Is this the right time to invest in green hydrogen stocks?

JM Financial said in a note last year that amid the rapid evolution of India's ‘Green Hydrogen’ sector, the demand is driven by oil refineries, exports, and ammonia-fertiliser producers, among others.

India’s green hydrogen energy sector is abuzz with project awards and government announcements. In January 2024, the Solar Energy Corporation of India (SECI) awarded tenders for the manufacture of 1,500 MW of electrolysers, and 412 ktpa (kilo tonnes per annum) of green hydrogen to companies like RIL, Greenko-John Cockerill, L&T, and Adani.

In the 2024 interim budget, the government allocated Rs 600 crore to the National Green Hydrogen Mission (NGHM), more than double of last year's Rs 297 crore.  While the segment is growing, the question is, is this the right time to invest.

India's green hydrogen mission

Recently, large corporations like L&T and steel manufacturers such as Jindal Steel have seen their stocks rise following announcements of green hydrogen projects. On March 1, L&T stocks gained nearly 2 percent after the company commissioned its first domestically produced hydrogen electrolyser at its green hydrogen plant in Hazira, Gujarat.

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Similarly, on March 5, stocks of Jindal Steel gained nearly 3 percent after the inauguration of its green hydrogen plant (runs both on renewable energy and gas) that was built in collaboration with Hygenco Limited. Through this plant, Jindal Steel will employ green hydrogen in its stainless steel manufacturing operations at its Hisar facility.

JM Financial said in a note last year that the rapid evolution of India's green hydrogen sector is driven by demand from oil refineries, exports, and ammonia-fertiliser producers, among others.

In January 2023, the government launched the NGHM to promote the "production, usage, and export of green hydrogen and its derivatives. This will contribute to India’s aim to become aatmanirbhar through clean energy, and serve as an inspiration for the global clean energy transition." In January 2024, the union cabinet approved provisions worth Rs 20,000 crore for the mission, including a PLI (production-linked incentive) scheme for "setting up a manufacturing base for electrolysers and other green hydrogen equipment."

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Does India have true green hydrogen stocks?

Most analysts contacted by Moneycontrol said that though the green hydrogen sector holds potential, it is still too nascent for significant investment.

Many of the listed entities in this sector are not pure green hydrogen players, but rather large corporations also investing in the segment, they said. Sagar Lele of Rupeeting, a PMS (portfolio management service) fund,  noted that despite ongoing discussions, not much has transpired by way of business and revenue.

"The biggest (green hydrogen) announcements in the sector have been made by companies like Adani Enterprises, Reliance, BPCL, IOCL, Gail, , etc. However, all these projects are in their early stages, with completion not expected until FY27 or even FY30," he explained. Moreover, their  impact would be minimal.

BNP Paribas is currently tracking Larsen & Toubro within this space. Priyankar Biswas, Lead Analyst – Industrials, Capital Goods, and Metals, said, "Our calculations suggest that approximately 3.1 million tonnes of capacity could be achieved by FY2030, potentially generating EPC (engineering, procurement, and construction) opportunities in the range of Rs 1.2 to 1.3 trillion until 2030. This represents a significant opportunity."

With the recent establishment of an electrolyser factory, L&T is well-positioned to secure  and execute  orders, he said.

Lele highlighted that as fund managers, instead of looking at larger players they were focusing more on smaller players like MTar Technologies, a key supplier for US-based Bloom Energy, which manufactures hot boxes for hydrogen fuel cells used in green electricity production.

"This accounts for about 60 percent of the company's revenue. Here, we see genuine, exciting business growth, reflected in the company's healthy 30 percent CAGR (compound annual growth rate,’’ said Lele. However, he added that companies like MTar are currently rare in the listed space.

Which companies will gain from the green hydrogen push

Alok Agarwal, Head – Quant, and Portfolio Manager at Alchemy Capital, said that the green hydrogen revolution is expected to boost producer profits and enhance valuation multiples of companies operating in the space.

"Considering the Rs 8 trillion capex estimated by the government of India for setting up operations, multiple sub-sectors stand to benefit, including the manufacturing of solar modules and wind equipment, renewable energy, farm operations, EPC, electrolyser production, and ancillaries like pumps, compressors, water treatment, and electrical & electronics," he added.

Challenges in the sector

Analysts point out that one of the main challenges in this sector is the cost of hydrogen. Biswas mentioned that the general consensus is that hydrogen costs need to drop to $2 per kg to be viable. Currently, for companies like L&T, costs are between $3.6-3.7 per kg. "To achieve viability, the costs need to decrease. As the scale increases, adoption is expected to rise," he explained.

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