Suren Chandrajit

Don’t underestimate the solar industry, says Suren Chandrajit.

Chandrajit, CEO of True Value Solar, says despite a spate of collapses this year, the solar industry faces a bright future, underpinned by further private-equity interest and government support and falling costs. 

He expects more consolidation in the next few years and says what’s hurting the industry is volatility. 

Chandrajit says his business, the second-largest in Australia witn $162 million in annual revenue, is taking on franchisees. 

He says part of True Value Solar’s success is the retention of its startup culture.   

It’s been a big year for solar: on the one hand, you’ve had all these company collapses after the removal or reduction of feed-in tariff across the country, and on the other we have the passing of the carbon tax.  

How did you find the year?

We’re actually an aggressive sales organisation. I guess at $162 million [in sales] you could certainly call it a medium-sized business but we still function a lot like a start-up.

So the guys work hard, we’re highly energetic, and if things aren’t working we change it.

We have that type of “go, go, go” culture, which I believe that’s why we’re successful and others are not.

We haven’t corporatised our culture in line with our revenue line, I guess, is probably a good way to put it. So that would be the first reason.

We manage our costs. I think Solar Shop [which collapsed in September] had some cost issues in terms of their overheads.

To give you some context, I believe their overhead was about twice ours but our company size is about four times theirs.

So we run a fairly lean organisation which helps us because the solar market, as you know, is fairly volatile.

There was a whitepaper which talks about the need for a national tariff model. Do you see that happening and what would that mean for solar?

I guess I can’t comment about politics but I don’t see it happening, to be very honest, or at least if it happens I think it will take some time.

I actually do believe that that would be a good way to go. It gives the market some certainty and it stops your big guys running from market to market depending on the opportunity.

I sound a bit optimistic, but you can say every Australian household deserves solar on the same basis as the other. So a level feed-in tariff would be a good outcome. 

But in terms of the future, if we look at it at a fundamental level, solar, renewables are here to stay. Australia’s solar resource is strong; we have good land mass; and we have a government that is, I think, fundamentally behind renewable energy.

We’ve gone on record that subsidies needed to be relaxed so we’ve been a supporter of subsidies coming down because solar costs have been coming down astronomically in the background.

Manufacturing costs of solar have halved in the last 18 months.

And that’s because of China?

That’s mainly because of the Chinese ramping up their manufacturing horsepower, yes.

So subsidies have to come down in line with that.

If the Government didn’t do that, two things are going to happen.

One is we’re going to start to make super profits at solar retailers or we’re going to start giving away systems to customers. And we know from the New South Wales experience that that doesn’t work on a sustainable basis.

What happens this July for your business, when the carbon tax kicks in?

As far as the carbon tax goes, there’s a lot of time that will have to pass for the impact of the carbon tax to wash through.

For our business, the positive thing about the carbon tax is that it increases residential power tariffs, which makes solar a more appealing product.

But I think obviously there will be some rises but it might take a few years or significant rises to come through, whereby solar gets far more appealing.

The way we see it is whatever the carbon taxes are going to make solar more appealing, we’re going to lose subsidy incentives.  

Tell us about how True Solar came about. 

We were founded in 2009 by a few guys that saw an opportunity. In late 2009 they saw the opportunity was bigger than they originally thought so they institutionalised the business, meaning they brought in an independent management team, professionalised the organisation. And I have to say, I guess the corporate and professional levels of customer service etcetera weren’t really existent in 2009 under the shareholders.

We were brought in to sell the business; that was our mandate. But in order to do that we had to grow it and professionalise it so we had to get customer service cleaned up, we had to get compliance cleaned up, and also grow the business.

In the year 2010, that is June 2010, we did about $33 million in revenue, about $7.3 million in EBIT. Last financial year we did about $162 million in revenue and $34.9 million in EBIT.

Now that’s a contrast I guess to your Solar Shops and your other companies you’ve noted that have gone into administration.

We sold the company to a German engineering firm called M + W Group in March of this year. They’re a business with about €2 billion in turnover, about €100 million in profit and 6,500 in staff so they’re a fairly large organisation.

They build TV fabrication lines for manufacturers mainly in China and Europe. So that’s our elevator pitch in terms of our business.

And what’s your background, private equity?  

I started my life at KPMG in accounting and finance so I left for private equity and then I ran a high-net worth family’s money. I used their money to start my first start-up in 2004. I sold that in a couple of years.

And what start-up was that?

That was in online gaming. I took that money and I lost it in China on another start-up, or lost a lot of it in China in another start-up.

What start-up was that?

That was in tech again; we were building a social network in China and I should of thought that the Chinese like Chinese-built social networks, not European social networks, but anyway it’s a lesson.

And then I came back and then worked in a venture capital fund in Melbourne and our mandate was to take Australian technologies to Asia, so the Chinese experience came in handy. And then I worked in the M&A team for Tabcorp most recently. The team that’s building a business to offset the loss in the [Victorian] gaming licence coming in 2012.

So I was part of that team until I left and started Solar.

So how long are you sticking around under M + W’s ownership?

I’ve got a long-term view on the business.

I’m not really part of any lockup provisions per se, but I was part of the buying group of the business so I wrote a personal cheque alongside M + W, so you could say I’m pretty vested in its performance.

I don’t believe in the investment banking model of selling your business and then washing your hands on it and moving on.

Last year was one of the biggest-ever years for solar panel installation. What happened this year and what do you expect for 2012?

So last year was a 400 megawatt ballpark installation year, so to give you some context on that, Germany on a good year will do 12 gigawatt so it’s about 30 times the size of Australia.

We will do about probably 760 megawatts this year so we’re going to double last year’s performance, or almost.

However, next year could be slightly down on this year.

So we’ve had a bumper year this year, there’s no question about it.

Why is it that your peers are collapsing?

I think volatility is what hurts companies most.

Fifty percent of our revenue, or most, comes from the REC subsidy, which has been around some time, and the price of that commodity – that renewable energy certificate – has gone from $40 down to $19.

So those companies that can’t wait to sell in the peaks and are forced to sell in the troughs, they will be hurt.

I suppose you expect solar won’t remain a cottage industry though? 

Absolutely, and we’re seeing the private equity funds coming into the market. Solar Shop unfortunately, they were also owned by a private equity fund.

Origin is the largest player now and we’re the second largest, so we’re also seeing the corporates start to move which means we expect some consolidation and some more sustainable moves into the solar market which will be large-scale, commercial-scale solar, finance and leasing products that support bigger solar system purchases.

So I’d expect it to move from a cottage to your sustainable business in the next three to four years. 

You mentioned Germany before and I remember a figure saying solar accounts for 40% there. Where is Australia now, 5%?

We’re about 8%. Five percent if you don’t exclude houses that aren’t appropriate for solar like townhouses and apartments. 

So as the second-largest provider in Australia, what market share is that?  

It’s actually very small. We’re the second largest with about 8% market share but that marketshare is in all markets bar New South Wales. In the markets that we operate, we’re about 12%.

Origin is about 14%, 15% so the two biggest players only occupy 22%, 23% of the market.

That just tells you just how fragmented the market is. There’s about 700 market participants in solar. 

And your business model, how many franchisees do you have and how does it work?

We just launched the franchise model about four months ago.

The intention of that model was to service regional customers better because as a metropolitan business to go out and do a road trip to do an installation 400 kilometres away you think, “that’s okay”, but then to go and service that customer when they have a one-off issue is a bit more difficult.

And as part of what I told you about before trying to get better with our customer service etc, we believed the franchise model was the best way to service the customers adequately.

So we launched it four months ago, we’ve got two franchisees, they’re going gangbusters and we expect to have about 30 franchisees by about mid next year. 

And how much is it for a franchise?

We keep it fairly low upfront so the franchise fee is under $25,000 upfront.

What we’ve done in the model is consolidated all of the services that normal small players do and get, so we’ve consolidated the REC aggregation model, the wholesale buying, all the normal things they pay for so they shouldn’t be any worse off under our model than if they just did it themselves.

Plus they get a bit of our strategic thinking in terms of our REC hedges and our RX hedges and all of those kinds of things that keep us ahead of our competitors.