New Issue Monitor Click here for CM Rating Reckoner

NIM
Monday, 5 August 2019
CM RATING 40/100

Sterling and Wilson Solar

Focused on providing solar EPC solutions

Though the growth opportunity is good, the current order book is not enough to sustain growth over very high base of FY19. Promoter pledge is another concern

Sterling and Wilson Solar (SWSL) promoted by Shapoorji Pallonji Group and Khurshed Yazdi Daruvala is an end to end solar engineering, procurement and construction (EPC) solutions provider. The company also provides operations and maintenance (O&M) services, including for projects constructed by third-parties.

The company commenced operations in 2011 as the solar EPC division of Sterling and Wilson Private Limited (SWPL) and was demerged from SWPL with effect from April 1, 2017, and the appointed date being May 14, 2018. Over the span of 7-8 years as part of EPC division as well as independent entity, it became the world’s largest solar EPC solutions provider, based on annual installations of utility-scale PV systems of more than 5MWp, with a market share of 4.6% in 2018, which increased from 0.3% in 2014.

The company currently has a presence across 26 countries with operations in India, South East Asia, Middle East and North Africa, rest of Africa, Europe, United States and Latin America and Australia. The company is also the largest solar EPC solutions providers in each of India, Africa and Middle East in 2018 with 16.6%, 36.6% and 40.4% market share, respectively, according to IHS Markit. In 2017, it won the bid for the 1177 MWp solar power project in Abu Dhabi, which is the world’s largest single location solar PV plant. In Fiscals 2018 and 2019, its revenues from operations outside India accounted for 59.11% and 69.82% of the total revenue from operations, respectively. The company often receives repeat orders from its customers and as of March 31, 2019 the clientele in India and outside India for whom it has executed more than one project constituted 83.26% and 64.35% of its total commissioned solar capacity, respectively.

As of March 31, 2019, the company had commissioned and contracted solar power projects numbering 205 (commissioned 177, under construction 28) with an aggregate capacity of 6870.12 MWp. The company as of March 31, 2019 provides O&M services to 116 solar power projects in India, Middle East and North Africa, United Stated and Latin America and Rest of Africa, aggregating to 5557.89 MWp, of which solar power projects having an aggregate capacity of 1573.66 MWp were constructed by third-parties.

The company strategically focuses on markets that have conducive solar power policies and high solar resources, and invest in geographies with long-term solar opportunities. The company adopts a disciplined expansion strategy that it customizes for each market with a view to enhancing its bidding abilities in these geographies. For example, to tap opportunities in the United States, it adopted a co-development business model to help it secure EPC rights through equity investments in companies undertaking the relevant projects. In other markets, such as Australia, it has acquired local companies to help it establish a permanent presence in the market.

The company to improve the efficiency of solutions and services provided by it devotes substantial resources in design and engineering functions and innovative engineering efforts. In this regard it currently is developing a research and design centre in Rajasthan. As at March 31, 2019, the design and engineering team of the company comprises 154 personnel. Overall it had 1160 full-time employees as at March 31, 2019 including 154 personnel in design and engineering team, 203 experienced engineering in O&M team.

Offer and Objects

The issue comprises of an offer for sale by the promoters Shapoorji Pallonji and Company aggregating up to Rs 2083.33 crore and Khurshed Yazdi Daruvala totaling Rs 1041.67 crore. The promoter selling shareholders will utilize a portion of the net offer proceeds, towards funding full repayment of the loans due to the company and Sterling and Wilson International Solar FZCO from SWPL and Sterling and Wilson International FZE, a subsidiary of SWPL, respectively within 90 days from the date of listing of the Equity Shares.

Strengths

It has geographically diversified order book. Of the order book (including Letter of intents) Europe accounts for 22.1%, MENA (Middle East North Africa) 20%, USA & Latin America accounts 26.2%, Africa 12%, India 11.8% and South East Asia 7.9%.

Strong track record of executing complex and large-scale EPC projects leading to high customer retention and repeat business. Customer base of the company includes blue chip strategic IPPs and developers, such as Marubeni, EDF Renewables, Alten, Sunseap, Sao Mai, Enfinity, ACWA Power and BNRG Renewables, and equity funds. It has strong relationship with other stakeholders. Repeat customers’ accounts for about 83.3% in India and 64.4% outside India.

O&M contracts generally provide for standard services associated with operating and maintaining solar power projects and typically have a tenor of two to ten years (sometimes even 20 year) and this provides steady revenue visibility. The revenue from O&M that stood at Rs 24.276 crore in FY2017 has increased to Rs 43.749 crore in FY2018 and more than doubled to Rs 93.576 crore in FY19. As on March 31, 2019 it has an O&M contracts for 5557.89 MWp and of which about 28.3% is O&M contracts projects EPC done by third parties.

Solar being the fastest growing forms of renewable energy the company offers service and solutions to a fast growing market. Due to sustained steady decline in levelized cost of electricity for solar PV, the demand is on steady rise providing strong market visibility going forward. The company sees market opportunity with projects worth Rs l lakh crore under pipeline and it has already submitted bids for projects worth about Rs 50000 crore of it. The company with a bid conversion rate of 24.4% in Indian and 21.6% in overall is expected to have significant growth in order book assuring revenue visibility going forward.

The company operates an asset-light business model where it typically leases equipment required for operations with customers of the company responsible for sourcing and acquiring real estate. The asset-light business model generally entails low capital expenditures and fixed costs, and offers flexibility and scalability to meet customers’ needs, provide customized solutions and respond quickly to market conditions. The company is able to operate with low working capital requirements as EPC contracts of it are typically of short duration and it requires an advance payment from customers for certain deliverables. Moreover the EPC contracts include shorter payment cycles from customers compared to longer payment cycles from its suppliers.

Weaknesses

Order book value of solar power projects (for which definitive EPC contracts entered) minus the revenue already recognized from those projects was Rs 3831.577 crore, as of March 31, 2019. In addition as at March 31, 2019, there are Rs 3908.16 crore worth of orders for which the company has won bids and have received letter of intent (LOI) but have not yet executed definitive EPC contracts. Subsequent to March 31, 2019, the company has signed definitive EPC contract for Rs 2195.931 crore worth of projects out Of these Rs 3908.16 crore order book for which LOI was available but no definitive contract signed as on March 31, 2019. Solar PV projects typically have a gestation period of around 12 months. Still the current order book (order backlog + order for which LOI received) translates into only 0.9 times of the FY19 revenues, leaving scope for fall in revenues in the current year.

The aggregate outstanding borrowings (on a consolidated basis) as on June 30, 2019, was Rs 6741.366 crore which comprised of facilities that the company directly availed (Rs 6457.807 crore) and facilities utilized within the combined limits sanctioned to SWPL (the "SWPL Facilities"). The comparable debt level as of March 2019 was just Rs 2227.78 crore. The debt is expected to come down by Rs 1935.463 crore as the promoter selling shareholders will utilize a portion of the Net Offer Proceeds, towards funding full repayment of the loans due to the Company and Sterling and Wilson International Solar FZCO from SWPL and Sterling and Wilson International FZE (a subsidiary of SWPL), respectively, within 90 days from the date of listing of the equity shares.

EPC services business of the company is of fixed-price short-term EPC contracts in nature offered to private and state-owned solar power developers. Thus any spike in cost of supplies or unexpected duty rate hikes will exert pressure on margin/profitability of the company.

Majority stake (51% stake) in UAE-based subsidiary Sterling and Wilson Middle East Solar LLC is held by a UAE national, Ahmed Mohammed Jassim Aljassim, a nominee of the company for its benefit as UAE law restricts stake of foreign owners to 49% in UAE-based companies except those registered in UAE free zone. Though nominee arrangement is widely used by many non-UAE-owned companies, the ownership structure for Sterling and Wilson Middle East Solar LLC could be challenged before a UAE court.

The company has been operating as a separate, independent company for the last two years only and may not meet the bid requirements of track-record or technical and financial specifications on its own as well as the management band width in comparison to the competitors who have more experience and longer track record of operations. For example, in Vietnam, the company has faced difficulties in satisfying bid requirements because it was not able to demonstrate the required period of prior EPC experience. Moreover post demerger, SWPL is under no obligation to provide assistance other than the services agreed under the framework agreement.

Heavy reliance on few customers as top two clients accounted 57.28% and 36.86% of the revenues in FY 2018 and FY 2019, respectively, and top five clients accounted a high of 76.44% and 53.68%, respectively, in FY 2018 and FY 2019.

The company had negative cash flow from operating activities of Rs 318.63 crore and Rs 723.344 crore in Fiscals 2017 and 2019, respectively.

Up to 35.76% of the company’s equity capital held by Shapoorji Pallonji and Company Private Limited

is pledged in favour of Housing Development Finance Corporation Limited.

Valuation

Consolidated revenue of SWSL for the fiscal ended March 31, 2019, was up by 20% to Rs 1640.2 crore and the net profit (attributable to owners) was up by 41% to Rs 638.99 crore. The consolidated EPS for FY 2019 was Rs 40. The offer price of Rs 775.780 discounts the FY19 EPS by 19.4-19.5 times. The asking price is 9.9 times the order book. There is no comparable listed player with mirror business.

Sterling and Wilson Solar: Issue Highlights

Sector Engineering - EPC
Offer Size (in Rs crore) 3125.00
Price band (Rs.) 775-780
Post-issue equity (Rs crore) 16.04
Post-issue promoter (including promoter group) stake (%)  
On Lower price band 74.9
On upper price band 75.0
Minimum Bid 19 shares
Issue Open Date 6/8/2019
Issue Close Date 8/8/2019
Listing BSE, NSE
Rating  40/100

 

Sterling and Wilson Solar: Consolidated Financials

  1603 (12) $ 1703 (12) $ 1803 (12) 1903 (12)
Sales 2739.43 1640.27 6871.71 8240.41
OPM (%) 6.9 3.3 7.8 7.8
OP 188.82 54.88 537.75 642.10
Other income 7.04 9.79 12.71 209.53
PBIDT 195.86 64.67 550.46 851.63
Interest 0.63 2.80 18.62 84.65
PBDT 195.23 61.87 531.85 766.98
Depreciation 0.93 1.57 3.17 7.80
PBT before EO 194.29 60.30 528.68 759.17
E 20O Income 0.00 -0.02 0.00 0.00
PBT 194.29 60.28 528.68 759.17
Tax 68.93 28.85 78.14 118.12
PAT 125.36 31.43 450.54 641.06
Prior Period items/adjustments 0.00 0.00 0.00 2.82
PAT after PPT 125.36 31.43 450.54 638.23
Minority Interest 0.00 0.00 1.64 0.76
Share of P/L of associates 0.00 0.00 0.00 0.00
Net profit Attributable to owners of the company 125.36 31.43 452.18 638.99
EPS (Rs)* # 7.8 2.0 28.2 40.0
* EPS on Post issue equity capital of Rs 16.036 crore. Face Value: Rs 1
# EPS is annualised in case of nine month/half/ quarter financials
$ Results pertain to the SWPL - Solar EPC division (as derived from the carved out combined financial statement)
Figures in Rs crore
Source: Capitaline Corporate Database