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Excerpted from an article by JK Gupta...
With finite reserves of conventional energy sources such as
crude oil, coal and gas, and increasing pressure from
environmentalists to cut emissions, the world is seriously
looking at alternative sources of clean energy. The surge in
prices of conventional energy sources in the recent years
has only hastened the process. For instance, crude oil is
hovering over $100 a barrel, while its cascading effect on
pricing of coal, gas and other forms of energy inputs have
reached the zenith.
For India, over the last few decades, the demand for power
and transportation fuels has increased significantly,
primarily due to high economic growth, rising urbanization
and rapid industrialization. This demand is expected to rise
further going ahead.
According to a Planning Commission report on the Integrated
Energy Policy, for India to maintain its GDP growth of 8 per
cent a year for the next 25 years, the country would be
required to increase its power generation capacity to
800,000 mw compared with the current capacity of 160,000 mw
(including captive plants).
While this not only provides an opportunity, it also brings
along a big challenge considering that the conventional
sources of energy such as coal and gas for power generation
are limited, besides the concerns over rising prices and
environmental degradation caused by such inputs.
Since about 65 per cent of India’s power generation capacity
is powered by coal, gas or oil, there are certainly more
challenges to overcome before India’s dream of self
sufficiency in power can be achieved. An equally daunting
task is that of meeting India’s rising demand for
transportation fuels, given that nearly three-fourths of the
country’s crude oil needs are met through imports.
In this perspective, and even though knowing that
conventional energy will continue to account for a majority
share, it makes sense to look at practical sources of
alternative energy, wherein it is economically viable and
its negative impact on environment is kept minimum.
Alternative energy is understood as an energy source to
replace fossil fuels, and is interchangeable with renewable
energy, which effectively uses natural resources such as
sunlight, wind, rain, tides and geothermal heat that are
naturally replenished. Renewable energy technologies range
from solar power, wind power, hydro electricity, biomass and
biofuels for transportation.
The India potential
In India, the installed generation capacity from renewable
energy has increased over ten-fold during the last decade to
9,220 mw or 7.3 per cent of the total installed capacity.
India is estimated to have strong potential in terms of
generation of renewable energy, mainly solar, biomass and
wind power. As per projections of the Ministry of
Non-Conventional Energy Sources, of the 240,000 mw total
power capacity planned by 2012, about 24,000 mw will come
from renewable sources of energy.
This seems realistic given that India ranks in the top five
in terms of wind and solar energy potential. In short, it
indicates huge opportunity to invest in companies operating
in the alternative energy space.
But, before that, one needs to understand the risks
associated with alternate energy. For instance, many of
these opportunities become economically viable only after
accounting for government assistance in the form of fiscal
incentives and subsidies. They help lower the impact of the
high capital cost involved with most alternative energy
projects. For example, the capital cost for one mw in a
solar-based project works out to Rs 12-15 crore, which is
far higher as compared with Rs 4 crore for coal-based
projects. Although the former enjoys virtually zero
operating costs, any withdrawal of incentives will prove
negative for the sectors growth. Second, if the price of
conventional energy sources decline sharply, a few of these
alternative sources of energy may not continue to be
attractive. These are some factors, while unpredictable in
nature, which need to be kept in mind.
Wind energy
According to the International Energy Agency, the share of
wind power in total electricity generation, globally, will
grow from 0.2 per cent in 2002 to 3 per cent by 2030. In the
Indian context, the potential of wind power is pegged at
45,000 mw as compared to the current capacity of 7,660 mw.
This, along with a much larger scope in international
markets, should translate into huge opportunities for
companies like Suzlon Energy.
Suzlon Energy
Significant size, highly diversified and well- integrated
operations is what describes Suzlon Energy, which is among
the world’s top five wind turbine manufacturer. The company
also provides services like consultancy, design, operations,
and maintenance for wind power projects. Suzlon generates a
bulk of its income from the overseas markets such as Europe,
US, South America and China, having offices and
manufacturing facilities in these regions.
In view of the strong demand in domestic and overseas
markets, Suzlon is expanding its capacities, including an
integrated manufacturing facility in China, a rotor blade
plant in the US, and a forging and foundry plant in India.
These will lead to an increase in its equipment
manufacturing capacity from 2,700 mw to 5,700 mw by FY09.
Its total order book of 3,358 mw, equivalent to Rs 17,110
crore, is equal to 2.1 times its FY07 revenue and thus,
provides good revenue visibility. Although the outlook is
robust driven by growing investments in renewable energy,
especially wind power, there are some near-term concerns.
The company’s earnings may be impacted on account of dollar
depreciation (55 per cent of the order book is on account of
US-based orders), increase in import duty on certain inputs
in the US and firm commodity prices. Lastly, some impact on
account of forex exposure is also anticipated for quarter
ended March 2008. Nonetheless, analysts value Suzlon’s share
at Rs 320 on the basis of sum of parts. Buy with a long-term
perspective.
Hydro energy
With so many rivers in the country, there is little doubt
over India’s potential with respect to generation of
hydroelectric power. The same is estimated at 150,000 mw
(current capacity at 33,941 mw). In order to narrow the gap
between potential and actual, the government has undertaken
several initiatives that should help add about 45,000 mw of
hydropower capacity over the next ten years. In other words,
it will open up opportunities for companies operating in the
hydro power segment, such as Jaiprakash Hydro Power, Alstom
Projects and, to some extent, Bhel, which derive a good
chunk of its revenues from sale of hydro power equipment.
Jaiprakash Hydro Power
Hydro power player Jaiprakash Hydro currently operates a
total capacity of 700 mw. Notably, it has mega plans wherein
it aims to add 7,000 megawatts (5,000 mw of hydro and 2,000
mw of thermal power capacity) of new capacity by 2012,
including the ongoing 1,000 mw project at Karcham, on Sutlej
River in Himachal Pradesh.
It’s expertise in the business, especially in terms of
implementation of hydro projects (through the backing of its
parent), places it in an advantageous position. That apart,
the company should benefit from its recent diversification
into the transmission business. While it has formed a joint
venture with Power Grid Corporation for setting up a
transmission line to evacuate power from its Karcham
project, thereafter, other new transmission projects may
also be considered. In terms of valuations, at the current
price, the stock trades at 2.7 times its estimated FY 08
book-value and, merits attention.
Alstom Projects India
A subsidiary of Alstom SA France (a world leader in hydro
power plants and mass rapid transport systems), Alstom
Projects is a leader in the hydropower equipment business in
India and commands a market share of 27 per cent. The
company generates over 50 per cent of its revenues from the
hydro power segment, while the rest comes from transport and
others industries.
In light of the rising demand, last year, the company
doubled its hydropower equipment manufacturing capacity.
Another indication of its prospects is it’s order book of Rs
3,200 crore, which works out to 2.5 times its FY07 revenue.
There is significant hydro power capacity to be added over
the next few years. Even at a conservative estimate of
30,000 mw of additional hydro capacity, the total
investments required will be Rs 150,000 crore (at Rs 5 crore
per mw). Of this, about 40 per cent or a staggering Rs
60,000 crore will be towards equipment. Needless to say,
Alstom will be a key beneficiary.
Solar energy
Not only is the potential for solar energy high in India,
solar power can be provided to remote areas even without the
support of a power grid. According to industry estimates,
the total domestic installed solar-based capacity is in
excess of 100 mw as against the potential of 50,000 mw.
Considering this and the support from the government, many
players are considering entering this segment. Among the
existing players that stand to gain include Webel SL Energy
Systems and Moser Baer.
Webel SL Energy Systems
A leading producer of solar photovoltaic cells and modules,
Webel SL Energy’ solar-based equipment manufacturing
capacity is expected to rise from 10 mw to 42 mw by FY08 and
to 102 mw by FY10. With this expansion, the management is
targeting revenues of Rs 1,300 crore, as against revenues of
Rs 107 crore in FY07. However, analysts conservatively
estimate the company to clock revenues of Rs 625-650 crore
by FY10. At present, Webel generates over 90 per cent of its
revenue by exporting to markets like the US, Europe, Africa
and Australia hence, it may get marginally impacted due to
the weak dollar.
The global solar industry is witnessing strong demand from
countries like the US, Germany and Japan on account of high
oil prices, government subsidies and environmental issues.
On the back of this demand, players like Webel are expected
to maintain a 30 per cent growth over the next five years.
For Webel, its share price has tanked to Rs 241 after
touching a 52-week high of Rs 846 in January 2008. At the
current price, the stock trades at 17 and 11 times its
estimated earnings for FY08 and FY09, respectively, and can
deliver decent returns.
Moser Baer
Among key emerging players in the solar power space is
optical storage disk maker Moser Baer. The company has
forayed into manufacturing of solar photovoltaic (PV) cells
in a big way, through its 100 per cent subsidiary (Moser
Baer Photo Voltaic-MBPV). MBPV is investing about $1.5
billion to increase its photovoltaic cell manufacturing
capacity to 600 mw by 2010, as against its current capacity
of 40 mw.
On April 3, this subsidiary signed a 10-year agreement with
China-based, LDK Solar, for
purchase of high-quality, multi-crystalline silicon wafers
(used to produce PV cells) capable of generating 640 mw of
solar power. This agreement will ensure reliable supply of
raw materials to MBPV. In order to strengthen its roots in
the business, MBPV will also investing in R&D.
Lastly, in November 2007, the company signed an agreement
with the Rajasthan government to set up a solar power
generation facility in the state with a total capacity of 5
mw, estimated to cost of Rs 100 crore. In totality, while
the solar-power business is relatively small in size as
compared with Moser Baer itself, it has the potential to
become bigger than its parent.
According to analysts, the combined value of Moser’s
businesses (optical media, home entertainment and PV) works
out to Rs 350 per share. Given the potential in its various
businesses, the stock, available at 7 times its estimated
FY09 earnings, can deliver good returns.
Ethanol
The next emerging form of alternative energy is bio-fuel.
According to industry estimates, there are remote
possibilities of crude oil prices falling below $90-100 per
barrel in the medium term. To overcome the cost pressure,
many countries like Brazil (the world’s largest producer and
exporter of sugar), are converting a big chunk of their
sugar into ethanol for blending it with auto fuels. In
India, though late, the government has made 5 per cent
blending mandatory. Notably, from October 2008, the
mandatory blending levels are slated to rise to 10 per
cent.
Praj Industries
One of the beneficiaries of the growth potential in the
ethanol space is engineering major, Praj Industries, the
leader in ethanol equipment manufacturing technology. The
company offers engineering products and solutions to produce
bio-ethanol and bio-diesel, brewery plants and related
waste-water treatment systems. The company has also made an
entry into the fastest growing ethanol markets, Brazil,
through a joint venture with Brazilian Engineering. The
company is also expanding its manufacturing capacities at
Kandla, Gujarat besides, making investments in R&D to
develop newer technologies. Praj’s total order book stood at
Rs 900 crore as on December 30, 2007, which is over 1.5
times its FY07 revenue, provides confidence.
However, Praj is no exception as its stock has corrected
sharply following the meltdown in stock markets. At the
current price, the stock is available at 12 times its
estimated FY09 earnings and, is attractively valued.
Emerging areas
Though in the nascent stages, there are other forms of
alternative energy such as biomass, technology to convert
waste plastic into power, biogas, geothermal power, etc.
There are companies, which are exploring opportunities in
these areas and may gain in the years to come. Asian
Electronics is one such company, which is mainly into the
lighting segment and has now developed a unique technology
that will help convert waste plastic into power. The new
initiative could prove extremely lucrative for Asian
Electronics considering that it has an agreement with HPCL
to process refinery bottoms into fuel.
Likewise, players like Suryachakra Power, which is into
biomass power, where power is produced by using rice husk,
redgram stalk and cotton stalk as inputs. In India, the
opportunities in biomass energy are yet to be tapped and
this segment is estimated to have the potential of
generating 19,500 mw of power as against the current
capacity of 950 mw. Lastly, on a small scale, companies like
NTPC have entered into the geothermal power, which is
nothing but energy generated by heat stored beneath the
earth's surface. While these emerging areas seem to have
potential, it may take a while before we see investment
opportunities. |
