Top 5 Renewable Energy Stocks to Watch Out in Nifty's Run to 40,000

The Indian benchmark index, Nifty 50, has risen from around 17,000 in early 2023 to over 20,000 in September 2023, a gain of over 20%.

Notwithstanding the recent correction due to India-Canada diplomatic tensions, the index seems to be steering confidently towards the 40,000 milestone, largely driven by India's thriving economy and a surge in foreign investment.

This journey to 40,000 could unfold at a pace that can surprise many. And investors looking to participate in this journey at a faster pace can look at the top renewable energy stocks from the index or that can be a part of the index in the future.

The renewable energy theme has picked up pace in India, with the country quickly becoming one of the world leaders in embracing the transition. The government has set a target of 450 GW of renewable energy capacity by 2030, and some of the top business houses in the country are investing heavily in the sector.

Here are five renewable energy stocks, all part of the Nifty 50 index, to watch out for healthy growth in the long term.

#1 Larsen & Toubro (L&T)

At the top of our list is the country's engineering major, Larsen and Toubro.

L&T is committed to leading the green revolution in India by playing a significant role in the renewable energy sector.

It offers a wide range of solar power solutions and designs, builds and installs solar power systems of all sizes, from small rooftop systems to large grid-connected systems.

The company has earmarked a capital outlay of US$ 2.5 bn (Rs 207 billion) over the next three to four years for all of its green energy initiatives. This investment will help it expand its production capacity, develop new technologies and enter new markets.

Between 2019-23, the company's sales and net profit have grown at a 5-year compounded annual growth rate (CAGR) of 9% and 8%, respectively. The returns have been strong, with the Return on Equity (RoE) and Return on Capital Employed (RoCE) averaging over 12% and 13.3%.

Larsen & Toubro Financial Snapshot (2019-23)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Revenue Growth (%)	11.76%	8.10%	-5.51%	15.05%	15.70%
Operating Profit Margin (%)	18.42%	18.67%	20.00%	17.18%	16.49%
Net Profit Margin (%)	7.15%	6.99%	3.43%	6.57%	6.89%
Return on Capital Employed(%)	13.29%	12.49%	9.97%	11.61%	12.98%
Return on Equity(%)	16.58%	15.84%	6.58%	13.07%	14.78%

Data Source: Ace Equity

L&T has deleveraged its balance sheet in the past five years. The debt-to-equity ratio has fallen from 1.2x in the financial year 2019 to 0.7x in 2023.

The interest coverage ratio has also been rangebound at 2.8 times over the same period. These healthy financial parameters give L&T the financial flexibility to invest in new projects.

The stock is trading at a P/BV of 4.5x, a 40% premium to its 5-year P/BV of 3.2x.

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

#2 Indian Oil Corp (IOC)

Next on our list is the state-owned oil and gas major, Indian Oil Corporation (IOC).

Indian Oil, a petroleum refinery, has ambitious plans to tap into the renewable energy opportunity.

The company has floated a new subsidiary for low carbon, clean and green energy business as the biggest oil refining and fuel marketing company pivots a transition plan to achieve net zero emissions from its operations by 2046.

IOC is targeting 200 GW of renewable energy capacity by 2050 as well as 7 m tonnes of biofuels i.e. oil produced from biomass and 9 m tonnes of biogas generated from decomposed plant and animal waste.

The refinery sector is emissions-intensive, accounting for 3% of the global carbon emissions. Therefore, the country's majority of oil and gas producers and explorers are venturing into green hydrogen.

IOC, one of the largest producers of hydrogen with conventional carbon-intensive methods, is targeting to convert 50% of hydrogen produced by 2030.

The company is building a green hydrogen plant at its Mathura and Panipat refineries. It also plans to set up a green hydrogen manufacturing unit in Kochi and has announced partnerships with ReNew Power and Larsen and Toubro to produce green hydrogen.

IOC Financial Snapshot (2019-23)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Revenue Growth (%)	25.23%	-7.85%	-23.50%	57.93%	42.73%
Operating Profit Margin (%)	6.15%	3.41%	8.47%	6.78%	3.60%
Net Profit Margin (%)	2.80%	-0.33%	4.10%	3.43%	1.21%
Return on Capital Employed(%)	15.87%	-0.25%	15.78%	16.63%	8.43%
Return on Equity(%)	15.26%	-1.81%	21.00%	20.97%	8.57%

Data Source: Ace Equity

IOC is a leader in its field which is well-reflected in its incredible performance between 2019-23. The sales have grown at a 5-year CAGR of 15%. The returns have been strong, with the RoE and RoCE averaging at over 11.3% and 12.8%, respectively.

This has strengthened the oil major's balance sheet. It is well-poised to fund the expansion plans with a healthy debt-to-equity of 0.4x and interest coverage of 7.1x.

The stock is trading at a P/BV of 0.93x, close to its 5-year P/BV of 0.9x.

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

#3 Adani Green Energy

Third on the list is Adani Green.

Adani Green's operational capacity has grown by over 40% year-over-year in fiscal 2023. The company commissioned 2,140 MW of solar-wind hybrid power plant, a 325 MW wind plant and a 212 MW solar power plant across Rajasthan and Madhya Pradesh.

And now, it plans to invest US$ 20 bn (Rs 1.63 tn) over the next decade. The company aims to increase its renewable energy capacity to 45 GW by 2030.

Adani Green Energy Financial Snapshot (2019-23)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Revenue Growth (%)	41.76%	35.56%	27.56%	48.56%	64.26%
Operating Profit Margin (%)	79.61%	72.34%	91.71%	77.03%	80.85%
Net Profit Margin (%)	-22.91%	-2.39%	5.83%	9.53%	12.49%
Return on Capital Employed(%)	4.75%	8.41%	10.72%	7.84%	8.46%
Return on Equity(%)	-47.29%	-7.61%	22.41%	47.68%	27.52%

Data Source: Ace Equity

Between 2019-2023, the company's revenue has grown at a CAGR of 43% in the last five years. It also turned profitable in the financial year 2021 after reporting consistent losses since inception. The net profit is up 5 times since then.

Going forward, there is a good chance it will fund its foray into renewable energy through debt. The debt-to-equity was at a whopping 9.2x in fiscal 2023 with a dismal 1.2x interest coverage ratio.

Given the high leverage on the balance sheet, this can severely deteriorate the quality of the business, eventually raising concerns over the business profitability.

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

#4 Reliance Industries

Fourth on the list is Reliance.

Reliance is setting up a comprehensive renewable energy ecosystem in India. The company has set an ambitious target of achieving net-zero carbon by 2035 and aims to set up a 100 GW renewable energy capacity by 2030.

It is constructing the largest integrated renewable energy manufacturing facilities in the world in Jamnagar.

The company has earmarked over US$ 10 bn to build this ecosystem. This will include a mix of reliable, clean, and affordable energy solutions with hydrogen, wind, solar, fuel cells, and batteries.

Of the Rs 750 bn, Rs 600 bn will go towards constructing state-of-the-art facilities to manufacture and integrate critical components. The balance Rs 150 bn will go towards value-chain, partnerships, and future technologies, including upstream and downstream industries, to create a fully integrated, end-to-end renewable energy ecosystem.

Reliance will need the expertise and technology to successfully build its fully integrated renewable energy plant. To this extent, the conglomerate has announced a wave of partnerships with REC, NexWafe, Sterling and Wilson, Stiesal, and Ambri for an estimated cost of US$ 1.2 bn.

Reliance Financial Snapshot (2019-23)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Revenue Growth (%)	25.23%	-7.85%	-23.50%	57.93%	42.73%
Operating Profit Margin (%)	6.15%	3.41%	8.47%	6.78%	3.60%
Net Profit Margin (%)	2.80%	-0.33%	4.10%	3.43%	1.21%
Return on Capital Employed(%)	15.87%	-0.25%	15.78%	16.63%	8.43%
Return on Equity (%)	15.26%	-1.81%	21.00%	20.97%	8.57%

Data Source: Ace Equity

The company's sales have been growing smoothly. However, the history of profits has been patchy. Between 2019-23, the sales have grown at a 5-year CAGR of 15%. The returns have been admirable, reporting a 5-year average RoE and RoCE of 12.8% and 11.3%, respectively.

The stock is trading at a P/BV of 2.2x, close to its 5-year P/BV of 2.1x.

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

#5 National Thermal Power Corporation

Last on our list is National Thermal Power Corporation (NTPC).

NTPC is the largest power generation company in India. It is also one of the leading players in the renewable energy space.

The company's renewable energy arm, NTPC Renewable Energy takes up large solar, wind and hybrid projects all over the country. It develops gigawatt scale renewable energy parks and projects in different states under the government's UMREPP (Ultra Mega Renewable Energy Power Park) scheme.

NTPC is setting up India's first green hydrogen fuelling station in Ladakh, which is expected to be operational by October 2023.

It is setting up India's first green hydrogen energy storage at its Simhadri facility and running a hydrogen pilot project at its Vindhyanchal unit.

In September 2023, the State-owned power producer and Oil India signed a Memorandum of Understanding to explore collaboration in the areas of renewable energy, green hydrogen & its derivatives, geothermal, and other decarbonisation initiatives.

This exhaustive list of initiatives highlights the power giant's commitment to the development of green hydrogen and its potential to decarbonize the energy sector.

Despite these initiatives and investments, the company's debt-to-equity has remained rangebound. As of March 2023, it stands at 1.5x with an interest coverage ratio of 3.2x. The company has limited room to leverage its balance sheet.

However, ideally, the government should incentivise these efforts, allowing companies to expand with ease.

NTPC Financial Snapshot (2019-23)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Revenue Growth (%)	10.07%	14.35%	0.50%	16.25%	29.23%
Operating Profit Margin (%)	24.79%	35.98%	36.15%	33.32%	27.70%
Net Profit Margin (%)	13.99%	10.87%	13.42%	12.78%	9.72%
Return on Capital Employed(%)	6.51%	9.77%	8.26%	9.24%	9.77%
Return on Equity (%)	13.06%	10.41%	12.24%	12.99%	12.13%

Data Source: Ace Equity

Between 2019-23, the company's sales and net profit grew at a 5-year CAGR of 14% and 10%, respectively. Considering the government's cap on returns, the 5-year average RoCE and RoE stood at 8.7% and 12%, respectively.

The stock is trading at a P/BV of 1.58x, a 43% premium to its 5-year P/BV of 1.1x.

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

Before you go, check out the below video where editor of Hidden Treasure Richa Agarwal discusses top wealth creating opportunities in the green energy sector.

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...