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BE Corporation
Awaiting the sunrise
Moser Baer’s bet on solar power gaining traction in the long term is not exactly off the mark. But the company has to tackle environmental challenges as well as its weak financial position
Issue Date - 01/03/2012
It can never be an easy decision to invest Rs.8 billion in a business, which you have to start from scratch. Seven years back in October, that decision was taken by the board of Moser Baer led by Chairman Deepak Puri. And their bet, which was on the business of solar energy, got off the ground largely due to the conviction of Ratul Puri, son of Deepak Puri & Executive Director, Moser Baer.

Actually, being on the edge with business diversifications has been more of a norm for Moser Baer. The company started with floppy discs and had to rejig is portfolio every few years as storage technology continued to advance at a menacing pace While Moser Baer did script an excellent ‘blue ocean’ story with its CDs and DVDs (where it brought down price points drastically, sold volumes on an FMCG model & also acquired a huge portfolio of titles), the company was sorely missing that one long term growth business. Ratul is extremely buoyant about the prospects of the solar energy space and the synergy between solar panel and CD/DVD manufacturing.

However, Moser Baer is still a long way off from the fruits of its labour and enterprise. Look at its net losses in the current financial year – Rs.959.1 million for the quarter ending December 2011, Rs.620.6 million for the quarter ending September 2011 and Rs.922.1 million for the quarter ending June 2011. The December quarter is the seventh consecutive quarter where the company has posted losses. The problems are rampant across storage media, which contributes 60.66% of its revenue and photovoltaic cells, which accounts for 32.6% of its revenues (external revenues for FY 2010-11). Global demand for solar energy hasn’t been according to the company’s expectations, and rising input costs over the recent quarters have only made matters worse. When you look at the nine months ended December 2011, the company still faces a huge interest burden of Rs.1.85 billion, which is actually a growth of 27.84% yoy.

However, all this short term risk will be remembered as astute business strategy if the company’s solar bet pays off. Serious questions were raised on the viability of solar panels and solar energy when a large part of the manufacturing done around the last 7-8 years ended up as excess capacity in the midst of the global economic downturn (something similar happened with Suzlon Energy, which suffered post the expensive acquisition of REpower). But the sector also got a boost in sentiment last year when the Fukushima nuclear power plant disaster led to a rise in sentiment in favour of solar.

However, the question that is relevant to Moser Baer’s fortunes is that beyond these short term volatile cycles, what is the future of solar energy in India and globally? The most critical hurdle that solar has to cross is to achieve grid parity with other conventional means of electricity generation. Different calculations are being made in different countries regarding the time line for the same. It depends on an array of factors, right from electricity rates in markets, potential of solar energy in particular areas and also the competence of players. In India, the government is projecting a grid parity by 2017 and targets generation of 20,000 MW by 2022. At present, given the high prices and low efficiency rates of conversion for solar cells (10-20%), their introduction into the grid raises electricity prices by 5-6 times. Under the reverse auctioning done by the National Solar Mission, price discovery for levelized tariff was Rs.10.49-12.24 /kWh for solar-thermal and Rs.10.95-12.76/kWh for solar PV projects (KPMG report). This compares unfavourably to Rs.4/kWh for conventional energy sources on a levelised tariff basis after accounting for inter-regional transmission charges and losses. KPMG predicts grid parity in India by 2017-18 in the aggressive case and 2019-20 in the base case.

Another critical constraint is the role of the government in building a robust manufacturing base in India, which has been quite enabling in developed economies in comparison. Germany is the benchmark case in point, which has installations of around 17000 MW and has grabbed 40% of the global solar energy market. It has introduced very remarkable initiatives for this sector, including interest rate rebate, loan guarantees of up to 80%, labour grants, training assistance and R&D support. An Asian Development Bank (ADB) report comments on the challenges for Asian economies including India, “Weak institutional capacity of government is viewed as risky by investors hesitant to commit to projects that rely exclusively on support mechanisms that are not well developed, have shorter durations or are likely to change over time.” The key missing elements are in the areas of strategic capacity-building and training activities, and parallel R&D programs. Kameswara Rao, ED – Government & Infrastructure, PricewaterhouseCoopers, comments to B&E on the lack of policy support in India, “The current approach of setting mandatory feed-in tariffs and tariff-based competitive bidding has created a market for solar power generation at more affordable basis. But there are serious doubts on conversion of these bids into live projects.”

Meanwhile, companies like Moser Baer have to be prepared for the competition that comes in as the tides turn favourable for the sector, particularly from Chinese and European players. Last year, trade information revealed that the Chinese were bringing in solar panels that were 20-30% cheaper than Indian companies. Indian industry leaders are seriously concerned and looking for more incentives including excise exemptions from the government. Moser Baer’s ability to leverage its R&D and improve its competitiveness in this virgin market will be key to its long term fortunes. Ratul has made an expensive bet, and investors have shown faith in Moser Baer’s abilities so far. But the current execution challenges and environment factors indicate that the business is going to seriously test Moser Baer’s capabilities and stretch its resources in the long run. And in the interim, it has to still get its balance sheet in order first.


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