Bright Horizons: WEL's Path to Solar Leadership Fueled by China+1 Opportunities

Transforming from India's Leading Module Manufacturer to a Renewable Energy Powerhouse

- Waaree Energy Ltd (WEL) embarks on a new backward integration journey, spanning from solar module manufacturing to ingot, cell, wafer, and module setup. Their impressive expansion journey has taken them from 2 GW in 2022 to a current (Oct 2023) capacity of 12 GW in installed module manufacturing, making them the largest module manufacturer in the nation. Additionally, they are establishing a 5.4 GW solar cell manufacturing facility in Chikhli, Gujarat, slated to be operational by the end of FY24.

- WEL holds the position of being the second-largest solar module exporter to the USA, right after China. They boast a substantial order book worth ₹45,000 Crores, equating to over 17,500 MW. Furthermore, the company has significantly dominated the Indian solar export landscape, securing a 67.9% share in FY24, valued at ₹4,616.5 Crores. Waaree Renewable Technologies Ltd (WRTL), the EPC business of WEL listed on domestic stock exchanges, experienced a remarkable 117% year-on-year growth in FY24, maintaining a five-year CAGR of 180%. WEL has a 74.5% holding in WRTL at the end of FY23.

- The group has also ventured into battery manufacturing, with Waaree Technologies Ltd (WTL) having 60.1% shareholding by promoters and being listed on domestic stock exchanges. They have recently announced their entry into the electrolyser business. WTL reported a remarkable year-on-year revenue growth of 123.9% in FY23 and secured a notable tender for 1 MW (400 tons) of green hydrogen production from Mahatma Phule Renewable Energy & Infrastructure Technology Ltd.

- Collaborating with Brenmiller, an Israeli company, WEL is actively involved in setting up and deploying thermal energy storage systems.

- To facilitate the second phase of capital expansion, the company successfully raised over ₹2000 Crores through private placements. An additional sum of approximately ₹2800 Crores will be raised through an IPO scheduled to conclude by the end of FY24. The remaining balance of ₹4000 Crores will be financed through debt. These funds will be dedicated to expanding the capacity for wafer-to-module production by 6 GW.

Indian Renewables: Answering the Call as Demand Surges and Supply Meets Peak Loads

- India's Electricity Dilemma: The Growing Gap Between Generation and Demand: In FY22, India ranked as the world's third-largest electricity producer, with a consumption of 1.7 petawatt hours (PWh), primarily driven by utility generation, accounting for 86% or 1.48 PWh. Despite a consistent 21-year CAGR of 6.7% in installed power generation capacity, per capita power consumption remains notably low at 1255 kWh. Regrettably, the power industry in India, while experiencing continuous capacity expansion, has been unable to keep pace with the surging demand. Recent reports indicate that India's power consumption surged by over 16% in August 2023, reaching an impressive 151.66 BU compared to the same period in the previous year, as per a Government of India report.

- In response to this qhigh demand, NTPC has initiated a bid process for the supply of 4 GW of electricity from gas-fired power plants for the upcoming months of October and November, as outlined in the tender. It's important to note that this tender includes a minimum guaranteed purchase of 75% of the contracted quantity. A recent report by BMI Research said India's power demand would grow by 70% by 2032 on account of rising urbanization and increased demand from the construction, manufacturing and services sectors. 

- Power source Now vs THEN: The Government of India (GoI) has set ambitious targets for its energy transition. By 2030, it aims to achieve a capacity of 500 GW from renewable sources. Additionally, GoI is committed to making 50% of its energy sources renewable and achieving a net-zero status by 2070.

- The solar energy sector is experiencing significant growth, driven by increasing demand for rooftop solar installations and Captive Utilisation of solar power. It is estimated that solar capacity will surpass 280 GW, and an additional 125 GW will be required to meet the GoI target of producing 5 million metric tons of green hydrogen. MNRE came out with a renewable plan to add 50 GW of annual renewable capacity over the next 5 years with bids of at least 10-15 GW of renewable capacity every quarter.  

Operations

- Organisation Structure:

-  Legacy:

o WEL is the largest enlisted in ALMM and amongst the only to be able to manufacture M12
o Integrated manufacturing facilities with automated production lines across 4 factories and more upcoming.
o Among the first developers of commercially viable advanced TOP-CON technology modules (High Efficiency).
o Robust collaborative ecosystem: government partnerships, JVs, marquee clients, suppliers and technology partners
o Quality assurance bolstered by the first and only NABL-accredited laboratory in India for PV module testing
o Previously had a JV with NEEPCO - first public private partnership in the sector

Financials & Valuation

- The company is strategically positioned for remarkable growth as it rapidly evolves into a prominent mid-cap industry leader. This growth trajectory is underpinned by several factors, including the surge in China+1 demand for resilient alternative supply chains and the ongoing global transition from fossil fuels to renewable energy sources, prominently led by solar energy.

- Over the past decade, the company has consistently demonstrated steady growth, maintaining an impressive average return on capital employed (ROCE) of 13-16%. Despite facing various challenges over the years, the company has judiciously leveraged debt to fuel its growth at opportune moments and has effectively managed to reduce its liabilities while optimizing asset utilization.

- In the wake of the COVID-19 pandemic and the Russo-Ukrainian conflict, which led to supply chain disruptions, the company demonstrated remarkable resilience by honouring all its commitments and orders. This reliability has solidified its status as a dependable partner, distinguishing it from certain Chinese entities that defaulted on their obligations. Consequently, the company witnessed a substantial increase in sales, a testament to its well-managed operations.

- The company's book value has impressively more than doubled, registering a robust Compound Annual Growth Rate (CAGR) of 13% between FY16 and FY22. As of September 2023, the company has successfully completed the first phase of its expansion, resulting in a cumulative module manufacturing capacity of 12 GW, with over 9 GW of this capacity featuring cutting-edge Topcon technology. The company is on track to finalize its Phase 1 capital expenditure plan in FY24, marked by the addition of a 5.4 GW solar cell manufacturing capacity, and notably, this expansion has been predominantly funded through internal accruals.

- The company's strategic vision is to establish complete dominance over the renewable energy supply chain, particularly within the module business. In pursuit of this objective, the company is embarking on the second phase of its capital expenditure plan. This entails a substantial investment of INR 8,500 crore to establish a state-of-the-art 6 GW facility encompassing the entire manufacturing process, from ingot to cell to wafer to module.

- The company has received approval for the Production-Linked Incentive (PLI) scheme, supporting the manufacturing of 6 GW of wafers to modules. Additionally, a supplementary 2 GW module manufacturing facility will be set up in the USA, which currently stands as the company's largest revenue source.

- It is noteworthy that Waaree Energies achieved a significant milestone by becoming the leading module exporter from India in FY 23, capturing an impressive 69% market share.

- The company boasts an impressive order book worth over ₹45,000 crores from esteemed clients. The Indian solar manufacturing sector presents substantial growth potential, with Adani, planning an 8 GW expansion at Mundra Solar, and Vikram Solar looking to expand from 2 GW to 4 GW in the USA. Furthermore, the market exhibits fragmentation, with foreign players like First Solar seeking opportunities, aiming for the largest capacity addition in Chennai, with an investment of ₹5,500 crores and a vision of achieving 100 GW in the next 5-7 years. Reliance has also entered the green energy sector, committing ₹60,000 crores, covering solar and green hydrogen.

- Additionally, the company secured a 1 MW tender for green hydrogen production and is looking to venture into the electrolyzer business, aligning with its battery business (WTL). The battery business has witnessed a substantial increase in revenue, supplying batteries for over 40,000 vehicles, indicating promising alternative revenue streams for the group's growth.

- Exit Strategy: The group is expected to file a new DRHP for an IPO slated for the end of FY24, with an anticipated fresh issue worth ₹3,000 crores, valuing the company at approximately $3 billion (₹24,000 crores). While the current trailing PE stands at 46, in line with the industry average, the forward PE is projected to drop to under 12 within the next one to two years, presenting an attractive investment opportunity.