Bloomberg reports that India's new government plans to bring solar power to every home in the country by the end of 2019. On the surface, this would seem to imply that India's solar market will explode in size in the next 5 years making it one of the biggest markets in the world. However, as the report notes, the outgoing government had a similar target earlier but did not execute per the plan. So, is it really different this time and if so what does this plan mean to the solar industry?
First we start with some background on India and its politics. India's recent elections brought forth a change of power with a mandate that is considered historic. Much of the credit for this victory is given to the incoming Prime Minister Narendra Modi - the man who is widely seen in India as an economic messiah. Mr. Modi's track record with the economy indicates that he is a man with a mission and has a keen appreciation of how to get the economy growing rapidly. The electoral mandate indicates that he has the political power to carry out his plans. It also helps that Indian industry sees solar as the most viable source of power in the Indian context even without governmental subsidies.
No commentary about Indian industry can go far without discussion of corruption. According to Transparency International, India ranks 94th out of the 177 companies in its surveys of Corruption perceptions Index - behind China, Cuba and many African countries. Corruption affects all aspects of Indian economy including solar deployments. It bodes well that Mr. Modi's party seems to have less tolerance for corruption than its predecessors. From a western perspective, our hope is not that Mr. Modi offers a "clean government" but a less corrupt and more efficient government.
Indian solar opportunity comes with other risks too. For example, SunEdison (SUNE) recently walked away from a project in India when it realized that the project dynamics are not what it assumed they would be. In a country with considerable amount of red tape, bureaucratic and political corruption, and shifting political priorities, such occurrences should be expected. Companies should understand the country specific risks and take sufficient care in bidding and contract terms to ensure an investment return consistent with the risk.
India's weak domestic solar manufacturers are another impediment to the solar growth story. India, in the past, has shown tendencies to protect inefficient domestic and public sector industries. Last week, India's Department of Commerce, at the behest of the country's domestic solar industry, announced that it is recommending anti-dumping tariffs for solar products from China, Taiwan, Malaysia and the US. Depending on the vendor and the country of origin, these recommended tariffs range from $0.11 to $0.81 per watt. If adopted, this tariff will not only raise the cost of solar energy but can dramatically slow down the country's solar deployment. Given the potential negative consequences, we find it unlikely that the tariffs, as proposed in the current recommendation, will be adopted. We hope the industry succeeds in its effort to reduce or remove the tariffs and the new government moves quickly and decisively to remove lingering uncertainty.
In spite of all the above challenges, we are cautiously optimistic about the Indian solar market primarily due to the decreasing costs and cost effectiveness of the technology. Assuming India does not erect significant trade barriers and starts to delvers on its solar goal, Indian solar market will grow rapidly and create substantial opportunities across the solar ecosystem. While growth estimates vary, India's 2013 solar deployment rate of 1 GW can easily double or triple in the next 12 to 24 months.
- SunEdison: The company has had its tentacles in India for several years now and has built relationships with financiers, developers, key decision makers, and the government. SunEdison already has a significant project pipeline in India and we expect this pipeline to grow substantially in the coming years. However, due to lack of product differentiation, SunEdison is will see substantial competition from commodity brand name Chinese companies such as JinkoSolar (NYSE:JKS) (see thesis), Trina Solar (NYSE:TSL) (see thesis), ReneSola (NYSE:SOL) (see thesis), Canadian Solar (NASDAQ:CSIQ) (see thesis), JA Solar (NASDAQ:JASO) and other second and third tier Chinese companies. In addition to the competition, a big risk that SunEdison faces is the Indian government's adoption of the tariff recommended by the Department of Commerce. The proposed $0.48 per watt tariff on SunEdison far exceeds that of the proposed $0.11 tariff on First Solar and can make SunEdison's projects uneconomical or vulnerable to competition from First Solar and India's domestic solar panel makers.
- First Solar: Similar to SunEdison, First Solar has long standing relationships in India and a backlog/pipeline of several hundred MW. First Solar has one major advantage in the Indian market that SunEdison does not have - its technology. First Solar's Cadmium Telluride (CdTe) technology is a proven high performer in India's hot and humid weather conditions. At any given rated wattage, its panels outperform competitors' silicon based panel technologies by a significant margin. While First Solar does not seem to be as aggressive as SunEdison in Indian project business, we expect First Solar to do well in the module business due to its technological advantage. And, if India goes ahead with the recommended tariffs from the Department of Commerce, First Solar will easily outperform SunEdison and Chinese vendors in both module and project businesses.
We expect several Chinese solar companies such as JinkoSolar to do well in India but these companies fall short of their US counterparts in terms of investments and relationships and are more susceptible to higher and punitive tariffs.
Our sentiment on First Solar: Buy
Our sentiment on SunEdison: Avoid (due to disclosure issues related to the company's poorly chosen retained value metric)
Disclosure: I am long FSLR, JKS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.