These small cap green-energy stocks are near record highs. Will they pull back?

India has invested heavily in expanding its renewable energy capacity over the past decade and now has the fourth-largest installed capacity globally. The country recently announced the world's largest expansion plan in the clean-energy space to meet its lofty goal of 500 gigawatts (GW) of non-fossil-fuel-based energy by 2030.

According to a report by Invest India, India’s non-fossil-fuel capacity has increased 396% in the past five years to 205.38 GW. The country has also registered the highest year-over-year growth in renewable-energy additions – 9.83% in 2022.

This stellar growth has driven the valuations of small cap green-energy stocks such as Waaree Renewables, Websol Energy, and KPI Green higher in the past five years. Let’s see if these three stocks could continue to generate outsized gains for shareholders.

Waaree Renewables

With a market cap of ₹14,620 crore, Waaree Renewables has returned 58,000% to shareholders in the past five years. It’s leading the charge in the solar engineering, procurement, and construction (EPC) business and is also the parent company of Waaree Energies, India’s largest solar module manufacturer and exporter.

Waaree’s expertise spans the entire manufacturing process, from sourcing raw materials to producing solar modules that meet globally approved standards. To date, it has completed 10,000 solar projects with an installed capacity of 1.9 GW. As a solar energy developer, Waaree contracts, owns and operates solar projects, providing clients a seamless transition to clean energy.

It has operated across geographies over the years, focusing on long-term investments in the industrial and commercial customer segments. This business model allows Waaree to benefit from a diverse client base that includes industrial enterprises and utility-based power producers.

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Waaree Renewables’s revenue and earnings growth are key drivers of its stock price. It has grown its top line from ₹7.37 crore in FY20 to ₹880 crore in FY24. Its revenue has increased in the past four quarters to ₹990 crore. Its bottom line has improved from a net loss of ₹3.18 crore in FY20 to a net profit of ₹148 crore in FY24, and ₹162 crore in the past 12 months.

With a trailing price-to-earnings multiple of 90x, Waaree Renewables trades at a hefty premium. Despite its astonishing gains, the company has attracted minimal interest from institutional investors. Around 74.46% of its outstanding shares are owned by the promoters, 24.7% by retail investors and 0.83% by foreign institutions.

Websol Energy System

With a market cap of ₹3,830 crore, Websol Energy has returned close to 5,000% in the past five years. Founded in 1994, the company makes and sells solar photovoltaic cells and modules. Initially established as an export-oriented unit in a joint venture, Websol is gaining traction quickly in India’s growing clean-energy market.

The company said it is expanding its solar module capacity to 550 MW and solar cell capacity to 2.4 GW to address the growing need for solar cells and modules in India and abroad.

Last year it received a sanctioned credit facility from the Indian Renewable Energy Development Agency through a ₹179.2-crore term loan. It will use the funds for the initial phase of its expansion, which includes a solar cell and module manufacturing facility.

Unlike Waaree, Websol’s revenue growth has been erratic. Its sales rose from ₹85.84 crore in FY19 to ₹218 crore in FY22 but fell to ₹20.23 crore in FY23 and ₹26.82 crore in FY24. In the June quarter its sales stood at ₹112 crore, up from ₹0.30 crore in the year-ago period.

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While Websol reported a net income of ₹22.88 crore in Q1FY25, its cumulative losses in the last four quarters have totaled ₹94.28 crore, which means the stock cannot be valued in terms of the price-to-earnings multiple.

However, with an operating margin of 39% in the June quarter and a net profit margin of 22%, Websol stock may be trading at 46 times forward earnings if we assume a net income of $88 crore (annualizing its Q1 profit).

Websol's promoter holding is quite low, at 27.7%, while retail investors own 72.3% of the company.

KPI Green Energy

The final stock on the list is KPI Green Energy, which has a market cap of ₹11,918 crore. The solar and hybrid vertical of Gujarat’s KP Group, it builds, owns, operates and maintains solar and hybrid power plants through an independent power producer (IPP) and a captive power producer (CPP).

The IPP segment develops and maintains grid-connected solar power projects and sells power units generated from solar plants. The CPP business develops, operates and maintains grid-connected solar power projects.

In the past five years, shares of KPI Green have returned close to 10,000%. Sales have grown from ₹34.6 crore in FY19 to ₹1,031 crore in FY24. Its net income has increased from ₹8.90 crore to ₹162 crore over this period. In the past four quarters, its net income has totaled ₹194 crore, valuing the stock at 61.3 times trailing earnings.

Promoters own 48.77% of the company, followed by retail investors with 36.95%, foreign institutions with 12.4%, domestic institutions with 1.56%, and mutual funds with 0.32%.

How KPI Green’s valuation compares with its peers

On the trailing price-to-earnings multiple, Adani Green is the most expensive of these. However, it is a large cap behemoth growing profitably at an enviable clip and commands a premium valuation. NHPC is the cheapest, but its net income has been range-bound in the last five years.

With ₹606 crore in trailing cash flow, Adani Energy has the flexibility to reinvest in growth projects or acquisitions and reduce the debt on its balance sheet, all of which should drive future cash flow and earnings.

KPI Green trades at a lower valuation than its peers and has expanded its cash flow in recent months, translating to a higher stock price. Finally, while Waaree Renewable has high return-on-equity and return-on-capital-employed multiples, its substantial profit margins have yet to translate to cash-flow growth.

Risks and challenges

Investing in small cap companies remains a risk proposition for these reasons:

Competition:India’s clean-energy market has become increasingly competitive, with several players vying for market share. This could lead to aggressive pricing and lower profit margins. An expanding market also attracts foreign investments and international players, forcing incumbents to lower prices or enhance their offerings. Companies with deep pockets may place lower bids to win contracts, thereby compromising industry-wide profitability and project viability.

Import risks:Green-energy companies have historically relied on components sourced from abroad, such as solar panels and wind turbines, which exposes them to supply-chain disruptions, import tariffs and trade wars. To reduce reliance on Chinese imports and mitigate some of these risks, it is essential to develop domestic manufacturing capabilities. The sector is sensitive to commodity price fluctuations, which affect raw material costs. This could eventually lead to higher electricity prices for consumers and reduce the competitiveness of these companies globally.

Market dominance:The presence of established companies with more resources, easier access to financing, and established government relationships creates barriers for smaller firms. Market leaders can easily create an uneven playing field and make it difficult if not impossible for smaller companies to thrive.

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The key takeaway

An Impactful Insights report forecasts that India’s renewable energy market will more than double from $22 billion in 2023 to $46.7 billion in 2032, clocking a compound annual growth rate of 8.7% over this period.

The report explains that rapid technological advancements in renewable energy technologies such as solar photovoltaics, wind turbine and energy storage systems, as well as growing concerns about climate change, will drive demand for clean energy.

While clean energy companies are poised to benefit from an growing addressable market, their growth is normalising, which could bring valuations down over time.

All three companies have to compete with prominent players such as Adani Green, Suzlon and Inox Wind, all of which have deeper pockets. Also, negligible interest from institutional investors and low liquidity of these stocks make them riskier bets than their established peers.

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Note: The purpose of this article is only to share interesting charts, data points and thought provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educational purposes only.

Aditya Raghunath has more than 15 years of wide experience in finance and financial writing. His interests extend to global stocks as well. He studied commerce at Mumbai University and has a degree in finance and marketing from the prestigious T A Pai Management Institute.

Disclosure: The writer or his dependants may or may not hold the stocks discussed here as per Sebi guidelines.