Why renewables? 

In 2000, British Petroleum (BP), a legacy oil company, in the pursuit of exploring ways to live without oil, changed their logo- with the rebranded logo containing the Sun, to show their shift from oil to cleaner energy sources. From there on, it was clear what the future holds.  

The possible contingencies in a probable ecological disaster on the verge of unfolding have led to an enormous interest in alternative energy sources like solar and wind.  

 The stock exchange 

The stock market, in India and abroad, is always reflective of what the future holds for the country and the general sentiment of the market. The potential of solar energy, especially in India is exponential- 300 days of sunshine, which has the potential to produce upwards of 700 GW of energy every year. Currently, India stands in 4th position in the total renewable energy capacity globally, 4th in wind capacity and 5th in solar power capacity. 

Currently, the annual energy demand stands at 1800 TWh and is expected to shoot up to 5500 TWh by the year 2050. Overall, there is a bullish sentiment on green energy stocks- in India, Asia and the western countries.  

 Metrics for high-value investors 

In the past decade, renewable energy stocks have always been a part of portfolios of long-term investors- both foreign and domestic. Metrics like high dividend yield, high ROE and high 5-year returns. The 5-year returns of some of the top stocks range from 500% to 3000%. The price-to-fair value ratio of most of the in-demand stocks is hovering around 1 and even below 1- implying many of the green energy stocks are massively under-priced.  

PE (Price/ Earnings Ratio) is not an appropriate assessment criterion. The PEG (Price/Earnings to Growth) ratio is a much more suitable metric to gauge the true potential of green energy stocks, as it accounts for the growth potential of the stock. The PE ratio of green stocks may indicate they are overvalued, but the growth rate of the stocks justifies the seemingly over-optimistic outlook.  

The only valid criticism would be the volatile nature of green stocks. As renewable energy is an emerging market, volatility is a by-product. Most of the blue-chip and stable stocks are usually of companies operating in a mature market.  

The bigger picture 

The installed renewable energy capacity is all set to increase by 15% CAGR in India in the coming decades. The fervour among the private companies to capitalise on the trends of tomorrow, coupled with the impetus from the government side like the PLI scheme for solar PV manufacturing worth 24000 crores is the reason behind the high ranking and optimistic outlook. 

 The government has formulated an ambitious Decarbonisation Plan for India, with a target of achieving 50% electricity generation by renewables by 2030. Moreover, the sustained capex inflow from domestic and foreign individuals and institutions has made India an attractive alternative energy market.  

 EY, the leading global consulting and accounting firm has ranked 40 countries in terms of attractiveness of renewable energy investment and deployment opportunities. The index is called the RECAI (Renewable Energy Country Attractiveness Index), and India has been ranked third.  

 Due to all the above-mentioned reasons, the green energy sector in India has been showing strong performance, and so are the green energy stocks. And everyone wants a piece of the pie. 

Disclaimer: The views expressed in this article are those of the author/authors and do not necessarily reflect the views of ET Edge Insights, its management, or its members