Niveshaay’s Green Energy Smallcase journey since inception

April 30, 2023 | Deep Dives

Green Energy Smallcase Performance – Niveshaay launched the Green Energy Smallcase in March 2021, and since then, this portfolio has delivered 3x return. The portfolio primarily consists of three themes: Renewable Energy, Electric Mobility, and Recycling. These themes have performed exceptionally well in recent years, driven by the ambitious goal of achieving net-zero carbon emissions worldwide.

GREEN ENERGY BEGINNING

The portfolios were deep red in 2020, but our hustle to make them green eventually led us to uncover the "Green Energy" portfolio. We hopped around the city to meet a few entrepreneurs across several industries, and our visit to Navitas Solar, a leading solar module manufacturer, caught our attention regarding the changing dynamics of the solar industry. The discussions progressed, and it was quite shocking yet equally attractive to see how solar glass prices were continuously skyrocketing.

This led us to the sweet discovery of "Borosil Renewables." The excitement didn't make us forget our roots, and we began our research process for the same. We studied global markets, particularly China, which leads the solar market. We found that the Clean Energy Index and Solar ETF were consistently outperforming the benchmarks. The commitment of capital towards cleaner energy and ESG norms was significant.

All major companies in the sector SunRun Inc (US:RUN), Xinyi Solar (HK:968), Flat Glass (HK:6865), Longi (CN:601012), Canadian Solar (CSIQ) and Jinko Solar (JKS) has given a return of 150-500% in last 1 year (Dec 19 – Dec 20).

While it was conclusively evident that “Borosil Renewables” is a story in making but the bigger picture was the renewable energy sector. Looking at all these trends, we really wanted to put our hands deep into this but faced a lot of difficulty in finding appropriate companies.

After identifying Borosil Renewables and observing the global green energy trend, we began exploring how to capitalize on the green energy theme in India. A few data points have supported our Green Energy portfolio thesis. Spending on renewable energy was on the verge of becoming the largest area for spending in the energy sector.

After examining various data and recognizing the government's focus on this sector, we made the decision to launch the Green Energy portfolio.

OUR STRATEGY FOR GREEN ENERGY PORTFOLIO

Selecting companies in the Indian market for the Green Energy sector posed significant challenges due to the absence of profitable and strong players. Rather than directly investing in EV manufacturers, battery manufacturers, and renewable energy generation companies, we opted to invest in indirect beneficiaries of the green energy theme.

We placed our focus on companies that demonstrated strong cash flow generation and maintained a debt-free status. This strategy has proven to be highly effective, resulting in a remarkable threefold return since our launch in March 2021 over the past two years. Our approach was simple yet effective: to avoid significant losses and ensure a better margin of safety by investing in companies with robust cash flow generation and reasonable valuations.

OUR TOP PERFORMERS IN LAST 2 YEARS

Shivalik Bimetal Control Limited

The company is a prominent supplier of critical components for Electric Vehicles, Energy Storage Devices, Switchgear, Electrical Appliances, and Smart Meters. It specializes in manufacturing shunt resistors, which are electrical components responsible for regulating the flow of electrical current within a circuit. These resistors are utilized for measuring and sensing current flow, as well as providing a low-resistance path for electric current.

Shunt resistors find applications in Electric Vehicles, Energy Storage, Smart Meters, and Power Modules. The manufacturing of these resistors necessitates expertise in specialized welding techniques. The company serves a highly specialized market segment.

Smart meters contribute to 45% of the overall shunt resistor business, while battery management systems (BMS) make up the remaining 55%.

Shivalik Bimetal Controls is classified as a tier 3 player in the EV supply chain. The company has directly benefited from the global trend towards electric vehicles, as evident from its revenue growth.

2. KPIT Technologies Limited

The company generates revenue primarily from the automotive sector. It actively participates in emerging technologies, including autonomous driving, vehicle connectivity, and electric vehicles. The company has established strong relationships with top global automotive original equipment manufacturers (OEMs).

Its continuous high growth in automobile engineering is supported by the increased research and development (R&D) expenditures from both the OEMs and tier-1 suppliers, focusing on emerging technologies such as autonomous vehicles and electric vehicles.

Indeed, KPIT Technologies has a diverse customer base that includes all major global original equipment manufacturers (OEMs) in the automotive industry. This wide range of clients ensures that the company is not reliant on the success of any single player in the electric vehicle (EV) industry. Regardless of which player emerges as the leader in the EV race, KPIT has significant potential for revenue growth due to its strong customer relationships and broad market presence.

According to McKinsey, the global automotive software and electronics market is anticipated to reach $462 billion by 2030, reflecting a compound annual growth rate (CAGR) of 5.5 percent from 2019 to 2030. In contrast, the overall automotive market for passenger cars and light commercial vehicles (LCVs) is projected to experience a more modest compound annual growth rate of 1 percent during the same period.

The impact of these trends is clearly evident in the recent growth of KPIT Technologies.

3. Apar Industries Limited

APAR Industries is a prominent global manufacturer specializing in conductors, cables, specialty oils, lubricants, and polymers. It stands among the top three producers worldwide for conductors and specialty oils, and it holds the position of the largest cables manufacturer for renewables in India. The company's three divisions—cables, conductors, and oil—are all benefiting from the push towards renewable energies.

The cables business has demonstrated robust growth in the export market and is projected to sustain a growth rate of 25-30% over the next five years. This growth has the potential to drive the share of cables to exceed 50% within the next five to seven years, resulting in an overall margin-enhancing impact on the business.

The company's favourable valuations, coupled with the increased global focus on renewable energy infrastructure, have fueled a strong momentum in its business growth. As a result, the company has experienced a re-rating of its valuations.

4. Sanghvi Movers Limited

The company is the largest crane rental company in India and holds the 6th position globally in terms of size. It boasts a fleet of 389 cranes with lifting capacities ranging from 40 tons to 800 tons. Additionally, the company owns and operates 17 depots strategically located throughout the country.

The Wind Mill and Power sectors are the primary industries for the company, and it specializes in owning a significant number of high-tonnage cranes. In the windmill sector, where installations are carried out at greater heights, larger tonnage cranes are essential to meet the requirements.

The average blended yield has increased to 2.15% in Q3 FY23, driven by high demand.

The company's attractive valuations, coupled with its strong earnings growth momentum and visibility of future growth, have led to a re-rating of the company.

OUR MISTAKES

Sona BLW Precision Engineering specializes in manufacturing precision forged bevel gears, differential assemblies, starter motors, and traction motors for automotive applications. The company has made substantial strides in the Battery Electric Vehicle (BEV) segment, increasing its presence from 1% in FY19 to 25% in FY22. Around 52% of its revenue is derived from gears and sub-assemblies that can be utilized in both internal combustion engines and EVs.

While the company experienced growth, a slower-than-expected growth rate and higher valuations contributed to the correction of its share price from its peak level. We exited the company with a profit; however, there was still a significant correction from its peak due to the higher valuation.

A similar situation occurred with C.E. Info Systems Ltd, where we entered at higher valuations, and slower growth than expected resulted in some correction. We exited this position with a loss of 17%.

TAPPING SOME UNLISTED OPPORTUNITIES

We constantly dwelled our efforts into finding companies which are benefitting through the transition happening across the green energy sector. To understand the competition and industry dynamics better, we even researched about private companies and their growth plans going forward.

We came across Waaree Energies Ltd. during our journey of managing Green Energy Smallcase. With a current capacity of 11 GW, it is India’s largest solar PV module manufacturing company. Considering it had only 2GW capacity in 2021 i.e., 2 years back, it has exponentially increased its capacity because of rising demand and healthy order book.

We participated in the fund raise of when Waaree Energies Ltd. did a private round of funding. It has turned out to be significant outperformer with its valuation more than double.

The company is now vertical integrating into cell manufacturing which will further expand operating margins of the business by 5%. It is also expected to further increase the capacity to 16 GW by 2025.

GOING FORWARD

Our journey with the Green Energy portfolio over the past two years has been fantastic. Throughout this period, we have conducted extensive research on the industry and continue to believe that there is immense potential in this sector. The green energy industry is still in its early stages of development, and we foresee significant opportunities in the next decade. We are optimistic about the future and excited to explore the many prospects that lie ahead in the field of green energy.

Disclaimer:

Niveshaay is a SEBI Registered (SEBI Registration No. INA000017541) Investment Advisory Firm. Our research expresses our opinions which are based on available public information, field research, inferences and deductions through our due diligence and analytical process. To the best of our ability and belief, all information contained here is accurate and reliable and has been obtained from public sources, which we believe to be accurate and reliable. We make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use. This report does not represent investment advice or a recommendation or a solicitation to buy any securities.

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