Waaree Energies

Hot IPO or Sustainable compounder

In this post we will review

• What does Waaree Energies do?

• Where does it sit in the entire value chain

• Why business is experiencing strong tail winds

• It’s Business Model

• China dependencies for raw materials

• Management gearing for growth

• Conclusion

Waaree Energies Limited is primarily engaged in the manufacturing of solar PV modules. As of June 30, 2023, the company has an aggregate installed capacity of 12 GW in India.

• Product Portfolio: Waaree Energies produces a range of solar PV modules, including multicrystalline modules, monocrystalline modules, and TOPCon modules.

• Module Variations: These modules come in various forms, including flexible modules (bifacial, framed and unframed) and BIPV (Building Integrated Photovoltaic) modules.

• Branding: Waaree Energies markets its products under the "Waaree" brand.

It is worth noting that while manufacturing solar PV modules is their primary business, Waaree Energies also derives revenue from EPC (Engineering, Procurement, and Construction) services, O&M (Operations and Maintenance) services, and the sale of solar water pumps and other products.

Where does company sit in value chain

The good things is company is moving into higher value business however it will take some time to complete this backward integration

The business is enjoying very strong tailwinds¹

this is due to significant growth in Waaree Energies' export sales, particularly to the United States. Favorable policies and demand dynamics in key export markets have created avenues for revenue growth and margin expansion, this is one of few industries where China’s loss has been India’s gain²

Domestic policies have helped, Government policies, such as the PLI scheme and various initiatives aimed at promoting solar energy adoption, have created a favorable environment for solar module manufacturers in India. These policies support domestic production and create opportunities for companies like Waaree Energies to expand their market presence and improve profitability. Some key ones are³

• Safeguard Duty (India): India imposed a safeguard duty on solar cells and modules imported from China and other Southeast Asian countries from July 2018 to July 2021. Initially set at 25%, the duty was gradually phased down over two years. This measure was intended to protect India's domestic solar manufacturing industry.

• Basic Customs Duty (BCD, India): Beginning April 1, 2022, India introduced a 40% BCD on solar modules and a 25% BCD on solar cells. This policy aims to boost domestic production of solar components and reduce reliance on imports. The BCD impacts the cost of materials for Indian manufacturers like Waaree Energies

Business Model and Strategy vs. Competitors

Waaree Energies differentiates itself from competitors through its extensive franchisee network, a focus on backward integration, and aggressive expansion in both domestic and international markets. These strategies offer several competitive advantages:

• Largest Manufacturer with an Extensive Franchisee Network: Waaree Energies is the largest solar PV module manufacturer in India, with an installed capacity of 12 GW as of June 30, 2023. The company boasts an extensive pan-India retail network, consisting of 284 franchisees as of June 30, 2023. This network enables Waaree Energies to effectively target the rooftop and MSME customer segments, particularly in Tier-1 and Tier-2 cities. By providing end-to-end product and service solutions through their franchisees, Waaree Energies reaches the last mile and increases consumer awareness. This localized approach helps establish strong customer relationships and acts as a strategic entry barrier against competitors and Chinese imports.

• Focus on Backward Integration: Unlike many competitors who rely heavily on imports, Waaree Energies is pursuing a strategy of backward integration into solar cell manufacturing and plans to expand into wafers and ingots. This strategy will enhance operational efficiency, improve supply chain security, and potentially reduce costs, leading to higher profit margins. The company is investing in a fully integrated 6 GW facility for ingots, wafers, solar cells, and PV modules, expected to be operational by Fiscal 2027. This focus on backward integration positions Waaree Energies to offer competitive pricing and maintain quality control.

• Aggressive Expansion: Waaree Energies is pursuing an aggressive expansion strategy in both domestic and international markets. The company is leveraging favorable government policies and incentives to increase its market share in India. For example, the Production Linked Incentive (PLI) scheme supports the manufacture of high-efficiency solar PV modules and reduces import dependence. Waaree Energies was selected as a manufacturer under the PLI scheme Tranche II. Concurrently, Waaree Energies is diversifying its export markets, targeting countries like the United States, Canada, and those in the EU. The company is in the process of establishing a 1.6 GW solar PV module manufacturing facility in the United States to tap into the growing global demand.

Competitive Advantages:

• Scale and Diversification: Waaree Energies’ size and diversified customer base allow it to offer competitive pricing, manage risks, and access a wider range of markets.

• Brand Recognition and Quality: Waaree Energies has strong brand recognition in India and is increasingly recognized globally. The company has received numerous awards and certifications for its products and services, reinforcing its reputation for quality and reliability.

• Experienced Management and Committed Employees: Waaree Energies benefits from an experienced senior management team with a proven track record of execution and a committed employee base.

By combining these advantages, Waaree Energies is strategically positioned to capitalize on the rapid growth of the solar energy industry in India and globally

Key Raw Materials and Dependence:

1. Solar Cells:

   • Solar cells are the most critical component for manufacturing solar modules. While Waaree produces solar modules, it largely imports solar cells from other countries, particularly from China, due to limited domestic production of solar cells in India.

2. Silicon Wafers:

   • Silicon wafers are another essential component used to manufacture solar cells. India has limited capacity to produce silicon wafers, and Waaree, like many other manufacturers, depends on imports from countries like China, Taiwan, and others.

3. EVA Sheets and Backsheets:

   • Ethylene Vinyl Acetate (EVA) sheets and backsheets are used in the encapsulation of solar cells within a solar module. These materials are also often imported as India’s local production is not sufficient to meet demand.

4. Glass and Aluminum Frames:

   • Glass for solar panels and aluminum frames for module structures are essential components. While some of these materials are available domestically, high-quality products may still need to be imported.

5. Polysilicon:

   • Polysilicon is a raw material used in making solar cells and wafers. Globally, most of the polysilicon production happens in countries like China, and India has limited polysilicon production capabilities, making Waaree dependent on imports.

Impact of Raw Material Dependence:

• Global Supply Chain Vulnerabilities: As many of these materials are imported, Waaree is exposed to global supply chain risks such as price fluctuations, availability, tariffs, and geopolitical tensions (especially with China, which is a key supplier of solar cells and polysilicon).

• Currency Fluctuations: The reliance on imported materials also exposes the company to currency exchange rate risks, which can affect profitability if the Indian Rupee weakens against the US Dollar or Chinese Yuan.

Mitigation Efforts:

To reduce this dependence, Waaree Energies and other Indian manufacturers are looking at:

• Expanding domestic manufacturing capacity, supported by the Indian government’s Production-Linked Incentive (PLI) scheme, aimed at boosting local production of solar cells and modules.

• Diversifying supply sources by exploring alternative suppliers from other countries to reduce dependence on a single country (mainly China).

Management is gearing up for growth

• Capacity Expansion: Waaree Energies outlines ambitious capacity expansion plans, aiming to reach a total solar PV module manufacturing capacity of 20.6 GW by Fiscal 2027. This includes:

  • Domestic Expansion: Increasing domestic capacity to 19 GW, including a 6 GW fully integrated facility in Odisha.

  • International Expansion: Establishing a manufacturing presence in the United States with an initial capacity of 1.6 GW, potentially expanding to 5 GW.

• Order Book: As of November 30, 2023, Waaree Energies had a substantial order book of 20.16 GW for solar PV modules, indicating strong demand for its products. This includes domestic, export, and franchisee orders, along with 3.75 GW of orders for its U.S. subsidiary

Conclusion

1. SOLAR industry is global commodity industry with huge supply glut from China

2. India is getting competitive and with support of government is building this industry , it has already become 2nd most cost efficient supplier

3. In short term USA will not be self sufficient on solar front , which means export opportunity to USA would continue

4. Domestic restrictions on Chinese Solar companies will continue in India as well

5. Waaree Energies have high probability of doing well due to the current Geo political set up

6. Valuations are not far fetched at expected market cap of INR 45,000 crore it is likely to trade at 20-22 PE inline with some global peers

If growth continues funds will chase this, I am interested and will be watching their execution

Remember before you go for goose chase

• Competition: Waaree Energies faces competition from domestic and international players in the solar EPC market.

• Government Policies: The company's success is partially dependent on government support and policy continuity.

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I try and end every post with something from my gallery

Paris

1. https://x.com/StocksRoyale1/status/1847626273360924954/photo/1

2. https://www.csis.org/analysis/assessing-united-states-solar-power-play

3. https://www.sebi.gov.in/filings/public-issues/jan-2024/waaree-energies-limited-drhp_80409.html