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Bull of the Day: Azure Power Global (AZRE)

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“I’d put my money on the sun and solar energy. What a source of power! I hope we don’t have to wait until oil and coal run out before we tackle that.” – Thomas Edison, 1931

Th Solar Power generation industry in the United States has seen multiple boom and bust cycles. Though the technology for turning solar energy into reliable electric power has continued to steadily improve, changes in the cost of competing fossil fuels as well as shifting political incentives have made predicting the success of solar manufacturing firms speculative at best.

In 2009 when President Obama took office, the US had approximately 1.2 gigawatts of solar electric capacity. Thanks to generous federal tax credits and $90 billion in investment in clean energy sources from the American Recovery and Reinvestment Act, that figure had grown to 31 Gigawatts by the beginning of 2017 – a 2500% increase. The fact that oil prices were considerably higher than they are currently for much of that period accelerated the adoption of alternative energy sources by making their price more competitive with fossil-fuel energy generation.

The rise of solar power in the US has mostly been in the residential market with homeowners in areas with reliable year-round sunshine generating most or all of their electricity needs using rooftop solar panels, while continuing to rely on the traditional power grid during times when solar generation wasn’t feasible. The cost of residential solar power generation is now low enough to make it a sound financial decision with the savings exceeding the cost of traditional utility electric power over the expected lifetime of the equipment - though it still does require an up-front investment in order to realize those savings.

Residential solar in the US has been a fickle and unpredictable investment with significant price competition and fossil fuel prices that have trended lower. Solar is often viewed as “expensive”, partly because the infrastructure for generation and delivery of fossil fuel-based electricity already exists across the US. Though the evidence that burning coal and oil has contributed meaningfully to undesirable climate change, the path of least resistance tends to be to continue using energy infrastructure that already exists.

That’s not necessarily the case in the developing world.

Azure Power (AZRE - Free Report) , based in India, develops utility-scale solar energy generation systems and sells that energy to governments and independent industrial and commercial customers. Unlike in the US, large parts of India are not already connected to an electricity grid that is capable of providing the predictable delivery of energy to consumers and businesses. With a growing middle class and a thriving business community who now desire on-demand electricity to fuel their commercial activities and personal lives – as well as experiencing over 300 days of sunshine per year – India is a near-perfect environment for large scale solar power facilities.

Not only is Solar power cleaner than fossil fuels – reducing air pollution and global environmental impact – new solar facilities are actually cheaper and faster to build than coal plants. To provide further incentive to developers of alternative energy solutions, the Indian government launched the Jawaharlal Nehru National Solar Mission (NSM) in 2010. In addition to providing clean, reliable power to Indian homes and businesses, the initiative also seeks to address India’s trade deficits with other countries and helps stabilize the Indian rupee as the country imports less coal and oil from abroad.

The prices commercial customers in India pay for solar energy is now competitive with wind power and traditional coal fired electricity and less than diesel power – which has been used extensively, especially in remote areas that are far from the power grid. In fact, the distance issue is critical to Azure’s business, as quiet, non-polluting, utility-scale solar generation facilities can be built in close proximity to growing communities and business centers, alleviating the need to transmit power over long distances.

Azure has become expert at navigating the government system of fair and transparent auctions for municipal power projects. The company’s experience and financial stability give it the upper hand over most competitors in the bidding for contracts to build large scale facilities. They were the first company to build a utility-scale solar facility in India and now have 35 such plants in operation – with more to come.

Azure’s revenues have been rising steadily, expected to grow 18% in the current fiscal year and 48% next year.

Quarterly earnings are less predictable because project approval and the costs of construction don’t necessarily happen on a convenient periodic basis, but that also creates the possibility of significant earnings beats, and the potential for rapid share appreciation. Azure Power is currently a Zacks Rank #1 (Strong Buy).

AZRE traded at twice the current level just two years ago and 60% higher in September of 2018, before a global slide in oil prices made solar companies less attractive to investors. Though oil prices are notoriously difficult to predict, many analysts feel that they have at least stabilized lately and geopolitical issues tend to cause prices to rise much faster than they fall.

Azure Power is in a single industry and operates in a single geographical location. Its market cap makes it less than half the size of US solar manufacturer SunPower (SPWR - Free Report) and a tenth the size of First Solar (FSLR - Free Report) , but when analyzing a stock’s potential for rapid appreciation, small size and a dominant position in a niche market can be a powerful combination.

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