Clean alternatives

Jitendra Kumar Gupta / Mumbai April 7, 2008

Rising costs of conventional fuel, environmental concerns and finite reserves are all forcing the world to look at alternative clean energy sources with a long-term perspective.

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 urbanisation and rapid industrialisation. 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.    ENERGY OPTIONS Rs Crore Sales % chg OP % chg Net profit % chg PE (x) Price (Rs) M Cap Asian Electronics 375.03 36.60 135.62 93.69 93.85 95.89 6.12 192.10 573.99 Moser Baer 1951.56 0.57 616.57 14.67 32.18 -54.30 81.63 156.15 2626.91 Praj Ind 690.48 37.67 150.54 65.27 121.87 74.12 19.87 132.19 2421.72 Webel SL Energy Systems 109.78 13.99 14.38 4.96 8.98 -11.61 20.47 240.90 183.81 Alstom Projects 1466.80 41.17 183.00 44.89 108.00 15.14 35.26 568.29 3807.54 Jaiprakash Hydro Power 334.05 19.22 412.11 15.46 232.83 21.06 11.23 53.25 2614.58 Suzlon Energy 6237.09 27.98 1465.07 20.39 1220.98 24.15 33.97 277.10 41480.48 BHEL 19083.10 20.38 4817.75 34.29 2898.84 35.95 27.59 1634.10 79992.46 Operating profit (OP) is excluding other income, All figures are for the trailing four quarters ending December 2007 and in rupees crore, unless specified, % change is over the corresponding four trailing quarters

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.    BIG OPPORTUNITY Source of energy Potential Existing capacity Wind 45,000 7,660 Small Hydro (up to 25 mw) 15,000 1,850 Hydroelectric 150,000 33,941 Biomass 19,500 950 Solar photovoltaic 50,000 30 Waste-based power 70,000 34.95 Industry estimates in megawatts (MW) 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