KP Energy - A Stock Story

 

INDIAN WIND ENERGY OVERVIEW

According to the CEA, wind and solar energy are the most prevalent renewable energy sources, aside from large hydroelectric power plants (more than 25 MW). At the end of January 2022, wind energy contributed 38% to India’s total renewable energy capacity.

Wind energy capacity increased at a CAGR of 8.4% from FY14 to FY22.

India’s wind energy sector is led by the country’s own Wind Turbine Generators (WTG) manufacturing industry, which has made steady progress over the years. A robust ecosystem, project operation capabilities, and a manufacturing base capable of producing approximately 10,000 MW per year have emerged from the rise of the wind sector. As a result, it achieved a cumulative capacity of around 40 GW in January 2022.

The pandemic, and most recently the second wave in India, had undoubtedly impacted the Indian wind energy industry’s performance. Production of wind towers, among other fabrication work, was de-prioritised as oxygen supply for industrial processes was diverted to medical requirements during this phase. However, since the second half of 2021, manufacturing and installation activities have slowly picked up. As a result, over 1.4 GW of wind energy assets are estimated to have been installed (by GWEC), surpassing the 1.1 GW installations from FY21.

OFFSHORE WIND DEVELOPMENT IN INDIA:

India aims to achieve an installation of 450 gigawatts (GW) of renewable energy capacity by 2030 to decarbonise its energy sector while pursuing its commitment to becoming a net-zero country by 2070. Currently, India’s installed renewable energy capacity is 111.39 GW. According to the latest data, India (2021-22), added 15.5 GW of renewable energy capacity with $14.5 billion (Rs11,338.8 crore) investment pouring into the sector.

30 GW of the committed capacity is to be achieved exclusively through offshore wind capacity, adding mileage to this sector.

India’s 7,600 KM long coastline, which is one of the longest in the world, provides vast potential for offshore wind power asset development in the nation.

Beginning from FY23, offshore wind bids to the tune of 4 GW per year (for a period of three years) are expected to be rolled out off the coast of Tamil Nadu and Gujarat for the sale of power through open access, captive, bi-lateral third-party sale, or merchant sale route.

KP Energy - A major player in the wind energy industry

KP Energy Limited is a leading name in the wind energy industry, providing Balance of Plant (BoP) solutions to its clientele.

Its presence is across the entire wind farm development value chain, right from the conceptualisation stage to the commissioning of a project, and thereafter operation and maintenance of the project.

KP Energy also plays a critical role in coordinating a wide range of activities related to utility-scale wind farm development.

Providing the turnkey balance of plant solutions for the project, including wind site locations, obtaining necessary approvals and development permits, wind data management, etc.

The company is a part of KP group which has an established track record of more than two decades in the infrastructure industry. KP Group is engaged in businesses of utility-scale renewable energy projects, microgrid solar projects, construction projects, fabrication & galvanizing and telecom infrastructure (telecom tower & OFC network) through its group companies. Promoted by Faruk Patel and Ashish A Mithani, KPEL is currently managed by Faruk Patel who possesses more than two decades of experience in various industries and around a decade in the wind energy segment. He is ably supported by his son Affan Patel and a team of experienced professionals, forming a strong second line of management for the execution of projects.

PROJECTS UNDERTAKEN BY KP ENERGY LIMITED:

KP Energy to develop wind projects worth ₹222 Cr for Aditya Birla Group:

KP Energy has bagged an order worth ₹222 crs to develop wind energy projects for Aditya Birla Group with the scheduled commissioning in March 2023.

KP Energy stated that it has aligned with Aditya Birla Group to develop the wind power project at Bhungar and Fulsar Site at Mahuva, Bhavnagar, Gujarat, under the Gujarat hybrid power policy 2018.

KP Energy will be responsible for providing the turnkey balance of plant solutions for the project, including wind site locations, obtaining necessary approvals and development permits, wind data management, windfarm development works, electrical line network and complete power evacuation capacity from pooling substation to GETCO (Gujarat Energy Transmission Corporation).

GADHSISA PROJECT - 300 MW:

In this project, the implementation of the contract provisions, deliverables and pending tasks have been completed and the company has also received the work completion certificate. As per the agreed-upon timelines and conditions, precedents are in progress, and they expect to complete the project in Q1FY23. Moreover, this will help the Company to optimise its liabilities and focus on its growth avenues.

MAHUVA - I PROJECT

KP Energy has commissioned this 15.3 MW project for a captive power consumer at the Mahuva Site well within the timelines. Despite a slight delay in WTG delivery, they were still able to commission this project in the shortest record time of four months due to their preparedness in the Balance of Plant activities which included area development, making access roads, laying foundations and a 33kv internal line network.

KP Energy Developed 251 MW Wind Project in Gujarat for CLP India:

KP Energy Limited had tied up with CLP India, one of the largest foreign investors in the Indian power sector to develop a 250.8 MV wind project in Dwarka in Gujarat.

KP Energy will be responsible for providing the turnkey balance of plant solutions for the project, including wind site locations, obtaining necessary approvals and development permits, wind data management and windfarm development works.

The company will also take responsibility to complete the power evacuation infrastructure comprising 220 kV dedicated lines and a pooling substation at Sidhpur in Dwarka.

BUSINESS MODEL:

A well-balanced combination of three business segments; namely

1. Project Based Revenue Engineering, Procurement, Construction and Commissioning (EPCC):

Their competence in the sector is because of:

• SITE IDENTIFICATION & ACQUISITION

  Their key competence is identifying and acquiring good windy sites for utility-scale wind farms.

• SITE PREPARATION

  They construct access roads and fetch ROWs in tough and challenging situations.

• CONSTRUCTION & ERECTION

  WTG civil foundation, 33kv USS & internal network as well as logistics, installation & erection of WTG.

• POWER EVACUATION

  They undertake EPCC of 33/66 & 33/220 KV wind farm pooling substation and EHV lines.

• PERMITS & APPROVALS

  They obtain all requisite permits & approvals from government authorities for the project execution and its operational life.

2. Operations and Maintenance (O&M):

KPEL undertakes O&M services for the BOP portion of its projects so that its clients don’t have to engage in the same. Energized wind assets are maintained for smooth functioning over their lifecycle.

3. Independent Power Producers (IPP):

KP Energy has its own power generation assets of 8.4 MW (4*2.1 MW) capacity at its own wind farms which is a recurring, annuity revenue stream for the company. It provides stability of cash flows in periods with lower capacity additions.

Growth Strategy of the Company:

Being dependent on one revenue stream is certainly not good. Thus, in this regard, the company is contemplating expanding their supplementary business verticals, O&M and IPP (mentioned in the annual report of 2021-22).

To build on their annuity income, they are also in the midst of evaluating projects to expand their power generation assets. Currently, they operate 8.4 MW of wind generation assets, but in their second phase, they are also looking to add wind-solar hybrid capacity. The plan is to sell the energy generated from this project to the C&I (Commercial and Industrial) customer base through the third-party sale mechanism under Open Access.

They have executed a Business Transfer Agreement with their wholly-owned subsidiary, which will independently operate and maintain its conceived projects. This subsidiary will also tap into different geographies and assets under its OMS umbrella by leveraging its long-standing exposure and position in the market.

Accomplishments of the company:

Gujarat’s number 1 Balance of Plant (BoP) solution provider for Wind Farms

Commissioned a 15.3 MW Wind Power Project for Captive Customers in a record time of 4 months

Emerged as the winner of the India Wind Energy Forum 2021 Awards in the category of Business Excellence Award – “Company of the Year: Developer > 1000 MW”

Greater than 200 MW Cumulative wind energy capacity energised by the Company since inception

Around 300 MW of additional capacity energised with the company’s scope of work completed

Around 514 MW Capacity of Power Evacuation Infrastructure

Around 1081 MW order book and business pipeline for the coming 2.5 years

Around 500 MW of additional power evacuation capacity is under development

RISK & RISK MITIGATION:

REGULATORY RISK:

This industry is a segment of the renewable energy industry. The renewable energy industry is eminently a regulated space, wherein any changes in Government and regulatory policies may impact the company’s performance. Any adverse changes in the wind energy policy or amendments in policies related to power evacuation facilities can significantly impact the operations of the industry and the Company.

BUSINESS RISK:

The company’s revenue streams are derived from capital expenditure in the wind energy space by either Independent Power Producer (IPP) or Captive Power Producers (CPP).

Therefore, depending upon the capital expenditure scenario and cycle, a reduction caused by either of them could adversely affect the financial performance of the company.

The company’s revenues come predominantly from one geographical location of Gujarat which could be a negative in the long run.

PROJECT DEVELOPMENT RISK

The project development process has several risks such as - building permits, land acquisitions and logistics which can lead to delays, cancellations and write-offs of projects. This may have a severe impact on the profitability of the business. In addition, project delays also lead to cost overruns which may impact profitability.

GROUP COMPANIES

1. KPI GREEN ENERGY LIMITED

Solar Energy Industry

KPI Global Infrastructure, the solar energy arm of the KP Group, is a multi-dimensional solar energy company with interests in power generation both as an Independent Power Producer (IPP) and as a service provider to Captive Power Producers (CPP). Operating under its brand name ‘Solarism’, it engages in providing turnkey solutions to its clients.

2. KP BUILDCON PRIVATE LIMITED

Galvanisation and Fabrication

KP Group’s flagship company, KP Buildcon Private Limited, is one of India’s largest Telecom Infrastructure providers since 2009. Its clientele includes the World’s Largest Telecom Towers Company.

3. KP HUMAN DEVELOPMENT FOUNDATION

Non-Profit Organisation

The KP Human Development Foundation is one of the entities of KP Group, established as a Non-Profit organisation in 2015. Over the years, the NPO has embarked on its journey towards facilitating quality education, helping the underprivileged, and improving the quality of healthcare in its communities.

Financials

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The company has seen the ups and downs of the wind energy industry. Till a few years back the main reason wind energy plants were being set up was to get tax and accelerated depreciation benefits.

Even in a severe pandemic year like 2020, the company managed to remain profitable.

With an increased focus on green energy and renewables, KP Energy has shown robust growth in recent quarters.

It has a ROCE of 30% and a debt-to-equity (D/E) of 0.21.

DISCLAIMER:

• This is for EDUCATIONAL purposes only.

• At Intelsense we regularly study interesting businesses. We keep profiling them. The idea is to keep learning and expanding our knowledge base.

• It does NOT construe a BUY or SELL recommendation on the stock.

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Sula Vineyards - A Wine Company

Business Overview

Sula Vineyards Limited is India’s largest wine producer and seller as of March 31, 2022. The company has been a consistent market leader in the Indian wine industry in terms of sales volume and value (on the basis of the total revenue from operations) since 2009 crossing 50% market share by value in the domestic and 100% grapes wine market in 2012. Sula Shiraz Cabernet was India’s largest-selling wine by value in 2021 (Source: Technopak Report). The gross billings of Sula Shiraz Cabernet amounted to ₹918.26 million, ₹475.64 million and ₹319.73million in FY2022 and for the six months period ended September 30, 2021 and September 30, 2022, respectively.

The business model of Sula Vineyards can be categorized into two divisions:

• The Wines Division: Involves the production of wines, import and distribution of wines and spirits etc.
• Wine Tourism: A complement of the former division, wine tourism involves wine tourism venues, resorts and tasting rooms.

The Company distributes wines under a bouquet of popular brands. In addition to the flagship brand “Sula,” popular brands include “RASA,” “Dindori”, “The source,” “Satori”, “Madera” & “Dia” with its flagship brand “Sula” being the “category creator” of wine in India. Presently, the company produces 56 different labels of wine at four owned and two leased production facilities in the states of Karnataka and Maharashtra.

The company’s wines are available at various price points between ₹250 to ₹1,895 per 750 ml bottle in Maharashtra, making them accessible for consumers with different budgets appealing to mass markets as well as having a premium product strategy. In particular, the wines are classified under four broad categories, namely the ‘Elite’ category with 21 labels, followed by the ‘Premium’ category with 13 labels, the ‘Economy’ category with 13 labels and the ‘Popular’ category offering 9 labels.

The products have been segment leaders under each of these four categories in the last six years from FY2017 to FY2022. The company also regularly introduces new products, with seven labels launched in the last five years.

The resorts under the company’s domain are the most visited vineyards in India, with approximately 368,000 people visiting in FY2020. The management launched the first wine-themed music festival in India, “SulaFest”, at its Nashik facility in 2008. “SulaFest” has been widely recognized as the largest wine music festival in India and one of the largest wine music festivals in Asia, based on attendance.

The company is one of the fastest-growing alcohol businesses in India with a CAGR of 13.3% between FY2011 and FY2022. The company emerged even stronger in the aftermath of Covid with its EBITDA moving from 9.68% in 2020 to 15.44% in 2021. The company services close to 8,000 hotels, restaurants and caterers, which makes it the leader in terms of footprint among wine players in India. The company continues to focus on its operating efficiency and tries to introduce wines to a larger portion of the population.

Industry Analysis

Macro Economy: India is the fifth largest economy in the world presently and is soon to be in the top 3. While the global economies are facing a setback, the Indian economy continues to present a favourable growth rate of over 7% which pushes demand and cash flow into the country. The growing disposable income of the population and the median age is one of the lowest compared to the western economies and China. Indian domestic consumption is going to drive the Indian economy in the upcoming years.

Alcoholic beverage Industry: World per capita alcohol consumption in CY 2021 is estimated at 6.6 litres of pure alcohol per year for the world population of 15 years above. The recorded alcohol per capita consumption for CY 2021 is estimated at 4.8 litres. The alcohol industry can be divided into 3 sub-sections: Beer, Spirits and Wine.

Fig: World Per capita recorded alcohol consumption in 2021

India is one of the fastest-growing alcohol markets among the top economies in the world. The recorded per capita consumption of pure alcohol in India has moved from 0.9 litres in 2000 to 3 litres in 2015 at a CAGR of more than 8%. The percentage drinking population of the world is close to 41.7% and is projected to stabilize at around 40%. India’s percentage of drinking population is projected to be close to ~33%.

India, just like any other developing country is a leader in the spirits market but other segments hold promise to grow, as a result of the rise in per capita income, trends and taste shifts and urbanization. India, with its share of low alcoholic beverages at close to 8%, is at a very low base and a prolonged period of correction in favour of wine and beer categories is bound to take place.

The share of wine and beer is projected to increase both through the expansion of the market and by taking a share of the market from spirits. While earlier, family celebrations with alcohol were very infrequent and viewed as taboo, it is more acceptable now in all kinds of social settings, be it birthday parties, get-togethers, official meetings, etc. Beer and wine with low alcoholic content are the preferred choice of drinks in such celebrations and are big opportunities in the Indian alco-beverage industry.

India’s per capita consumption of wine is less than 100ml. The contribution of wine to overall alcohol consumption in India is less than 1% against the world average of close to 13%. Consumption of wine is higher in developed countries which is as high as close to 30% in Europe. A comparison between India and China shows that in China, even though the contribution of wine to overall alcohol consumption is close to only 3 %, China’s per capita consumption of wine is more than 50 times that of India.

Fig: Contribution of alcoholic beverages in 100% alcohol in CY2021 (volume per cent)

Indian wines industry is growing at a much quicker pace at 18.3% by value between FY 2014 to FY 2019 than the IMFL market growing at 12.3%. by value for the same period. There is growing awareness towards the perceived health benefits of wine which makes it more acceptable as compared to spirits. The supply of domestic wines that are reasonably priced and easily available as compared to imported wines has also helped expand the market as leaders in the domestic market have invested in the complete value chain of wines and winemaking. Growth in income, increasing urbanisation, a high share of young population as well as an increasing preference for wines among women are driving higher consumption of wines.

Fig: Key players in the Indian Alcoholic Beverages

Recent trends in the industry include premiumisation where people are ready to pay and consume higher-priced premium products as a result of an increase in per-capita income and urbanisation. The covid period also saw the restructuring of the distribution and delivery networks of various sectors including beverages which has allowed a lot of cost-cutting and has increased the accessibility of wines and other beverages in the country. Reduction in social taboos centred around drinking and increased in-house drinking has opened up a new line of products which are more affordable, easy to produce and store and has developed brand equity.

With the increase in disposable income, especially among women, urban earning women are driving the growth of the wine segment in India. There is a shift in trend from binge drinking towards social drinking, which has also led to a widespread inclusion of wine in parties and gatherings. Wine is becoming a preferred drink for millennials156 who look to socialize after office hours and on weekends.

The Indian Wine Market is projected to reach INR 3,785 cr by FY2025 with a CAGR of 20% from FY2022 to FY2025.

Fig: Indian Wine Industry Market Size by value (in INR cr)

The drivers of growth in the Indian Wine Industry:

• Growing Income levels and rapid urbanization
• Growing awareness about wines
• Wider appeal
• Growing perception of health benefits
• Growth of wine tourism
• Increase in home consumption
• Change in social perception

Business analysis

Strengths:

• High barriers to entry: The wine market in India will remain concentrated, with high barriers to entry due to the nature of the product, as well as trade barriers prevalent in the alcoholic beverage market.
  • Regulations and trade barriers
  • Initial cost of Investment
  • Long gestation period and production cycle before realising any profits demotivate new companies to venture into winemaking.
• Branding:
  • Sula is the largest and one of the oldest producers of wine and associated products in the country
  • Sula is one of the top 10 vineyards followed by social media handles in the entire world.
• Innovative product ideas and a portfolio of offerings
• Caters to all income groups with products in all pricing ranges. It is also to be noted that the product from the company is the market leader in their respective sections
• Largest Wine distribution chain and historic sales record and strategic relationships
• The raw materials required in winemaking are rare to come by or costly to grow and procure. Sula has developed a good relationship with the farmers in the country and has a good standing contracted relationship.
• Leader and pioneer of wine tourism in India.
• Experienced management and the increase in EBIDTA Margins suggest a huge growth potential.

Risks associated with the business:

• Subject to licensing, excise regime, rules and regulations, including the adverse application of corporate and tax laws
• Adverse climate conditions could affect the harvest of grapes
• Supply restrictions or delays could seriously impact the business
• Revenue is dependent on a limited number of customers. The inability to diversify into new relationships or the failure to keep up with the existing customers could seriously impact the business
• The wine market is relatively young in India
• Advertising or promoting alcohol products is discouraged in India and the wine market needs more awareness among the population. Thereby any promotional effort taken by the company will be subject to great risk.
• There are outstanding legal proceedings involving the company, its promotors and its directors
• Against the company – 1 criminal proceeding and 9 tax proceedings
• Capital-intensive business is subject to seasonality in its sales.
• Business nature requires inventory build-up which increases storage risk, insurance and risks
• Two vineyards and a few offices, resorts and guest houses are not owned by the company and are taken on lease

Financials

For detailed financials: https://www.screener.in/company/SULA/consolidated/#top

DISCLAIMER: This is for educational purposes only and is NOT a buy or sell recommendation.

Disclosure: I am a SEBI Registered Research Analyst - Registration Number: INH300006607. I have no position in the stock at the time of publishing this article.