After up to 595% rally in 1 year, wind energy stocks hit by policy overhang

Shares of companies involved in wind energy generation declined up to 5 per cent amid reports that the government may bring back reverse auctions in the wind energy sector

Shares of companies involved in wind energy generation declined up to 5 per cent on the BSE on Monday amid reports that the government may bring back reverse auctions for the sector.

Shares of Inox Wind, and KP Energy ended at 5-per cent lower circuits, while those of Suzlon closed 3 per cent weak. It, too, slipped 5 per cent intraday. Shares of Orient Green Power, meanwhile, lost 3.4 per cent after falling over 4 per cent intraday.

By comparison, the benchmark S&P BSE Sensex edged 66 points (0.09 per cent) higher at 73,872.

According to reports the Ministry of New and Renewable Energy (MNRE) is weighing reinstating the 'reverse auctions'; limit the size to 600 MW for plain vanilla wind tenders; and mandated issue of bids on pan-India basis rather than State-specific for auctioning of wind power capacity by Renewable Energy Implementing Agencies (REIA)- SECI, NTPC, NHPC and SJVN to the developers and State agencies.

While the move is likely to have insignificant impact, frequent policy flip-flops may act as an overhang on the stock in the near-term, analysts said.

The market size of the sector, they said, is significantly more than manufacturing capacity and execution capability of the industry. Further, driven by years of concerted efforts, the industry is on the cusp of significant expansion in capacity additions.

"However, it faces a threat from consistent policy flip-flops. Policy changes, such as the waiver of inter-state transmission system (ISTS) charges for renewable energy projects beginning in 2025, could further disrupt the sector," JM Financial said in a note.

Reverse auction was introduced in 2017 to discover competitive tariff. While the first reverse e-auction was oversubscribed 2.7 times, resulting in a tariff of Rs 3.46/kWh, tariffs kept decreasing. They went lower than Rs 3/kWh at one point, compared to feed-in-tariffs.

This, coupled with delay in signing of power purchase agreements (PPAs), delayed payments, and execution challenges constrained the capacity addition. The 'Reverse bidding' was, thus, changed to '2-parts closed bidding' in January 2023, reviving the industry.

On the bourses, shares of Inox Wind have zoomed 411 per cent over the past one year, while those of Suzlon have leaped 401 per cent. Meanwhile, shares of KP Energy, and Orient Green Energy have 595 per cent, and 174 per cent, respectively.

By comparison, the benchmark index has moved up 23.5 per cent during the period.

Bringing back reverse auctions could, thus, leave companies vulnerable to excess inventory woes, experts added.

That said, given the large market size, change in bid's construct to Round-the-clock (RTC)/ Firm and Dispatchable Renewable Energy (FDRE) and increasing share of Commercial & Industrial (C&I) players, wind energy firms have long-term growth tailwinds.

"Most of the bids in recent months are for supply of RTC/FDRE power (solar+wind+storage), which are decided through reverse auction. Moreover, recent bids are under-subscribed leaving opportunities for all qualified industry players," the brokerage said.

JM Financial maintains 'Buy' (target: Rs 54) Suzlon underpinned by strengthening order book, enhanced financial health, and a robust bidding pipeline.

In the October-December quarter, Suzlon Energy reported a consolidated net profit of Rs 203 crore, up 159.11 per cent year-on-year (Y-o-Y) from Rs 78.36 crore in the corresponding period last fiscal.

Inox Wind, on the other hand, turned profitable during the quarter with PAT of Rs 4.7 crore as against net loss of Rs 26.8 crore in Q2FY24 and Rs 290 crore in Q3FY23.

"Execution has picked up as expected and an increase in the proportion of 3MW WTGs would drive profitability after years of slowdown. The company is likely to surpass its previous guidance of 600 MW execution in FY25 by a significant margin. We have revised our FY25/FY26 PAT estimates higher by 25 per cent/29 per cent," said analysts at Systematix.

Inox Wind, according to analysts, maintains a competitive advantage in terms of its existing common infrastructure and land bank, which is built and replenished on an ongoing basis. Systematix has a 'Buy' rating on the stock and a target of Rs 724.


Facing headwinds