The SOLAR CRISIS - KPI Green Energy analysis.

Solar Stocks - Understanding the Crisis🔻

Competition crisis : With govt itself attracting businesses through subsidy and tax relief, many corporations of different industries also try to enter this sector. Now, why doesn’t this risk come with all stocks? Well it does but the simple answer to this is “Pricing Power”.

When companies have pricing power i.e its competitors can’t replicate their same product or service then it becomes a MOAT. However, in power sector - its a commodity business in the end you supply Power and clients can switch from one source of electricity to another, yet have same outcome without major impact on operations.

Let’s also understand what happened with KPI Green Energy :

• Stock has corrected more than 50% from its ALL TIME HIGH, but what exactly went wrong?

• KPI Green had two segments through which it earned its revenue, IPP (independent power producer) and EPC (Engineering, Procurement and Construction). IPP generally means manufacturing in house solar plant and selling electricity produced by it. CPP means setting up solar plant as a contractor by providing services like Engineering, Procurement and Construction (EPC).

• The IPP segment had significantly high margin of 85-90% as compared to CPP business segment, however between 2022 - 2023 KPI Green had 87.5% revenue from CPP business resulting in downside of its Profit margins although sales was growing fast.

While the stock was skyrocketing during this period, there’s some notable risk factors involved here :

1. Electricity Power is a commodity, doesn’t matter where it is coming from wind, thermal, hydro, coal, nuclear, etc it has no impact on operations.

The price of electricity is determined via auctions/bidding in which aggressive bidding by power producers keeps pushing the prices lower.

Due to intense competition and technological advancements, the price/tariff of solar power has declined sharply from over ₹12 per unit to about ₹2.6 per unit in the recent past.

Meaning KPI green cannot push its selling price more than its competitors to sustain its profitability, in such cases there’s a threat of new competitor with higher cash surplus offering electricity power at lower costs than KPI Green that can affect its market share or profitability.

2. Valuation concerns, the stock price was moving too fast than sales could grow. Hence, when the sell off started stock got into steep correction with pessimism.

High expectations of results every quarter, high valuations leads to high street expectations for sustaining its current EPS growth or executing its orderbook very timely. Any bad quarters or delay in execution leads to sharp corrections for such overvalued stocks.

3. Regulatory concerns, solar sector is highly regulated by government and currently there are many tax relief along with subsidy provided from govt. However, its obvious that govt is trying to attract businesses in renewable energy and hence giving so many relief but once people adopt these sources and lot of businesses have came in sector - govt may change its policies and focus on generating income via taxes from companies and people.

For example, in Gujarat Solar Power Policy 2021, the govt. imposed a banking charge of ₹1.50 per unit and increased a cross-subsidy surcharge, which led to lower net realization for solar power projects.

4. As highlighted earlier the IPP segment of company does bring higher profit margin but there’s a threat in this segment of fixed price in contract. Meaning the price for its product is fixed for years and in between that time if Raw Material price increases then KPI has to take hit on their profit margins and they won’t be able to change their pricing afterwards.

Another issue from this is most of these contracts are not long term and KPI Green clients have right to issue a notice for 6 months to 1 year and terminate their deal.

5. Financial Risk - CFO/PAT is not greater than 1. Meaning cash flow for company is not smooth, which results in company needing outside funds to grow its sales.

The funds can come through debt or equity dilution but the constant needs of funds is never healthy for company in longer run.

Let’s talk about some opportunities in the company :

1. Orderbook contains 52% orders from its IPP segment which has higher margin. Meaning company maybe able to sustain its profit margins going ahead, if they execute their orderbook timely.

2. Debt to Equity is less 1 and management has committed to keep it that way. However, due not enough cash surplus in company it’s been raising money with QIPs constantly to expand the business which results in dilution of equity.

3. Although company doesn’t have pricing power, it has made some technological advancement to sustain its profitability by lowering expenses in operations.

4. Valuation is much more comfortable at current price, however any fall on profitability will change the view of valuation significantly. So stock doesn’t seem undervalued but more fairly valued with certain risk.

This whole analysis is to not give you recommendations for KPI Green but understand the business threat and opportunities. If you’re comfortable with above Risk factors and believe in the opportunities presented by company then you can make more informed decision.

We are personally not invested in this stock, neither comfortable with Risk Factors present in most of the famous Solar stocks. We are betting on just one power stock as of now in long term : Tata Power.

The bet is not purely on solar growth, but supported by its EV charging market share and ambition of setting up 1 Lakh charging stations in India✔️.

We have made separate article on Tata Power available on our website “GrowthSquad”, where we discussed its Risk factors and opportunities both. You can give that article a read as well.

Will we invest in any of these stocks? That would be dependent on coming quarters and watch execution of these companies📈.

Regards,

Team GROWTHSQUAD.