Azure Energy World Restricted (NYSE:AZRE), one in every of India’s premier renewable vitality companies, got here underneath fireplace in mid- to late 2022 for a marked enhance in administration turnover that noticed it lose 4 CEOs and some different executives within the span of a few 12 months (two CEOs between April and September 2022, and two extra between September 2022 and Could 2023). Additionally problematic for the corporate was the revelation of whistleblower allegations of mismanagement and information manipulation throughout the firm, in addition to Azure’s affirmation of the whistleblower’s claims.
These points have broken the corporate’s popularity and prompted buyers to unload the inventory, driving it down from over $10 per share in late August 2022, earlier than these incidents, to ~$2 per share at time of writing. On this article, I’ll briefly clarify why I believe that even when the decision of those scandals prompts a rally within the medium time period, Azure inventory nonetheless will not be long run choose for buyers.
Monetary information on Azure is considerably sparse after 2021, so I’ll recap the final 5 full years of knowledge, with fiscal years ending in March.
Complete revenues had been $65 million, $118 million, $143 million, $172 million, and $208 million within the 2017-2021 interval. That is to say that income elevated at a largely linear clip of about $30 million per 12 months for the previous 5 years, excluding a near-doubling of income between 2017 and 2018. Money stream from operations for the 2017-2021 interval was -$400 thousand, $29 million, $31 million, $49 million, and $68 million. Lastly, web incomes for this era had been -$22 million, -$12 million, $1.1 million, -$30 million, and -$57 million.
To sum up, the core enterprise of Azure has been money stream constructive, however Azure general has not but develop into constantly worthwhile, and could also be declining in profitability over time as of 2021 based mostly on the more and more detrimental web earnings. Not probably the most encouraging financials, however I’ve actually seen worse.
Valuation information for AZRE is even sparser than monetary information, however there a minimum of is a few information of word. AZRE’s ahead Worth to E book ratio is 0.46, in comparison with practically 1.8 for the utilities sector; AZRE’s ahead Worth to Money stream ratio is about 1.9 in comparison with the sector ratio of ~8. Each of those point out important undervaluation for AZRE in comparison with the common inventory in its sector, however for the explanations I’ll clarify within the subsequent part, I don’t see long run undervaluation or deep worth right here.
To make clear, I do see some undervaluation within the brief to medium time period, as AZRE appears oversold on account of buyers’ overreaction to the corporate’s scandals, however in time, underperformance from Azure the corporate will result in truthful undervaluation of its inventory. AZRE is thus one thing of a long run worth lure.
Brief time period and medium time period worth buyers might web worthwhile returns by going lengthy on AZRE shares and promoting after some time, however as I’ll clarify, long run worth buyers might need to look elsewhere.
My Viewpoint on Azure
Brilliant Medium Time period Prospects
Regardless of the seriousness of the general public scandals weighing on Azure, I believe the detrimental penalties might be comparatively short-lived. As a renewable vitality agency in a rustic that’s quickly increasing its renewable vitality manufacturing and investments, and whose authorities is adopting aggressive inexperienced vitality targets, Azure has a number of tailwinds propelling its enterprise and its inventory value towards the achievement of first rate efficiency within the medium time period. As soon as buyers recover from the dangerous publicity and understand Azure remains to be a agency that’s rising its revenues in an increasing business with a vibrant future, they’re more likely to snap up AZRE shares, contributing to a brief to medium time period rally for the corporate.
Nonetheless, even assuming that the corporate does put these 2022 scandals absolutely behind it, Azure seems poised for long run underperformance in comparison with friends like ReNew Vitality World Plc (RNW).
Dim Lengthy Time period Prospects
The main subject I’ve with Azure as a long-term funding stems from its inexplicably low development. Whereas the marketplace for solar energy in India grew exponentially by 24 occasions between 2014 and 2022, Azure’s revenues have largely grown linearly over the previous 5 years. As talked about within the financials part, this primarily consisted of regular ~$30 million will increase from ~$120 million to ~$210 million over the previous 4 years.
Against this, ReNew’s revenues from 2017-2022 (fiscal 12 months ending in March) had been $200 million, $378 million, $621 million, $642 million, $658 million, and $781 million. ReNew has additionally banked nearly $700 million in income from Q1-Q3 2023, indicating that the corporate has probability of creating ~$850 million for FY2023.
Except for the distinction in scale of the revenues for every firm, what stands out to me is the distinction in income development. Like Azure, ReNew began the late 2010s with an exponential enhance in revenues; not like Azure, nonetheless, Renew continued its exponential income trajectory within the following years, excluding a droop from 2019-2021.
Not solely is ReNew’s income base bigger, however its exponential development is extra constant, which ought to be the case for a profitable agency in a nascent and rising business. Azure’s continual lack of ability to develop exponentially in tandem with its market is thus a pink flag that indicators a average to excessive chance of long run underperformance.
Dangers to Thesis
Questions abound as to what Azure’s present monetary numbers would possibly appear to be. Azure’s 2022 and 2023 information, as soon as made accessible, might reveal that exponential income development has been renewed on the agency, pun supposed. This revelation can be the principle threat for the thesis of this text, since Azure’s low, linear development is primarily what offers me pause.
Nonetheless, it is also the case that the reputational fallout from present scandals is about to doom the corporate, ushering to start with of the top for Azure. Traders might unload the inventory additional, and Azure’s enterprise companions might quickly lower ties with the agency, each resulting from Azure’s present controversies, culminating in chapter proceedings for the agency. This might erase any probability of Azure having a rally coming its approach within the medium time period, thus breaking that a part of the thesis.
As a consequence of its inexplicably low development, I can’t suggest Azure Energy World Restricted as a long run funding. It appears more likely to underperform different firms like ReNew Vitality World Plc in the long run, whatever the medium time period rally that may seemingly come up as soon as its 2022 points are settled. Nonetheless, due to secular tailwinds that may seemingly propel the corporate ahead, I can’t suggest that long run buyers promote Azure both, since its long run prospects, whereas poorer than its friends for my part, usually are not irredeemably poor.
Subsequently, for long run buyers desirous about driving the wave of Indian renewable vitality investments, I price AZRE a maintain.
Editor’s Notice: This text covers a number of microcap shares. Please concentrate on the dangers related to these shares.