Ujaas Energy - Value Migration to Solar Power

Solar panels have been seeing rapid technological changes leading to decrease in cost of solar power production. Is it a good idea to become a solar panel manufacturer relying on a third-party for technical know-how when we regularly hear stories of new efficient techniques of panel manufacturing? IMHO the story of Ujaas was probably better as an installer rather than a manufacturer, where they could have picked the most efficient panels of the day for current projects rather than having to support a manufacturing base and so being stuck with something obsolete in some time.

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Hi Aseem,

I have exactly the same problems as you said. Outsourcing the IR does not seem to be going well for Ujaas; not that I would know if they did any worse as I have not actively tried to contact management for any company earlier. When I e-mailed inquiring about 300cr capex, the IR said talks are ongoing. Before 2 days - after you shared the link and CMO tweeted - I inquired again for 300/600 cr. capex (capacity, JV share, funding, etc.) and also 50 MW NHPC + 30MW sundry orders. They said it would be speculative to comment on capex, and the 50MW + 30MW is what Ujaas has bid for. I backed up my claims with the links above and I didn’t get further reply but after 2 hours I was forwarded the contents of yahoo link you shared (presumably along with all other shareholders). I called the IR and asked why he claims Ujaas has not yet bagged orders when the article is very clear. I read verbatim from the article. He said the wording in the article is not proper!! If that is the case, why do they forward such an article?? And instead of doing the research themselves they’re feeding off our work. Anyhow, we have to wait till Q1 concall for clarity, but the 600 cr. capex seems bound to happen. Hope there’s no equity dilution - but 300 cr. spending seems to be just doable considering 100cr. farm asset. I would be more comfortable with less capex.

It’s amazing how our thoughts coincide with each other. I have about 29% in Ujaas, 29% in cash, and 25% in Ajanta. Would increase stake in Ujaas only if the results and orderbook are good. Looking to load up on Shilpa in case of deep correction (actually confused whether to wait for full-fledged bear market or just correction). The cash came from recent selling and not due to macro. Though I also feel a global crash would not be surprising - look at US Fed, China yo-yo-ing, and Grexit drama.

Tolaha, I agree with you. That was the original thesis for investment. The other problem is that globally, there was a lot of capacity installed before few years and plants were working at less than full capacity due to less demand e.g. Indosolar. But in light of recent developments - as part of ‘Make in India’ govt. requires some fraction of cells to be manufactured in India (see link below) for the solar plants it issues tenders for, through NTPC and SECI - we need to find out what are the new factors at play. Prima facie, it seems that the cost of setting up facility is small compared to the variable cost for manufacturing cells. Will dig up further over weekend.

http://cleantechnica.com/2015/05/14/indias-ntpc-awards-250-mw-ultra-mega-solar-power-project-tender/

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@chintans @aseem
what about the stock is some news is there

Hi Gauravgzp87,
No known reason from public info…Looks like operator move… Technically a strong accumulation was going on, looks like it is completed and now the script will start moving. It closed very well and crossed 19, and closed well above 18, where it was finding resistance. I continue to hold full qty. Next couple of trading sessions are important to confirm the momentum, else it will be lose the steam and go back to sub 17/18 zone. From Fan principle, it had formed a good chart, but didn’t move; next couple of days will confirm the breakout… If it continues we should see 24-25 levels soon… Lets watch closely…All the best…

I am not an expert on stock evaluation. I have a reasonable exposure to solar industry (4 years) but still not an expert in the same. Please take your call after a detailed due diligence. I am involved in a project where we are trying to do a project similar to Ujaas but in a different state. So, in a way we are competing for same set of investors. So my views might be biased.

Disclosure - not Invested.

Hi, I have not looked at Ujaas from investment perspective. However, I work in solar sector and understand the business model of Ujaas. So sharing my views on solar business similar to that of Ujaas(which may be incorrect) -

  1. India added approx. 2500 MW in last 3 years or so in operating solar projects. Most of this is ground mounted MW scale projects feeding electricity to grid.

  2. Such projects are either set up in 1 of the 2 ways - 1). Selling power to govt. body such as Distribution company at a rate determined through reverse bidding 2). selling power to an industry under Open Access mechanism. The 2nd category of projects received REC whereas the 1st category do not

  3. Ujaas business model historically was based on 2nd. However, RPO mechanism which requires obligated entities to buy RECs has not been enforced strictly till date. Therefore REC purchase volumes have been on lower side. IMHO this enforcement will start taking place sooner or later (within 1 to 2 years).

  4. Ujaas business model involved buying land, obtaining permissions and providing a plug and play model to investors for setting up solar projects. This works very well for investors that want to set up less than 5 MW of solar projects for tax benefits and who do not have bandwidth and inhouse team to take care of land acquisitions, permissions, etc. Large investors who set up 10 MW or more capacity and have solar as a business segment typically do not invest for tax benefits. These investors have dedicated teams to acquire land, permissions, etc and are not typically clients of Ujaas. The reason is that they can build larger projects on their own without having to pay Ujaas a premium for land, permissions, etc.

  5. Ujaas primarily operates in MP where solar projects do not make financial sense for investors if they cannot sell REC. Therefore this business has been down for Ujaas for last 1.5-2 years

  6. Most of the capacity addition in MW scale grid connected projects is taking place by non - tax benefit seeking investors. Typically they set up projects of >10 MW . For example, Skypower, Canada has recently won 3 projects in MP for 50 MW each. If Ujaas wants to do this project, they have to come as pure EPC or if they come as turnkey provider, then they cannot expect same margins as they work with tax benefit seeking smaller investors.

  7. In pure EPC, Ujaas does not enjoy a premium reputation as Sterling wilson, Mahindra Cleantech, Rays Power, Welspun, Bosch, ACME and some other international players such as IBC. So they may not be able to gain significant market share in pure EPC of large MW grid connected projects.

  8. EPC for MW scale grid connected projects is a low entry barrier business with very high competitive intensity. Pre-tax net margins are less than 5%

  9. Investors typically require EPC players to undertake regular O&M of the project and provide generation guarantees. Ujaas is a relatively smaller player and banks funding the larger projects for investors may not be comfortable with Guarantees from Ujaas (Not sure on Ujaas credit rating and forum members should check). In such cases, Bank Guarantees may have to be provided by Ujaas (typically 5-10% of the annual expected revenue from project). Can Ujaas has a good balance sheet to be able to provide such bank guarantees (Typically 5-10 lacs BG per MW capacity). These BG are long term and cumulative BG over a period needs to be considered.

  10. In an effort to bring down cost, govt is mostly resorting to reverse bidding. The larger the project , the lower is the cost and therefore average project size has been increasing under bidding mechanism. It is common to see bids in multiple of 50 MW. Members should evaluate if Ujaas has received any such EPC orders. But Please remember that the margins will be very less in such EPC orders.

  11. For Mysite and Myhome businesses,net margins are less than 8-10% and the competitive intensity is very high. Much much higher than MW scale EPC projects. There are more than 1000 small and large companies providing these services. Though market is large, margins are very low.

  12. such projects are not rocket science and even trained local electricians can undertake myhome kind of projects. In Europe such markets are dominated by local installers. Govt is focussing on training and creating a large pool of such installers. They are even launching an app called suryamitra so that buyers can locate such installers in the vicinity and avail their services.

In summary,
1). Large MW grid connected solar is a capital intensive play and will be dominated by PE, hedge funds and institutional money that will build projects under yieldco.
2). Small MW (< 5 MW) projects will be driven by tax benefit seeking investors and Ujaas can do well there if it expands outside MP (MP electricity tariffs are lowest) or in MP if RPO is enforced
3). MyHome and MYSITE may be difficult for Ujaas to gain a strong meaningful foothold. But always a possibility if they can build large teams across the country and indust professionals.

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Check this out:

I guess all these will be on EPC Model just like @sjain_13 explained above.

and i m new to this forum so plz pardon my mistakes

We are planning to install solar panels on our house for domestic consumption. The installer was selected based on word of mouth referrals. The installer seemed to be a sole proprietor / small local firm type . Defenitely no big brand play involved . And there are a quite a lot of small firms ,and electricians into it.

Hope to get more info from the installers soon on price, popularity etc

Disclosure - not invested. Interested because of its huge scope(solar) but highly doubt if it will make money for 99% of its investors.

@Lynchfan To be honest, I couldn’t understand that. Could you please elaborate?
Do you mean that a fraction of the transaction is unaccounted like in real estate deals?

Sorry. My comment was not specific to ujaas. It was about the solar renewable energy sector n general.

Inspire of its huge opportunity size the following three factors make it a very tough sector.

  1. Regulatory pricing risk, non compliance risk , govt electricity boards apathy towards private players(TN)

  2. Crowding - Too many players from multinationals to small scale entrepreneurs in the mix.

  3. Technology obsolescence - With active well funded research worldwide any advances are disruptive to the existing players.

Regarding the first point ,I had spoken to a entrepreneur who was interested in solar,wind renewable energy projects in our area. Though on book govt talks of subsidies & plans for thrust in renewable energy, on a operation level there is lack of regulatory support to new or even existing players . Ex delayed payments , unfovourable rates ,lack of capacity grids , harassment by bureaucrats on payments.

Hence my view that in this tough environment all players/investors may not make money. Identifying the winners would be pretty tough.

** Please consider the above only as a layman’s view on the sector. I could be wrong. I have no knowledge on ujaas future prospects.**

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Q1 FY16 results out: (comparisions YoY, with Q1 FY15)

Topline halved, bottomline flat.
Revenue: 11.77 cr v/s 24.94 cr
PAT: 1.43 cr v/s 1.48 cr

Solar Power Installation Revenue: 3.7 cr v/s 19.5 cr (approx. 0.6 MW v/s 3 MW) :thumbsdown:
Margins apparently higher due to O&M & slight decrease in finance costs :thumbsup:

Will update on order book and capex plans post concall.

Edit: No clarity on either front in concall. Just the talk of being L1 for 80-100 MW. I’m in wait n watch mode till Q4 (unless the market becomes overheated before that).

The AR is out. Download Link

Key points:

  1. Board has given approval to raise upto 500 Cr through equity/equity linked instruments. AR states the possible routes could be - ADR, GDR, FCCBs, NCDs, FCDs or direct equity.
  2. The Company has made investment in the following foreign subsidiary Companies:
  • Ujaas Energy Limited (Dubai)
  • Ujaas Energy HK Limited (Hong Kong)
  • Eizooba Energy one Limited. (Uganda)
    Don’t know what these investments are about. Could be asked in an investor concall.
  1. ESOPs scheme is being implemented. This is a good sign, shows that the promoters want to reward employees.
  2. Debt down from 132 Cr to 110 Cr.
  3. Key management personnel took a pay cut of 69% during the year due to poor financial performance of the company.
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The company keeps on talking about REC repurchase obligations (RPO) being enforced on state DISCOMS. Given the poor financial state of affairs of DISCOMS, I think relying on RPO enforcement would be impractical in the short/medium term. If there comes a regulation to enforce coal/gas based power producers to buy RECs then that might be a big growth trigger for the company.

I have some background in solar energy project viability estimation and would like to share my thoughts. Broadly speaking, there are generally 2 kinds of solar power projects:

  1. Large commercial projects
  2. Small roof top projects

Small roof top projects might require a battery for storing excess solar power generated during the day. The cost and life time of the battery makes such projects un-viable in the short/medium term and also increases the operational headache (One has to perform regular battery maintenance, replace battery every 3-4 years etc). Hence you won’t find a lot of these roof top projects on residential buildings. It might make some sense for commercial establishments which have a a large rooftop area and power requirements during the day. However the trigger for roof top based projects would come when state DISCOMs start implementing the net metering system. In net metering, the rooftop generation is connected to the grid in a 2 way mechanism. One can sell excess electricity generated to the DISCOM during the day, thus avoiding the use of batteries to store the excess power generated. And purchase electricity from the DISCOM when there is no sunlight via the same connection. There is no net metering in India at the moment (correct me if I am wrong).

In the AR the company has not talked a lot about taking up large scale commercial projects. This is a negative in my opinion, given the current state of affairs in India only large scale projects would be viable for most investors and the success of roof top projects depends heavily on the implementation of net metering. That is not likely to come anytime soon.

Awaiting more clarity on the future steps of the management. This could be taken up in the investor concall.

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Some states like UP have already implemented net-metering. Seven or so states are in last stages of finalizing policies. Many other states have started talks.

Thanks @chintans. Can you share some links/literature on the current state of affairs.

Here are 2 good posts on the state of net metering in India. Link 1 and link 2

The posts make some valid points:

  1. Approx cost of rooftop generation is Rs 10 per unit. electricity tariffs are lower than this. Net metering would mean that the customer would have to sell at a loss. Only consumers in high tariff zones will benefit from net metering. Other customers would require more incentives (tax, subsidy etc)
  2. DISCOMs don’t want to lose these profitable high tariff customers.
  3. Net metering still in the experimental phase in India. Has been implemented only in a couple of states (one of them UP and the other one I suspect is Pondicherry)
  4. The experiment has proved quite successful in Pondicherry.

Would love to know about the experience in UP.

@fabregas

  1. From the viewpoint of the whole grid, net-metering is obviously desirable since it adds robustness.
  2. From the viewpoint of the customer, net-metering can never harm as one can go off-grid if one wishes. Further, I believe it would help in early adoption in urban areas with less power outages, since the customer installing a solar PV system could get rid of (individual) or minimize batteries (industrial) which form a substantial part of the installation cost.
  3. From the viewpoint of the discom, net-metering is certianly not desirable if the discom is a private entity as the discoms have monopolies/oligopolies and 5 customers installing solar PV could take away revenue of even 6 customers, whereas the 5 customers might have done so due to net-metering in the first place.
    Germany had implemented feed-in-tariffs where the customer importing to the grid got paid more than cost of production in the first few years of this policy. This was done to encourage early adopters. In a calibrated fashion, they kept reducing the incentive for customers and today the customer is paid the market price for exporting. However, the discoms and hence the customers got their payment which is obviously not practical here, at least today.
    In US, few discoms implemented net-metering. But over few years as they started realizing that they are losing revenue, there are now widespread oppositions. We need to see how this unfolds.
    In India, in theory the discoms should be happy to lose revenue as it means fewer losses :stuck_out_tongue_winking_eye: However, I think this is mainly a matter of policy. Do we want a pseudo democracratic decision like US where the interest of everyone (including the monopolistic discom) is considered, or do we want a socialist solution like Germany where the discom is forced to forego revenue in favour of the larger good. I hope it is like the latter outcome, but not for reasons of socialism, rather because as Modi promised, we get minimum government and maximum governance like in a true capitalistic society. This is also a way of eating the dead elephant (public discom) one bite at a time. I would say the public discoms will first resist since they would be lethargic to installing new meters, and paying for forcefully imported power. I assume inspite of being lazy they are intelligent enough to realize this will take away their customers, but probably don’t care so much about this. The private discoms will oppose this lock, stock & barrel. At the end, I think the onus is on the State Energy ministers. Also, if there is some load shedding in a region currently, this newly found power source might provide enough power at peak, getting away with the need for load shedding.

This article states that Tamil Nadu, Karnataka, Andhra Pradesh, West Bengal and Uttarakhand have implemented net-metering. Gujarat and MP are in advanced stages of discussion as stated in the concall. In UP, Kanpur has implemented net-metering (click on May news). Apparently the IAS officer and some officials of KESCO played some role in this.

Update:
Yesterday, Ujaas informed BSE that it has bagged an order from Oil India for setting up 9 MW for 88 crores, including O&M for 25 years. This is roughly 9.8 cr/MW. Earlier management said typically they charge 6.5 to 7 MW for setup and ~0.1 MW for O&M p.a. with 5% annual increase in O&M. Removing 2.5 cr for O&M (and assuming the 88 crores includes present value of future O&M payments - is this a justifiable assumption??) gives 7.3 cr as the revenue per MW, which should result in good margins. This project is to be executed over next 6 months - so should reflect in Q2/3/4 results.

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One need to keep in mind that Solar projects are very simple when it comes to implementation.

It involves just sourcing of panels and assembling it along with some minor civile work.

Would like to highlight that it has got No Entry Barriers

@chintans Thanks for such a detailed response. Agree with your thoughts on net-metering. Need to wait and watch on how the situation pans out in India. If its favorable, early starters like Ujaas can reap huge benefits. I generally do not invest in sectors which are heavily regulated or in which major clients are public sector companies. But I can make an exception for solar, because increasing solar power generation is inevitable. What we need to figure out is the right time to invest.

USA recently won a dispute against India at the WTO. The dispute was regarding subsidies given by the Indian govt to local solar module/cell manufacturers. Jawaharlal Nehru National Solar Mission (NSM) had mandated that certain portion of the materials under this initiative be procured locally. Subsidies were to be given to comply with this regulation. USA had alleged that such subsidies discriminate against foreign suppliers of solar cells & modules.

Here is the link to the WTO dispute details.

Here is the link to a news article regarding this verdict

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Q2 results (in Rs. cr):

Qtr. Q2FY15 Q2 FY14 Q1FY15
Sales 52.7 28.8 11.8
PAT 3.28 1.89 1.43

TTM PAT: 13.1 cr
TTM EPS: Rs. 0.654

Around 46 cr. of revenue from setting up solar systems ~ 7 MW; slight improvement. But eagerly waiting concall for details of order book which I expect to start increasing in the coming quarters.

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Chintan,

Just read your OP and going through the other posts now. Would you say that - solar is their main line of business? Is it comparable to Moser Baer Solar? Solar REC is like Carbon Credit?

From what I understand, most of these Indian vendors only provide the installation & engineering services for sourcing done from China (like an EPC provider).