Sell Waaree, Premier Energies shares! Why Kotak is bearish on solar sector stocks

Kotak Institutional Equities has initiated coverage on solar sector stocks Premier Energies Ltd and Waaree Energies Ltd with 'Sell' ratings. The current valuation of Indian solar manufacturing companies implies that the sector will continue to see exponential growth over the medium term, Kotak said. While the brokerage does see a strong 18 per cent annual growth rate in capacity addition over FY2024-30, sustenance of unit economics at current levels is unlikely, it said. This is due to the increasing competitive intensity in the sector.

Kotak said Premier Energies and Waaree Energies are two credible domestic solar equipment manufacturers. On Premier Energies, it said the company has taken an integrated capital-intensive approach and has an earlier mover advantage due to its operational solar cell capacity.

"In our view, Waaree Energies has strong growth potential, driven by a large domestic module capacity and (2) established presence in the highly lucrative US market. We see Waaree having strong cash flow generation due to higher profits from the US, which we expect to help the company reinvest in domestic backward integration," it said.

Kotak said valuations are at a premium across Indian pure-play solar equipment companies, extrapolating recent good times and, therefore, it initiated coverage on Premier and Waaree Energies with 'Sell' ratings.

The Indian government has implemented multiple trade (basic custom duty) and non-trade barriers (ALMM, DCR, PLI). Similarly, the US has imposed a 50 per cent tariff on Chinese solar imports and implemented the Uyghur Forced Labor Prevention Act in June 2022 (UFLP Act).

"These measures have been key to the Indian solar manufacturing sector’s exponential growth. Sustenance of such policies over the medium term is key to ensuring the scaling up of the industry," Kotak said.

Indian manufacturers have primarily concentrated on module assembly with a sharp focus on the domestic and export markets. Currently, many companies are entering solar cell manufacturing due to the implementation of ALMM List II from FY2027. Kotak expected heightened competitive intensity to start impacting margins from 2028.

The brokearge said Indian solar companies are well-positioned for strong growth in domestic and US markets, aided by trade and non-trade barriers. Over the medium term, it believes that integrated Indian manufacturers (from ingot to module) and companies with local US manufacturing presence would continue to enjoy a competitive advantage over peers, resulting in superior profitability, it said.