Solar Market Will Eventually Be A Place For Big Players, Says Bernstein

Bernstein analysts have said that the solar market will eventually be a place for the big players. The investment bank has initiated coverage on Waaree Energies Ltd. and Premier Energies Ltd. with an 'underperform' rating.

According to analysts at Bernstein, the solar equipment makers are at the peak of their return cycle and set to underperform as earnings growth moderate and larger peers add competitive pressure.

The target price for Waaree Energies has been set at Rs 1,902, a potential downside of 25% over the previous close. For Premier Energies, the share price target is Rs 693, a downside of 31%. Both companies went public last year.

"With retail solar panel prices in India at two to three times of global levels, low barriers to entry, and big competitors on the horizon, we are close to cyclical peak returns in the solar PV space," Bernstein analysts Nikhil Nigania and Aman Jain said in a note.

They see earnings growth moderate for the two companies after FY27 once their capacity comes online and supply glut hits.

Insights from the Chinese market also suggest that high return on equity (ROE) levels are often unsustainable, typically not lasting beyond two years. This implies a contrarian investment strategy: buying when ROEs are low and selling or trimming positions when ROEs exceed the teens, the analysts said.

Competition

Analysts said the solar market will eventually be a place for the big players, with backward integration companies like Reliance Industries Ltd. and Adani Enterprises Ltd. to lead. The two conglomerates have pledged thousands of crores in investment in solar power generation and equipment production.

"While Waaree does show the potential to join this league and is rightly exploring avenues beyond the module-cell, we think the key competitors have much bigger wallets to compete, against whom Waaree and Premier don't have a big right to win. We see their returns normalize to teens from 40%+," the note said.

Waaree Vs Premier

Bernstein favours Waaree Energies over Premier Energies due to its potential for backward integration into ingot-wafer production, which could provide a competitive edge. Ingots and wafers are used to make solar cells and modules.

Additionally, Waaree's substantial international order book offers better visibility on realisation spreads, an advantage not seen with Premier, making Waaree a more attractive choice.

Shares of Waaree Energies and Premier Energies closed 1.03% and 2.98% lower, respectively, on Tuesday, compared to a 1.5% decline in the benchmark Nifty 50.