worse radiation.
- Commitment of government to energy independence.
- Large scale of opportunity.
- Less risk of technological obsolescence since the company does not manufacture its own solar cells.
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.