Uniqueness of Big Wave Stocks 

Moser Baer Clean Energy had commissioned a 30 megawatt (MW) photovoltaic (PV) farm at Banaskantha district in north Gujarat. The plant was to supply an estimated 52 m units of energy in a year - roughly the amount that Kerala consumed in a day.The Adani Group had commissioned a 40-MW solar power project , touted as the country's largest, in Gujarat's Kutch district. For Adani, India's largest private thermal power producer, it was the first major project in the renewable energy space.

A French company, Solairedirect, had set a new benchmark in green energy investment by bidding for its proposed 5 MW plant Pokhran, Rajasthan. It was, by far the lowest tariff quoted under India's ambitious Solar Mission.

Each project underlined the importance of solar energy in India.

The country, sun drenched for more than 300 days a year, was believed to be ideally suited to use it. But India had remained far behind Europe and the US, both in manufacturing and project capacities.

This was not about India a couple of months or years back. Rather I am referring to India of 2012.

You read that right.In January 2010, the Centre launched the Jawaharlal Nehru National Solar Mission. It targeted setting up a generation capacity of 20,000 MW by 2022 (10 times the capacity in 2012).

So, the central and state governments were aggressively working to harness the power of the sun.

Within a year there were massive investments in both solar and wind energy projects. But the policy decisions did not take off.

In just one year, investment in clean energy initiatives in India went down by 52.7%.

The investment in wind, was also reduced to half in the absence of any incentive scheme. Solar businesses comprising both power production and equipment manufacturing began suffering due to poor policy enforcement.

The government had hoped to sell solar power at the same rate at which conventional power was sold by 2016. However, the objectives of the Solar Mission were hardly met.

Stocks like Suzlon Energy, Inox Wind and Orient Green Power were just few of the stocks that were the victim of the failure of the solar energy sector to take off a decade back.

Something similar has happened in China too.

Over the past 15 years, China has come to dominate the global market for solar energy.

Nearly every solar panel on the planet is made by a Chinese company. Even the equipment to manufacture solar panels is made almost entirely in China.

The country's solar panel exports have grown in double digits.

But China's solar panel domestic industry is in upheaval.

Wholesale prices plummeted by almost half last year and have fallen another 25% this year. Chinese manufacturers are competing for customers by cutting prices far below their costs. And they still keep building more factories.

The price slashing has taken a severe toll on China's solar companies.

Stock prices of its five biggest makers of panels and other equipment have halved in the past 12 months.

Since June 2024, at least seven large Chinese manufacturers have warned that they will announce heavy losses for the first half of this year.The turmoil in the solar energy sector amid enormous factory capacity and booming exports highlights how China's industrial policy backfired.

Generous lending from state-owned banks and generous local subsidies produced manufacturing overcapacity. But this did not ensure profitability of the sector.

The Chinese solar companies cut costs and prices sharply to maintain market share. That led to a few low-cost survivors while many competitors were driven out of business in China and around the world.China's government banks ended up lending so much money to the sector for factory construction that the country's solar factory capacity is roughly double the entire world's demand.

In a nutshell, neither was the solar energy sector in India viable in 2012. Nor is the Chinese solar industry sector viable today.

The companies rode massive waves of macro trends in the sector.

These were no doubt big waves.

However, neither the government policy making, nor the incentive-dependant financials of the businesses were sustainable.

So, they ended up becoming false big waves.

But there are real big waves too.

Ones that allow companies to grow significantly fast. And allow their stock prices to generate 2 to 3 times the returns of the benchmark index.

For instance, when I started tracking Bharat Electronics a couple of years back, I noticed how focused the company was on R&D.

Meeting or speaking to the management of public sector defence majors was impossible back then due to the confidential nature of orders. However, that Bharat Electronics was already working closely with teams at DRDO and ISRO was evident.

For several years, I studied the business model and the nature of order book of the defence major.

Bharat Electronics boasted of a wide range of state-of-the art defence products like defence communication equipment, radars, naval systems, sonars, electronic warfare systems, tank electronics and simulators.

By 2017, when I finally developed sufficient conviction on Bharat Electronics, it had a lot going in its favor...

It had a strong R&D focus...

It had high entry barriers so competitors wouldn't be able to eat into its market share...

It had a robust order book...

Its profit margins and return ratios were consistently improving.

It was in sound financial health with near zero debt.

All these factors were good enough for any investor to enjoy a good return on Bharat Electronics.

Not surprisingly Bharat Electronics' working capital improved dramatically by the time I recommended the stock in 2018. My conviction was about the company's ability to cater to India's defence research needs.

The same year Hindustan Aeronautics, India's only producer of fighter planes, got listed.

The big inflection points came in the subsequent two years.

First was the Pulwama attack in 2019.

Next was the Galwan valley clash with China in 2020.

Both made the Indian government realise the crisis of India's over dependence on defence imports.

First the government-imposed import ban on 928 defence items in self-reliance push. By 2023, more than 7,000 critical defence items and spares were banned for imports and had to be procured from domestic manufacturers.

According to Ministry of Defence, imports shrunk from 46% of India's defence capex in 2019 to 37% by December 2022.

By early 2023, Hindustan Aeronautics was ready to export the indigenously developed Brahmos Supersonic Missile to other countries.

Over time I was already researching a bunch of defence stocks and had recommended a few.

It was clear that Data Patterns, Bharat Dynamics, Solar Industries and a few other stocks that were riding India's indigenous defence manufacturing wave.

The profits from the group of such big wave stocks far exceeded the benchmark Sensex and Nifty 50.

I saw the pattern repeat in railways, shipbuilding, EV stocks etc.

And I was convinced that investors who begin early to ride in such clusters of 'big wave' stocks have significantly higher chance of fetching market beating returns.

Stay tuned if you wish to know more about Big Wave stocks.

Hope you like this video. Thanks for watching.