This article provides an in-depth fundamental analysis of Ujaas Energy Ltd, which owns, erects & sells solar power plants, provides operations & maintenance services to them and manufacturers transformers.
In order to benefit the maximum from this article, an investor should focus more on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc used to get the information. This will help her in improving her stock analysis skills.
Ujaas Energy Ltd Research Report by Reader
Q: Hi Vijay, I must say, your website is a great guide for small investors like me. I have prepared the 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 the 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 solar power producers under the Preferential Tariff Mechanism. Ujaas Home is the perfect solution for producing clean green energy for houses.
Ujaas Energy Ltd has formed two foreign subsidiaries named Ujaas Energy HK Ltd in Hongkong and Eizooba Energy One Ltd in 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 of Ujaas Energy Ltd:
- Cost of goods sold (COGS) has decreased from its worst 91% in 2012 to 79% in 2014 which is improving the gross margin
- Sales & General Administration (SGA) expenses when compared to revenue also decreased to 2% in 2014 from its worst 8% in 2011
- An increase in revenue and decrease in COGS for 2013 and 2014 has helped the company to record good operating margin in both years
- Net profit in 2014 came down to 7% from 11% in 2013, mainly due to a 2% increase in COGS and a 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 the previous year
Sales to Inventory Trend of Ujaas Energy Ltd:
Decrease in inventory to sales from its worst 32% in 2012 to 7%, which indicates the following:
- Investment in inventory shrinking in relation to sales
- Sales increasing
- Efficiency of management
Declaration of dividends in 2013 and 2014 at 9.26% and 8.88% is a good sign for investing in the company. However, as long as the company is growing at a great rate, investor should not worry about the payout ratio
Quarterly Results of Ujaas Energy Ltd:
- 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 the 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 the slump in revenue in FY2015.
Balance Sheet Analysis of Ujaas Energy Ltd:
- Networth of the company in relation to total liabilities is decreasing due to an increase in debt.
- 376% increase in the 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:
- The increasing trend in asset turnover ratio is a positive sign
- In 2014, INR 2.19 revenue was generated for every INR 1 invested in assets
- 49% increase in asset turnover ratio when compared to the previous year (i.e 1.47 in 2013 has increased to 2.19 in 2014)
- Return on capital employed (ROCE) is on an increasing trend
- ROCE is very impressive when compared to borrowing costs. It is a very positive sign for an investor to invest
- Return on Assets (RoA) is on the lower side though it is on an increasing trend from 2013
- Ujaas Energy Ltd’s debt to equity ratio is on an uptrend but no need to worry as it is still less than one.
- 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 a positive sign for investors.
- Effective inventory management and reduction in working capital days increase operating efficiency
Peer Group Comparison of Ujaas Energy Ltd:
- Ujaas Energy Ltd’s OPM % and NPM% are the best when compared to its peer group.
- ROCE is also very impressive when compared to the peer group
Shareholding
- Promoters holding 70% of the shares shows that they have confidence in the company
- No record of pledging shares
Compounded Annual Sales, Profits and ROE growth
- Compounded sales and profit growth for the last 3 and 5 years is very impressive
Management Analysis of Ujaas Energy Ltd:
- From the operating history, one cannot derive too much information on management bandwidth by looking at past behaviour. However, management has executed well by growing at very high rates in the last 2 years while maintaining the asset book quality.
- Dividend declaration in last 2 years is positive, though, it is not on the higher side. However, when a company is growing at a high rate, an investor should not worry about the dividend yield rate.
Long Term View:
- Central Govt has clarified that the solar industry cannot afford anti-dumping duty at this moment and the enforcement of Renewable Purchase Obligation is a positive sign for the solar industry.
- Govt’s commitment to 100 GW of green energy by 2022 is a great boost for all the companies in the solar industry. High ROCE and low debt, when compared to peers, make Ujaas Energy Ltd a strong case for buying.
- Ujaas Energy Ltd is expected to grow at a 25% to 35% growth rate. While it is difficult to predict the future share price, my target for the next year is 2.3 to 2.5 per share from its current market price of INR 18.
- Considering potential opportunities in this industry, Ujaas Energy Ltd could well be a potential multi-bagger if an investor holds this stock for the 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.
Dr Vijay Malik’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 in by you.
Let us analyse the past financial performance of Ujaas Energy Ltd:
Financial Analysis of Ujaas Energy Ltd:
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 the investor community that any growth of 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 a negative outlook because of the 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 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.
Advised reading: How to do Business Analysis of Solar Power Plants
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 the 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 a such wide variation in its tax payout ratios.
Operating Efficiency Analysis of Ujaas Energy Ltd:
The 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, the 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 indicates 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
The financial data of Ujaas Energy Ltd provided by the Screener website does not provide cash flow data for the 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 into cash flow from operations. PAT for these 3 years (FY2012-14) is INR 65 cr. whereas the CFO over a 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.
The 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 a growing business. The debt levels of Ujaas Energy Ltd have been increasing year on year. The 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 businesses 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:
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.
However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, taking into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, a low PE ratio of the company’s stock may be a sign of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
- 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
- How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
- Hidden Risk of Investing in High P/E Stocks
Analysis Summary
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 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.
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Disclaimer
Registration status with SEBI:
I am registered with SEBI as a research analyst.
Details of financial interest in the Subject Company:
I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.
