Renewable Stocks Plunge: Are Companies Now Fairly Valued?

Renewable energy stocks have experienced a strong rally in the market over the past two years, driven by new order wins, robust execution, and the overall euphoria surrounding the theme. While this surge delivered impressive returns for investors, it also led to a significant rise in company valuations.

However, key stocks in this sector have seen a sharp correction over the past one to three months, falling more than key market indices.

Let's take a closer look at the valuation of these stocks now:

Renewable energy project developers like Tata Power Ltd., Torrent Power Ltd., JSW Energy Ltd., NTPC Ltd. and more have fallen 15% to 40% over the past three months.

Earlier, valuations of these companies were a key concern. However, post the recent correction, the 12-month forward EV/Ebitda valuations have shifted significantly from the start of FY25, as per Bloomberg data.

Stocks like Tata Power, JSW Energy, NTPC and NHPC Ltd. are currently trading close to their five-year historical valuations. Stocks like NLC India, Adani Green Energy Ltd. and SJVN Ltd. are trading below historical valuations.

Demand is expected to be strong. Given the recent correction, stocks like JSW Energy, Tata Power, NGPC, CESC Ltd., NLC Ltd., and SJVN Ltd. currently look good from a risk-reward perspective, according to Rupesh Sankhe, senior power analyst of Elara Capital.

Wind turbine manufacturers Inox Wind and Suzlon Energy Ltd. have seen sharp corrections of 30% and 23%, respectively, over the past three months.

According to Bloomberg, Inox Wind Ltd.’s 12-month forward EV/Ebitda ratio stands at 38.5, which is higher than its historical average. Meanwhile, Suzlon Energy's valuations remain lower than its historical average at 34.

While the majority of the analysts tracking these counters have bullish views on the companies, with no 'sell' call assigned to either, it is important to note that some analysts do remain cautious about the wind energy sector.

In October, Nikhil Nagania, director at Bernstein, flagged significant downside risks to the wind energy narrative. He pointed out the seasonal nature of wind power and described project execution as a "nightmare," underscoring its limitations in addressing India's energy needs.

While some renewable developers remain favourable to analysts, the outlook for newly listed solar module and cell makers, Waaree Energies Ltd. and Premier Energies Ltd., appears less optimistic.

After strong debuts and initial gains, both stocks have corrected by 11–18% in the past month. Despite the drop, valuations remain high, according to Sankhe.

Pankaj Kumar, vice president of fundamental research at Kotak Securities, shares a similar view. While Kotak is optimistic about long-term industry demand, it has a 'sell' rating on both stocks due to elevated valuations. Kumar notes that current multiples already price in robust medium-term growth driven by capacity expansions. However, rising competition could pressure unit economics over time, potentially impacting margins for Waaree Energies and Premier Energies from 2028 onward.

Based on the average consensus on 12-month target prices as per Bloomberg data, Adani Green Energy, Inox Wind, NTPC, Suzlon Energy and Tata Power have the highest upside potential from current prices levels.