Analysis: Ujaas Energy Limited

Modified on July 1, 2018

This article provides in depth fundamental analysis of Ujaas Energy Ltd, which owns, erects & sells solar power plants, provides operations & maintenance services to them and manufacturers transformers.

Ujaas Energy Ltd

Q: Hi Vijay, I must say, your website is a great guide for small investors like me. I have prepared Ujaas Energy Ltd research report. Of course, it is not going to be up to the mark, but I have tried my best.

I would like to know your views on buying Ujaas Energy Ltd for long term. Thank You for all your support!

Regards

Sudheer Verma.

Company Background

Ujaas Energy Ltd is an India-based company engaged in the manufacture and sale of solar power. The Company operates business in three segments, which include e-Transformer, Solar Power Plant Operation and Manufacturing & Sale of Solar Power Systems.

Its projects include Ujaas Park, a product that provides a complete turnkey solution for investors who want to become a solar power producer under Preferential Tariff Mechanism. Ujaas Home is the perfect solution for producing clean green energy for house.

Ujaas Energy Ltd has formed two foreign subsidiaries named Ujaas Energy HK Ltd at Hongkong and Eizooba Energy One Ltd at Uganda. Ujaas TM My Site caters to the need of various commercial organizations, who wish to install solar power generating systems on their own premises or sites of their choice.

Income Statement Analysis

Ujaas Energy Ltd Equity Analysis Research Report

  • Cost of goods sold (COGS) has decreased from its worst 91% in 2012 to 79% in 2014 which is improving gross margin
  • Sales & General Administration (SGA) expenses when compared to revenue also decreased to 2% in 2014 from its worst 8% in 2011
  • Increase in revenue and decrease in COGS for 2013 and 2014 has helped company to record good operating margin in both years
  • Net profit in 2014 came down to 7% from 11% in 2013, mainly due to 2% increase in COGS and 1% decrease in other income
  • Ujaas Energy Ltd’s revenue has grown significantly in 2013 and 2014 to 614% and 116% respectively when compared to previous year

Sales to Inventory Trend

Ujaas Energy Ltd Equity Analysis Research Report

Decrease in inventory to sales from its worst 32% in 2012 to 7%, which indicates following:

  • Investment in inventory shrinking in relation to sales
  • Sales increasing
  • Efficiency of management

Declaration of dividend in 2013 and 2014 at 9.26% and 8.88% is a good sign for investing in company. However, as long as company is growing with a great rate , investor should not worry on the payout ratio

Quarterly Results

Ujaas Energy Ltd Equity Analysis Research Report

  • Net profit declined 81.82% to INR 0.58 crore in the quarter ended December 2014 as against INR 3.19 crore during the previous quarter ended December 2013.
  • Sales declined 80.02% to INR 7.03 crore in the quarter ended December 2014 as against INR 35.19 crore during previous quarter ended December 2013.
  • Net profit declined 83.39% to INR 1.88 crore in the quarter ended Sept 2014 as against INR 11.32 crore during the previous quarter ended Sept 2013.
  • Sales declined 86.94% to INR 28.80 crore in the quarter ended September 2014 as against INR 220.44 crore during the previous quarter ended September 2013.
  • Management is of the view that, weak enforcement of renewable purchase obligation and fear of anti-dumping duty is the main reason for slump in revenue in FY2015.

Balance Sheet Analysis

Ujaas Energy Ltd Equity Analysis Research Report

  • Networth of the company in relation to total liabilities is decreasing due to increase in debt.
  • 376% increase in net block of INR 150 cr as compared to 2013 due to the following
    • 37% decrease in working capital (efficient management) of INR 54 cr invested in company plant and equipment
    • 30% increase in retained earnings of INR 33 cr invested in plant and equipment
    • 77% increase in debt of INR 52 cr invested in plant and equipment

Key Ratios and Valuation

Ujaas Energy Ltd Equity Analysis Research Report

Ujaas Energy Ltd Equity Analysis Research Report

  • Increasing trend of asset turnover ratio is a positive sign
  • In 2014, INR 2.19 revenue generated for every INR 1 invested in assets
  • 49% increase in asset turnover ratio when compared to previous year (i.e 1.47 in 2013 has increased to 2.19 in 2014)

Ujaas Energy Ltd Equity Analysis Research Report

  • Return on capital employed (ROCE) is on increasing trend
  • ROCE is very impressive when compared to borrowing cost. It is very positive sign for an investor to invest
  • Return on Assets (RoA) is on lower side though it is on increasing trend from 2013
  • Ujaas Energy Ltd’s debt to equity ratio is on uptrend but no need to worry as it is still less than one.

Ujaas Energy Ltd Equity Analysis Research Report

  • 64% decrease in working capital days in 2014 (82 days) when compared to 2013 (230 days).
  • Improvement of 149 days in relation to last year, to convert its working capital to revenue is positive sign for investors.
  • Effective inventory management and reduction in working capital days increases operating efficiency

Peer Group Comparison

Ujaas Energy Ltd Equity Analysis Research Report

  • Ujaas Energy Ltd’s OPM % and NPM% is the best when compared to its peer group.
  • ROCE is also very impresive when compared to peer group

Shareholding

Ujaas Energy Ltd Equity Analysis Research Report

  • Promoters holding 70% of the shares shows that they have the confidence in the company
  • No record of pledging of shares

Compounded Annual Sales, Profits and ROE growth

Ujaas Energy Ltd Equity Analysis Research Report

  • Compounded sales and profit growth for last 3 and 5 years is very impressive

Management Analysis

  • From the operating history, one cannot derive too much information on management bandwidth by looking at past behavior. However, management has executed well by growing at very high rates in last 2 years while maintaining the asset book quality.
  • Dividend declaration in last 2 years is positive, though, it is not on higher side. However, when a company is growing at high rate, an investor should not worry about the dividend yield rate.

Long Term View

  • Central Govt has clarified that solar industry cannot afford anti-dumping duty at this moment and the enforcement of Renewable Purchase Obligation is a positive sign for solar industry.
  • Govt’s commitment of 100 GW of green energy by 2022 is a great boost for all the companies in solar industry. High ROCE and low debt when compared to peers makes Ujaas Energy Ltd a strong case for buy.
  • Ujaas Energy Ltd is expected to grow at 25% to 35% growth rate. While it is difficult to predict the future share price, but my target for next one year is 2.3 to 2.5 per share from its current market price of INR 18.
  • Considering potential opportunity in this industry, Ujaas Energy Ltd could well be a potential multibagger if an investor holds this stock for long term.

Risks To The Business

  • If Govt does not hold on to its targets, which is looking unlikely at this moment.
  • Govt regulations on pricing

Ujaas Energy Ltd Equity Analysis Research Report

Author’s Response

Hi Sudheer,

Thanks for your feedback & appreciation! I am happy that you found the articles useful!

I appreciate the hard work you have put to prepare this report on Ujaas Energy Ltd. The report is very useful for any investor who wishes to analyse Ujaas Energy Ltd as a potential investment. I thank you on behalf of all the readers of www.drvijaymalik.com for the time & effort put by you.

Let us analyse the past financial performance of Ujaas Energy Ltd:

 

Financial Analysis of Ujaas Energy Ltd:

Ujaas Energy Ltd Equity Analysis Research Report

Ujaas Energy Ltd had been growing its sales at a moderate pace of 10-15% year on year until FY2012 when its business suddenly spiked and started growing by leaps & bounds. In FY2013, its sales became almost 7 times to INR 234 cr. from INR 34 cr. in FY2012. In FY2014, it again more than doubled its sales to INR 526 cr. It has been widely known in investor community that any growth more than 30-35% is highly unstable and is usually due to factors outside the control of the company. In FY2015, the sales of Ujaas Energy Ltd declined almost 80% to INR 111 cr.

As per the communication from the management to the credit rating agency India Ratings (Fitch):

According to the management, Ujaas has consciously slowed down the process of setting up of power parks expecting an adverse change in government’s policy for solar power cells”.

India Ratings has put the credit rating of Ujaas Energy Ltd under negative outlook because of significant business slowdown, as it has the potential to affect the debt serviceability of the company.

Now, whether the management has consciously slowed down the business or the external factors have stopped playing the role to the extent they did in FY2012-14, is to be analysed. In your report, you have mentioned that Ujaas Energy Ltd has been impacted by dumping by foreign manufacturers and weak enforcement of Renewable Purchase Obligations, which is also evident in the management interview shared by you.

It seems that Ujaas Energy Ltd is heavily dependent upon the regulatory environment for its business. It did well during industry wide tailwinds in FY2012-14 and crash-landed when it faced headwinds in FY2015.

A look at the profitability trend of Ujaas Energy Ltd would indicate that both the operating profitability margin (OPM) and net profit margin (NPM) have been fluctuating widely during last 10 years (FY2006-15). Operating profit margins (OPM) have been varying from 1-38% and net profit margins (NPM) have been fluctuating from 1-11% over the years.

Such fluctuating margins are characteristic of companies, which have low bargaining power with their customers. In such businesses, companies find it difficult to pass on the increase in raw material costs to their customers quickly and thus take a hit on their profitability margins.

Read: How to do Financial Analysis of a Company

Over the years, the tax payout ratio of Ujaas Energy Ltd has been fluctuating from 26% to 56%. An investor should study it in detail to understand the reasons for such wide variation in its tax payout ratios.

 

Operating Efficiency Analysis of Ujaas Energy Ltd:

Operating efficiency parameters of Ujaas Energy Ltd reflect that almost all the parameters have been fluctuating widely over the years. Net fixed assets turnover has been varying from 38 to 1.4, then to 6.1 and again to 4.6 over the years. Similarly, inventory turnover ratio of Ujaas Energy Ltd has been varying from 8.0 to 4.3 to 17.6. Such wide fluctuation in the operating parameters indicate that the business model of the company is yet to get firm establishment and it is heavily influenced by external factors beyond its control.

Read: 5 Simple Steps to Analyse Operating Performance of Companies

Financial data of Ujaas Energy Ltd provided by screener.in does not provide cash flow data for year before FY2011. When we analyse the cumulative profits and cash flow data for 3 years (FY2012, FY2013 and FY2014), we realize that during these 3 years, Ujaas Energy Ltd has not been able to convert its profits in to cash flow from operations. PAT for these 3 years (FY2012-14) is INR 65 cr. whereas the CFO over the similar period has been negative at INR (43) cr. Receivables days are high at 92 days in FY2014. It indicates that Ujaas Energy Ltd has been facing challenges while collecting cash from its customers.

Inability to convert profits into cash has ensured that Ujaas Energy Ltd has to rely on alternate sources of money (like equity and debt) to fund the requirements of growing business. Debt levels of Ujaas Energy Ltd have been increasing year on year. Total debt of Ujaas Energy Ltd has increased from INR 2 cr. in FY2008 to INR 120 cr. in FY2014. Increasing debt levels with growing business are the features of companies operating in capital-intensive businesses.

Investors should be cautious of investing in companies, which have continuously increasing debt levels, as high debt has the potential of increasing the risk of bankruptcy and reduced profitability under tough business conditions.

You should read the analysis of two other companies: Ahmednagar Forgings Ltd and Amtek India Ltd, to understand the impact low fixed asset turnover can have on the debt levels of companies. You may read their analysis here:

Q&A Analysis: Ahmednagar Forgings Ltd

Q&A Analysis: Amtek India Ltd

 

Margin of Safety in the market price of Ujaas Energy Ltd:

Ujaas Energy Ltd is currently available at a P/E ratio of about 30.2, which does not offer any margin of safety as described by Benjamin Graham in his book The Intelligent Investor.

Read: 3 Simple Ways to assess the Margin of Safety in a Stock

Also Read: Hidden Risks of Investing in High P/E Stocks

 

Conclusion:

Overall, Ujaas Energy Ltd seems to be a company, which enjoyed economic tailwinds during FY2012-14 and grew its business at a breakneck pace, however, the presence of tailwinds in FY2015, has hit its business hard, thereby reducing its revenue by 80%. Ujaas Energy Ltd has been unable to maintain sustained profitability margins due to low bargaining power with its customers.

Ujaas Energy Ltd has seen wide fluctuations in its operating efficiency parameters over the years indicating that its business model is yet to be established. It is not able to convert its profits into cash and thereby has to rely on debt to fund its growth requirements. An investor should keep a close watch on its debt levels. Investors should analyse Ujaas Energy Ltd further to understand the reasons for fluctuating tax payout ratios.

Read: How to Monitor Stocks in your Portfolio

I believe that any investor should wait for the stability in the operating and regulatory environment before taking any decision about Ujaas Energy Ltd. As we have witnessed that the business model of Ujaas Energy Ltd is highly dependent on external factors, any investment in Ujaas Energy Ltd currently might become a proxy for speculation on regulatory actions.

These are my views about Ujaas Energy Ltd. However, you should do your own analysis before taking any investment related decision about Ujaas Energy Ltd.

You may use the following steps to analyse the company: “How to do Detailed Analysis of a Company

Hope it helps!

Regards,

P.S.

DISCLAIMER

  • The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
  • I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
  • Currently, I do not own stocks of the companies mentioned above in my portfolio.

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