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Are Renewable Energy Stocks in Bubble? 

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Renewable energy stocks have given investors one of the best returns in its short history. In the last one year, some of the pure renewable energy stocks in India like Suzlon is up by 245%, Waaree Renewables Technology is up by 774%, INOX Wind is up by 269%,  SJVN is up by 222%,  NHPC is up by 119%, and Adani Green is up by 89%. And, many other stocks belonging to the renewable or clean energy sector have seen similar kinds of returns. 

This raises one big question: are these types of returns sustainable, or are renewable energy stocks in a bubble? Let’s do an in-depth evaluation. 

Overview of the Renewable Energy Sector in India

The adoption of the Paris Climate Agreement in 2015, in which India is also a signatory, was the turning point for the renewable energy sector across the globe. In this agreement, the world leaders pledged to try and prevent global temperatures rising by more than 1.5 C above pre-industrial era-levels by the end of this century. 

This has led to massive investment in the clean and renewable energy space by both the government and private sector. The Government of India has allocated $2.2 billion to develop 5 million MTPA green hydrogen capacity and 125 GW of renewable energy. On the other hand, the private sector has pledged over $200 billion to support India’s energy roadmap. 

Unprecedented Growth and Value Concerns

Renewable energy is a sunrise industry that is characterized by high innovation and growth potential. This has resulted in a rapid boom in renewable energy stocks and has attracted a lot of interest from investors. 

Many stocks with unproven business models or little or no profits have seen their stock prices and valuations skyrocket.

Price-to-Earnings Ratios of the Top Renewable Stocks

StockPrice-to-Earnings Ratio
Adani Green224
Waaree Renewables Technology139
Inox Wind
KPI Green Energy Ltd. 67.2
SJVN60.8
Data Source: Screener.in as of 30th June 2024

The price-to-earnings ratio reflects how much investors are paying for every rupee of earnings. For example, Adani Green has a PE ratio of 224, which means investors are paying 223 rupees of premium on every rupee of earnings. 

Inox Wind has no PE ratio because the company has been reporting losses since FY18. Yet, the stock is up by 269% in the last one year. 

These high valuations in renewable energy stocks can be one reason why institutional investors are avoiding them or have a very low stake in companies. 

Are Renewable Energy Stocks in a Bubble?

The dot-com bubble in the early 2000s is one of the classic examples of a sunrise industry that turned into a bubble. During the period, the tech stocks primarily internet-related companies experienced explosive growth in the market valuations. 

Eventually, when the bubble burst- it resulted in massive correction in stock prices, wiping out trillions of dollars from the market. Nasdaq fell 77% from its peak during the dot com bubble. Many companies went bankrupt or had to change their business roadmap. Similar situation was noticed during the 2008 global financial crisis, when financial stocks bore the heavy burnt. 

5 Stages of a Bubble

Generally, bubbles are deceptive and unpredictable in nature, but there are five stages in the lifecycle of a bubble- displacement, boom, euphoria, profit-taking, and panic

Definitely, there is euphoria around renewable energy stocks- but it is very difficult to state, whether they are in a bubble or not. 

Indicators of a Bubble in Renewable Energy

Expensive Valuations: Most pure renewable or clean energy stocks have seen their valuations soar to the point where continued growth seems unsustainable. 

Speculative Investments: Similar to the dot com era, investors are pouring money into renewable energy stocks, ignoring the fundamentals, business models, or profitability. This speculative investment can lead to an inflated stock price

Policy Changes: The current rise in the price of renewable energy stocks can also be attributed to favorable government policies and subsidies. Any policy or subsidy model change can significantly impact the stock price growth. 

Technological and competitive risks: Rapid advancements in solar technologies are leading to a fall in solar power costs, which are expected to fall to Rs 1.9 per unit by 2030. This could lead to disruption, and companies failing to innovate or adapt may struggle to maintain their market position.

While the evolving scenario may indicate that renewable energy stocks are in a bubble, that may not be true either. Unlike the dot-com bubble, there is a real urgency to shift towards renewable energy to combat climate change. This shift from fossil fuel-based energy to renewable energy is likely to provide long-term support for the sector. 

Furthermore, there is a strong increasing demand from both corporations and consumers for sustainable energy solutions and are ready to pay a premium for green energy solutions. 

Investment Opportunities in the Renewable Energy Sector

The renewable energy sector can be divided into three following categories:

Pure Play Renewable Energy Stocks: These are companies that are fully engaged in either renewable energy generation or providing green energy solutions. Some pure play renewable companies include NHPC, Adani Green, SJVN, and Waaree Renewables Technologies. 

Companies Diversifying into the Renewable Energy Sector: Many businesses are diversifying into the renewable energy sector, recognising its growth potential and its commitment to the environment. This category includes companies like Tata Power, NTPC, GVK, and JSW Energy.

For example, Tata Power has made an ambitious target of becoming a 100% renewable energy company by 2045.

Companies Supporting Renewable Energy Companies: Similar to how auto auxiliary industries assist automobile manufacturers in creating various parts for them and provide a crucial ecosystem for the industry’s efficient operation, the renewable energy sector has one as well. For example, Borosil Renewables manufactures solar glass for solar panels, Suzlon manufactures wind turbines, Waaree Green manufactures solar panels, and so on. 

While the valuation concerns in renewable energy stocks are real, the sector holds significant promise and offers a long-term growth potential. If you want to invest in renewable energy stocks, you should first understand the business model, financials, future earnings potential, and valuations, ignoring stock market euphoria and volatility.  

FAQ

  1. Is it good to invest in renewable energy stocks?

    The renewable energy sector is a growing industry. While they offer a huge upside potential in the long term, before investing, understand their business model, future earnings potential, financials, and valuations.

  2. What are the top renewable energy companies in India?

    Based on market capitalization, top renewable energy companies include NHPC, Adani Green, Suzlon, SJVN, Tata Power, Waaree Renewables, JSW Energy, KPI Green Energy.

  3. Will renewable energy sources replace thermal power plants?

    The government has set an ambitious target of meeting half of India’s energy requirement through renewable energy sources by 2030. The share of thermal energy in India’s energy basket will reduce gradually in the coming years.

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I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.

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