These solar power companies are gearing up for IPOs. Will they shine?

PMEA Solar Tech, Acme Solar Holdings, and Waaree Energies, which are seeking to go public, operate in less advanced areas, and industry experts say they need to offer a competitive edge to secure and maintain premium valuations in the current bull market.

“Most of these companies do not have the technological edge investors are looking for," Rupesh Sankhe, vice president of institutional equity research at Elara Capital told Mint. “Companies engaged in more technologically complex steps of solar energy production have a competitive advantage."

The recent listing of Premier Energies is emblematic of the market’s appetite for such moats. The domestic solar cell and module manufacturer recently had its ₹2,830.40 crore IPO oversubscribed by nearly 75 times. Since then, its stock has delivered around 29% returns.

Even industry veteran Websol Energy, despite reporting net losses of ₹121 crore and ₹24 crore in FY24 and FY23, respectively, has seen stock returns soar by 600% over the past year. Both these companies are among the few that manufacture solar cells in India and hold a key position in the solar energy value chain.

The value chain

The solar energy production value chain involves several technologically intensive processes, including sourcing polycrystalline silicon as a raw material and producing silicon wafers and ingots from it. Currently, only Adani Group produces these wafers and ingots in India for internal use.

“Adani's initiative could pave the way for other players, but domestic ingot and wafer manufacturing is still in its initial stages highlighting the ongoing dependence on established international producers for a critical part of the solar cell supply chain," PMEA Solar’s draft red herring prospectus said. “India's presence in this segment remains limited."

Another crucial node of the value chain is transforming these silicon wafers into photovoltaic cells. So far, India has been reliant on cheap cell imports from China. However, more domestic companies like Premier Energies, Websol Energy System, and Jupiter Solar have started offering integrated cell and module manufacturing capabilities, albeit on a smaller scale.

The final node of the value chain is the assembly of solar modules using solar cells, which is the least technologically intensive process of all. Most domestic companies like Waaree Energies, Vikram Solar and Goldi Solar are engaged in module manufacturing.

To support India’s quest to achieve 300GW of installed solar capacity by 2030, most module manufacturers plan to integrate solar cell manufacturing facilities into their current operations. However, they do not have sufficient capital to execute their plans, which is why they are tapping India’s booming IPO market right now, Sankhe said.

Companies like PMEA Solar, which focus on mounting solutions for solar modules, and large-scale energy producers such as Acme Solar, NTPC Green Energy, and Adani Green Energy, are positioned toward the end of the value chain. These companies lack the technological prowess needed to fully localize India's solar energy value chain.

NTPC Green Energy, an industry behemoth, plans to tap the capital market with its IPO of ₹10,000 crore to reduce its debt and fuel its expansion plans.

Also Read: Investors are excited about NTPC Green’s IPO, but experts advise caution

Waaree Energies

Waaree Energies announced its IPO in December 2023, but it got the Securities and Exchange Board of India’s (Sebi) approval only last week due to ongoing governance issues. Waree had no solar cell manufacturing capabilities when it filed its draft red herring prospectus almost a year ago.

It plans to set up a 6GW capacity ingot-wafers, solar cells and modules manufacturing facility at Odisha and has earmarked ₹2,500 crore from the IPO proceeds for this purpose. Its IPO consists of a fresh issue of ₹3,000 crore.

“While we have extensive experience in the manufacturing of solar PV modules, we have no experience in manufacturing solar cells," Waaree Energy’s draft red herring prospectus said. “Our shift towards backward integration...involve...potential challenges in the synchronization of the manufacturing processes and uncertainties related to the efficiency and reliability of the in-house production."

It takes a company around two years to set up and operate its cell manufacturing facilities. In this context, Premier Energies, which has set up a new 2GW solar cell and module manufacturing plant, is already way ahead of Waaree Energies.

The company’s only competitive advantage right now is its demand security because of its strong export capabilities and substantial government policy support. Aided by US’s protectionist trade policies against China, Waaree Energies’ solar module export sales grew around 600% on-year to 46,165 units.

This boosted the company’s revenue by almost 137% on-year to ₹6,751 crore In FY23, while its profit jumped 525% on-year to ₹500 crore during the same period.

Despite such strong financial performance, industry experts think Waaree Energies does not have a strong enough moat to evince investor interest like Premier Energies because it does not yet have an operational solar cell manufacturing facility.

Also Read | Vivek Kaul: Today’s IPO frenzy can’t be attributed to India’s growth story

“Module makers who have integrated cell manufacturing capabilities are being valued more than those who are just into assembling modules," Anil Ladha, director and chief financial officer of Renaissance Solar and Electronic Materials, told Mint. Renaissance Solar is into the more technologically intensive process of manufacturing silicon wafers. However, it does not yet have any operational capacity.

PMEA Solar

PMEA Solar produces hardware for more technologically advanced solar modules which can track the sun’s movement. The company plans to raise ₹600 crore through a fresh issue of shares during its IPO and has earmarked ₹80 crore from the net proceeds to add to its hardware manufacturing capacity for such advanced modules.

However, the company mainly caters to foreign customers because Indian module manufacturers are not technologically advanced yet to develop in-house solar tracking modules. Currently solar tracker penetration in India is at 45% with 6GW of annual installed capacity, according to PMEA Solar’s draft red herring prospectus.

With an operational capacity of 22GW and a market share of 9%, the company focuses on a very niche segment. However, in FY24, the company diversified beyond its only customer - US-based Nextracker Inc and started supplying to another undisclosed US-based solar tracking company along with India-based Sterling and Wilson Renewable Energy.

As a result, the company had to expand its manufacturing capacity which led to an 87% on-year growth in its revenue at ₹1,500 crore during FY24. It reported an almost 280% on-year jump in profit at ₹104 crores during the same period.

Even though the company is competitively positioned in its niche segment, its contribution towards India’s solar energy value chain remains miniscule. This might be a dealbreaker for many investors, according to experts.

 

Acme Solar

Acme Solar Holdings is a renewable energy generator with an operational capacity of only 1.3GW of solar energy. With the lowest operational capacity among its listed peers, it is up against established giants like NTPC Green Energy, Adani Green Energy and ReNew Energy Global.

All these companies have operational wind energy generators in their portfolios, while some also have hybrid generators. Acme Solar only has solar energy generators, and it plans to raise up to ₹3,000 crore through its IPO to add more types of energy generators to its portfolio.

However, industry experts are satisfied with Acme Solar’s project execution track record so far. The company’s revenue from selling electricity rose 4% on-year to ₹1,319 crore in FY24. The company commenced a new project for the Solar Energy Corp. of India in Rajasthan during that period which led to a rise in its revenue.

The company’s total revenue rose despite its engineering, procurement and construction services business not generating any revenue in FY24 as it sold certain important materials of its business to its promoter Acme Cleantech during FY23.

The company saw an almost 2,300% on-year rise in its net profit at ₹698 crore in FY24, on account of significantly higher profit margin and lower expenses compared to FY23. It made a loss of ₹3 crore in FY23.

“Since Acme (Solar) does not have a large balance sheet, it does not have access to cheaper funding, which increases its funding costs and makes it slightly uncompetitive compared to its listed peers," Sankhe said. “However, they have a good (project) execution track record, so investors are not worried."

Even though most solar energy companies lack certain competitive advantages investors are currently looking for, industry experts agreed that they need extensive funding to develop new moats in the long run.

“It is always welcome to see more solar companies tapping the primary market because the industry needs money for its growth. More companies will keep coming with their offerings," Ladha said. “However, they must offer investors some additional value as well."

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