Why Bernstein initiated coverage with ‘Underperform’ call on Waaree, Premier Energies?

Global brokerage firm Bernstein has initiated coverage on renewable energy stocks Waaree Energies and Premier Energies with an ‘Underperform’ rating, citing limited competitive advantages and valuation concerns.

Bernstein has set a price target of ₹1,902 for Waaree Energies, implying a downside of 20 percent from the stock's previous close. Similarly, the brokerage assigned a target price of ₹693 for Premier Energies, suggesting a potential decline of 24 percent.

The downgrade comes at a time when India is aggressively expanding its solar energy sector, with an annual investment of $20 billion. However, Bernstein remains cautious about the long-term profitability of the industry. The brokerage highlighted that Indian-made solar panels are priced two to three times higher than global benchmarks, making cost competitiveness a key concern.

The brokerage noted that while both companies have made significant strides in India's renewable energy sector, they may struggle to compete against industry giants like Reliance Industries and Adani Enterprises, who have the advantage of backward integration.

Bernstein pointed out that Waaree Energies has the potential to scale up and expand beyond its core module-cell business. However, the firm emphasized that both Waaree and Premier lack the financial muscle to effectively challenge the larger players in the market.

Earnings and Returns Likely to Moderate

According to Bernstein, the supernormal returns enjoyed by these companies may not be sustainable in the long run. The brokerage expects their returns to normalize to mid-teen levels from the current 40 percent. One major risk factor cited is the 30-year performance warranty offered by these companies, despite the fact that solar panels have not been in the market for such a long period.

Additionally, Bernstein highlighted that their financial performance is highly dependent on import regulations in India and the US. With global solar prices fluctuating and competitive intensity increasing, the brokerage believes both stocks are overvalued given their regulatory-driven business models.

Challenges from Oversupply and Market Cyclicality

Bernstein's report also raised concerns about the cyclical nature of the solar industry. The analysts pointed out that global solar manufacturing capacity currently exceeds 1,200 GW, while actual demand stands at around 600 GW. Similar trends are emerging in India, where solar module manufacturing capacity is expected to exceed 70 GW by FY26, against a projected domestic demand of 40 GW.

Moreover, solar cell manufacturing capacity is projected to surge from 21 GW in March 2025 to over 60 GW by FY27, raising concerns about potential oversupply and margin compression. The brokerage noted that many top solar module manufacturers from 15 years ago are now either bankrupt or have exited the industry due to similar challenges.

Historically, Bernstein observed that return on equity (RoE) in the solar sector tends to decline sharply after two years of strong performance. The analysts recommended that investors should consider trimming their holdings once RoEs exceed the mid-teens.

Exports Provide a Short-Term Opportunity, But Face Headwinds

Indian solar exports have surged in recent years, rising from $0.1 billion in FY22 to $2 billion in FY24, driven primarily by US restrictions on Chinese imports. However, Bernstein cautioned that sustaining this growth may prove challenging, given the widening price gap between US and global markets.

Currently, US solar panel prices stand at around 25 cents per watt, while global prices hover near 9 cents per watt. With the US rapidly ramping up domestic production, adding 19 GW to its existing 52 GW manufacturing capacity, Bernstein believes Indian solar manufacturers will struggle to maintain their pricing advantage.

Stock Performance and Valuation Outlook

Shares of Waaree Energies and Premier Energies have delivered strong returns since their listings, with Premier Energies gaining 100 percent from its IPO price of ₹450 per share and Waaree Energies rising nearly 60 percent from its issue price of ₹1,503 per share.

Despite these gains, Bernstein remains skeptical about their long-term investment potential. The brokerage estimates a 21 percent downside for Waaree Energies and a 26 percent downside for Premier Energies, based on an 11-12x FY27 EV/EBITDA multiple. This valuation methodology assigns market caps of approximately $6 billion for Waaree and $4 billion for Premier.

Bernstein’s initiation of coverage with an ‘Underweight’ rating underscores the challenges facing India’s solar manufacturing sector. While Waaree Energies and Premier Energies have been early movers in the industry, their long-term profitability remains uncertain due to competitive pressures, oversupply risks, and declining returns.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.