According to Kotak, Suzlon Energy’s market capitalization has increased significantly more than the value that would probably be created by adding more capacity.
In a strategy note released on Tuesday, Kotak Institutional Equities claimed that its exercise in reverse-valuation of Suzlon Energy Ltd. exposes the shortcomings in the way the market values businesses. Calculations by the domestic brokerage indicate that Suzlon Energy’s market capitalization has increased more than the value that will likely be created over the next few years from incremental capacity addition, “let alone the next few years of potential opportunity for the companies in the best-case scenario.”
According to Kotak, the expectation of a significant increase in generation capacity has caused the stock prices of companies that supply equipment for electricity generation, like BHEL and Suzlon Energy, to rise dramatically over the last few months. “We agree with the premise of requirement of additional electricity generation capacity given electrification of the Indian economy and steady growth in electricity demand.”
Suzlon Energy’s stock has increased by 270% so far in 2023. In the past five years, the stock has increased by 738 percent.
Nevertheless, given the greater economics of solar electricity compared to wind electricity, the brokerage believes India is unlikely to add significant amounts of wind- or coal-based thermal generation capacity, according to Kotak.
According to Kotak, Suzlon Energy would have to supply wind turbine generators (WTG) equivalent to 8–12 GW of new wind generation capacity annually for the rest of eternity in order to justify its m-cap. It stated that this is improbable because Suzlon Energy has only added 2.1 GW of total wind generation capacity over the same period, and India has only added 8.6 GW of new wind generation capacity.
The tendency of the market to assign multiples—and high multiples, at that—to the earnings of companies in certain sectors that have “limited opportunities” is rather peculiar. A good example of this laxity is the current trend of electrification, which has historically plagued the pharmaceutical industry but is less of a problem now. Finally, the inclination to utilise multiples for non-recurring earnings is more common during times of intense market bullishness,” the report stated.
According to Kotak, the market overemphasises short-term earnings, which causes both sides to overestimate the fair values of their companies. It said that as a corollary, this makes market players more likely to engage in momentum investing, which is becoming a more frequent occurrence in the world of investing.
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