Should You Invest in Solar Penny Stocks in 2024?

Do you have a reasonably high-risk appetite when it comes to investing? If the answer is yes, then perhaps it's time to give penny stocks a shot.

Priced anywhere between Rs 1 to Rs 100, penny stocks are essentially the underdogs of the stock market world. These are a class of low-priced public companies that often fly under the radar.

But don't let their small price tags fool you. These pint-sized stocks can possibly double, triple or quadruple your money over the long term.

It is not unusual for a good penny stock to turn multi-bagger in a short span. They are famous for generating extremely fast returns.

This is all thanks to the fact that penny stocks are heavily influenced by liquidity and news flow.

Therefore, any noteworthy announcement can drive a penny stock to new heights or send it plummeting. That is if you carefully select the fundamentally strong penny stock from the lot.

And with solar stocks garnering a lot of attention of late, what can be better than investing in solar penny stocks?

The Solar Boom

The stock market has been abuzz with solar stocks, with most of them surging over 15-40%.

The excitement and hoopla are justified considering the significant developments including Prime Minister Modi's unveiling of a new scheme to electrify 10 million (m) households with solar power.

This ambitious endeavour presents a huge 10x opportunity, especially considering the current count of fewer than 1 m households with rooftop solar installations.

However, this is not the only time the government has shown its proactive stance in supporting the solar sector.

There have been other innumerable earnest policy reforms and budgetary allocations, showcasing the government's commitment to this segment of renewable energy.

For instance, the government has rolled out the Production Linked Incentive Scheme (PLI) as part of the National Programme on High-Efficiency Solar Photovoltaic (PV) Modules.

This initiative, backed by an investment of Rs 240 bn, aims to propel domestic manufacturing, establishing India as a formidable force in solar energy.

In the first phase (Tranche-I), the PLI has already boosted the integrated capacity by 8,737 megawatts (MW).

Moving forward to Tranche-II, 11 companies have been allocated a combined manufacturing capacity of 39,600 MW for domestic Solar PV modules.

This injection of Rs 930 bn into the sector is set to create over 100,000 direct and indirect employment opportunities.

Apart from this, the Solar Park Scheme aims to establish over 50 solar parks, each with a capacity of 500 MW or more, totalling around 38 GW by 2025-26.

These parks serve as focal points for solar energy generation, attracting investments and facilitating the growth of solar power.

By achieving economies of scale, they make solar energy more cost-effective and accessible.

Currently, 11 solar parks with a combined capacity of 8,521 MW are operational, while 7 parks with a total capacity of 3,985 MW are partially completed.

More importantly, the government has helped mitigate the concerns regarding imports from China, thanks to the expanding solar manufacturing sector and the 'Make in India' initiative.

A large part of this push comes from the government's ambitious target of 450 gigawatts (GW) of renewable energy capacity by 2030, and the solar sector is likely to benefit in a big way. India currently stands 4th globally in solar power capacity, boasting a total of 70,096 MW in 2023.

With these policy interventions and the potential for substantial savings for households, the solar sector is poised for remarkable growth.

While penny stocks would have been a great way to apply this opportunity, we only found two operating in the solar space.

#1 Orient Green Power

The first one is Orient Green Power.

Orient Green Energy operates in the renewable energy sector.

Presently, the company boasts a large wind capacity portfolio. Their wind farms, spread across several Indian states including Tamil Nadu, Andhra Pradesh, Gujarat, and Karnataka, boast a combined capacity of 402.3 megawatts (MW).

Looking ahead, the company is exploring opportunities for expanding its capacity and entering the solar energy sector.

However, it has not yet provided a detailed plan for this expansion. There is interest in understanding how the company intends to finance this expansion, especially considering its significant existing debt burden.

Despite ongoing debt repayments, the debt-to-equity ratio remained high at 2.05 in FY 2023.

Orient Green Energy Financial Snapshot (2019-2023)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Revenue Growth (%)	-14.40%	5.60%	-32.80%	20.00%	-7.50%
Operating Profit Margin (%)	81.90%	83.40%	66.70%	73.50%	78.60%
Net Profit Margin (%)	-15.00%	6.10%	-19.90%	15.00%	13.60%
Return on Capital Employed(%)	7.30%	9.40%	4.80%	9.70%	8.70%
Return on Equity (%)	-9.50%	3.90%	-10.50%	9.80%	6.90%

Data Source: Ace Equity

In addition, generating internal funds seems challenging due to the erratic business performance observed between 2019 and 2023.

During this period, both sales and net profit experienced declines of 7.6% and 186%, respectively.

Consequently, return ratios such as Return on Equity (RoE) and Return on Capital Employed (RoCE) have exhibited volatility.

To know more about the company, check out its factsheet and latest quarterly results.

#2 Urja Global

Urja Global has a diverse product range in the consumer goods market including batteries, solar batteries, E-rickshaws and E-scooters.

The company boasts a comprehensive portfolio in the battery market, including lithium batteries, automotive batteries, inverter batteries and solar batteries.

Additionally, it provides various solar products such as solar study lamps, LED lanterns, solar panels, inverters, solar home lighting systems, solar atta chakki, solar water pumps, and solar rooftop systems.

The company has installed solar-led street lights in various Gram Panchayats across India. Apart from this, it has also installed solar PV plants across the country.

Urja Global Financial Snapshot (2019-2023)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Revenue Growth (%)	2.70%	19.40%	-8.20%	-50.90%	-44.40%
Operating Profit Margin (%)	1.20%	1.80%	2.10%	2.80%	8.10%
Net Profit Margin (%)	0.00%	0.70%	1.20%	1.10%	3.90%
Return on Capital Employed(%)	0.80%	1.60%	1.70%	1.00%	1.60%
Return on Equity (%)	0.00%	0.70%	1.10%	0.50%	0.90%

Data Source: Ace Equity

Despite a robust product portfolio, the company has faced challenges in its performance over the past five years.

Both sales and net profit have experienced a downward trend, and the return ratios have been dismal.

Additionally, a big red flag is that the auditors have raised concerns regarding the company's internal financial controls concerning financial reporting as of 31 March 2023.

These include uncertainty for realizing the carrying value of its trade receivables, non-maintenance/updation of fixed assets register including capital work in progress, loans and investment register for agreements or contracts with related parties, no documentary evidence available for loans and advances given etc.

The company has ceased the sale of unprofitable and low-end appliances to concentrate on high-value products and volumes, aiming for continuous growth and market significance.

Moreover, it is dedicated to enhancing its footprint in current segments through better distribution approaches.

Nevertheless, the discrepancies highlighted in the auditor's report raise significant concerns, emphasising important considerations when investing in penny stocks.

To know more about the company, check out its factsheet and latest quarterly results.

A word of caution...

Both Urja Global and Orient Green Power illustrate the challenges investors may face when investing in penny stocks.

Penny stock companies usually have shaky financials, with unstable revenues and profits. Moreover, their track record of dividend payments often lacks reliability, contributing to investor uncertainty.

These low-priced companies tend to have major fundamental defects, flawed management teams, unfavourable competitive positions etc.

Now, we don't mean to scare you away.

While penny stocks are notorious for eroding investor wealth, they can also present opportunities for rapid returns.

The key lies in identifying promising candidates while avoiding companies with shaky or inadequate management.

Investors should prioritise consistency in performance and seek indicators like economic moats.

In the end, it all boils down to one thing, research. If you conduct independent research and follow sensible investing principles, you may spot the next multibagger stock for your portfolio.

Nevertheless, caution is paramount, and prudent decision-making is crucial when considering investment opportunities.

Do your homework, then invest smartly!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...