Right time for investors to accumulate green stocks

The oilfield of the future is not 200 feet deep below the surface. It is 96 million miles above the ground .This is not an understatement. High oil prices in the 1970s ended the era of crude oil as a source of electric power and kick-started the wind energy industry in Europe and elsewhere.

Will the current regime of triple-digit crude oil prices begin the era of renewable energy? Conventional sources of energy, including oil and coal, not only have to bear the brunt of higher costs, they are also under attack by the green brigade. These hydrocarbon fuels are blamed for global warming and climate change. And with climate change taking centre-stage in energy concerns across the globe, policymakers and investors are waking up to the potential of green energy — be it with wind, small-hydel, solar, bio-mass or ethanol.

Renewable energy sources like geothermal, solar and wind constitute approximately 2.2% of global energy generation. Internationally, a lot of investment is taking place in green fuels which are renewable and non-polluting. The momentum is the strongest in Europe and the fever is just catching up in India.

Barring wind energy and ethanol, there are few commercially operational projects in this space. This makes it difficult for equipment suppliers to establish scale and thus, bring down costs to competitive levels. With technological development being critical in the industry, these companies need huge funding in the initial years. Consequently, while many companies have forayed into the renewable space, only a handful of them have made it their main business.

We feel that this is a suitable time for investors to start accumulating right stocks in this space. Given the size of the global energy market, the sky is the limit for companies which get it right. We, at ETIG, bring you a bouquet of companies in the green-energy segment. Take your pick.

Wind power

As pointed out earlier, wind power is the largest and most popular among renewal sources right now. Initiated by government subsidies, the growth in wind energy in India has primarily been driven by technological advancement and higher scale of operations.

And as technology improves, wind energy is becoming costcompetitive vis-à-vis conventional sources. In the 1980s, a typical wind turbine generator (WTG) could produce one-tenth of a megawatt ( mw) of electricity; now 5-mw capacity WTGs are commonplace. The industry now plans to move offshore, where wind speed is higher and more consistent.

Offshore WTGs can produce up to 20 mw, which will radically change the scale and economics of wind energy. The best way to gain from growth in wind energy is to invest in equipment suppliers. In India, Suzlon Energyis the only major listed company in this space. It has grown beyond the domestic market to emerge as the world’s fifth largest wind turbine supplier with over 10.5% of global market share.

It is now aggressively investing in technology and manufacturing capacity to emerge as one of the top three global WTG suppliers. Its revenues have been rising steadily. But the company’s margins have come under pressure in the past six quarters due to a product recall involving one of its bigger customers in the US. In terms of valuations, Suzlon compares well with other equipment manufacturers like Bhel, which supplies equipment for coal-fired power plants. Considering its future growth potential and ambitious growth plans, investors can accumulate the stock.

Small hydel

Hydro power is one of the oldest sources of renewable energy. But it has lost out to thermal power due to the cost, complexity and time involved in executing large projects. These require construction of huge dams and reservoirs, damaging environment and displacing people.

This has created global interest in small projects, which are simpler to construct and do not damage ecology. Small rivers, rivulets and artificially-created storage dams or other small water bodies can be tapped to generate up to 20 mw power, which can be used locally.

Jyoti: This is a engineering company which manufactures small hydro-power (SHP) sets. It is the single source for hydro turbines and auxiliary equipment. This division contributes 20-25% to the company’s total revenues of over Rs 200 crore. Jyoti is in the growth stage and has achieved a turnaround from being a lossmaking company till FY05. With increasing government focus on renewable energy, Jyoti’s business in the domestic and global markets is picking up. It expects to be a Rs 500-crore company in three years and is optimistic of growth in the SHP segment.

A New Dawn...

Solar power

According to various studies, the earth receives more solar energy in just one hour than the world consumes in one year. Unfortunately, today, solar energy contributes only 0.1% of the world’s total energy needs. The key challenge in harnessing solar energy is the efficiency of technology and equipment.

The technology in the sector is still evolving and nearly half a dozen technologies are vying for supremacy. Among the emerging technologies, thin film solar panels and concentrators are best positioned to be commercialised. While solar energy costs are declining, the costs of other sources of energy, including generation and distribution costs, are rising. This indicates grid parity can be reached earlier than estimated.

In the long term, companies are differentiated on the scale or manufacturing efficiencies, access to technology and level of integration along the photo voltaic (PV) value chain. Two promising companies in this sector are Moser Baer and Webel SL Energy. Moser Baer: This is India’s largest and world’s second largest optical storage media manufacturer. The company has now ventured into the less capital-intensive and high-margin business of solar photo voltaic cells (PVC).

With a strategy to offer multiple PV technologies, the company is aiming at bringing down PV electricity costs to match conventional energy price points. In the long run, it plans to set up the world’s largest thin film solar fabrication unit in the country. Its PV business earned revenues of $43 million in FY08, contributing nearly 10% to the total revenues of the company.

It is expanding its crystalline silicon capacity from 40 mw to 80 mw. The company’s thin film project facility is nearing completion and is on track to raise its capacity to 180 mw by FY09. Webel SL Energy: This is a leading manufacturer of solar PVC and modules in India.

It is one of the fastest growing manufacturers of solar PVC in Asia (outside Japan). The company has an installed capacity of 10 mw and intends to grow to 40 mw by FY10. Rising silicon prices are pushing up its raw material costs, affecting margins. To combat this, Webel is investing in technology and forward integration into raw material production.

Biomass

Renewable energy can be extracted from biowaste arising from trees, crops and garbage. This energy is released either by burning biomass in a controlled environment or converting it to other usable forms of energy like methane gas, ethanol or bio-diesel.

The bagasse obtained as a by-product by the sugar companies is used to generate power, which is either consumed internally or sold commercially. Most sugar mills now use molasses, another byproduct, to produce ethanol, which is an alternative transport fuel.

In India, leading sugar companies like Bajaj Hindustan, Balrampur Chini and Bannari Amman are actively into co-generation of power and manufacture of ethanol. India’s largest sugar company, Bajaj Hindusthan,earns 15% of its revenues from nonsugar businesses like ethanol and power generation. It intends to earn 35-40% of its revenues from value-added and non-cyclical business.

It expects exportable surplus from its co-generation units to cross 100 mw in the sugar season, which will start in November ’08. It generated around 80 mw a year ago. For Balrampur Chini, power co-generation contributes more than 15% to the company’s total revenues and is a major driver of profit growth. In view of the recent capacity expansions, the total saleable co-generation capacity stands at 126 mw.

Besides the co-generation of power, sugar company Bannari Ammanhas also ventured into wind power generation while de-risking its business model. Power generation contributes more than 20% to its total revenues. Equipment suppliers like Praj Industries, Triveni Engineering and Thermax are yet another set of companies associated with bio-mass energy. They are leading suppliers of equipment to companies in this sector.

Praj Industriesis one of the largest suppliers of processes and systems to companies manufacturing ethanol, biodiesel and distillery industry. The ethanol business contributes 85% of the order book of the Rs 700-crore company. Praj is involved in R&D to make breakthrough cellulosic technology for ethanol. Triveni Engineeringmanufactures steam turbines, high speed gears and water & wastewater treatment equipment. It earns 40% of its revenues from its non-seasonal high-margin yielding business of steam turbines and co-generation of power.

Thermaxis a leading manufacturer of engineering equipment like boilers and heaters, absorption cooling, power and cogeneration systems and water and wastewater solutions among others. Around 80% of its revenue comes from its energy business. So,take your pick... join the ‘Go Green’ movement and save the planet.