Sterling and Wilson Solar IPO: Business model, diverse operations key

Shapoorji Pallonji & Company holds a 66% stake in SWS while the rest is held by Khurshed Yazdi Daruvala

The timing of Sterling and Wilson Solar’s (SWS’) initial public offering (IPO) could raise some doubts as the power industry has little to cheer about — whether thermal or renewables. Yet, investors could look at the IPO, given some of its strengths especially in terms of operation. For one, much in sync with its promoter – Shapoorji Pallonji’s operating model — SWS is a pure-play EPC (engineering-procurement-construction) player operating in the solar power segment.

Shapoorji Pallonji & Company (SPC) holds a 66 per cent stake in SWS while the rest is held by Khurshed Yazdi Daruvala, promoter of the company. Both plan to offload a 25 per cent stake collectively through the IPO.

SWS was incorporated as a solar EPC division of Sterling & Wilson Pvt Ltd in 2011. In April 2017, it was demerged from its parent company to tap the equity market. Being an EPC contractor, the company takes negligible project-level exposure to debt or equity, thus ensuring that its balance sheet remains light from a liability perspective. SWS follows the global practice of ensuring that it doesn’t commence work unless its client secures all required permission for execution of the project. To that extent, SWS’ clients are responsible for sourcing and acquiring real estate and funds required for the project. This is why the default rate of SWS is also well below 1 per cent. SWS’ leadership in India — 16 per cent market share — and some of the key countries it operates in, such as Africa and West Asia with a share of 36–40 per cent, could also provide comfort to investors. In addition, IHS Markit indicates that SWS was a global leader in solar EPC projects with a 4.6 per cent market share in 2018. The comforting factor is that the company largely caters to independent power plants (IPPs), project developers and equity funds. SWS doesn’t have much history of working on government tenders — in India or globally.

The other major strength is its ability to diversify. From almost 100 per cent of its income coming from India in 2017, SWS has now broad-based its revenue stream to cover 26 countries, thus reducing the country or political risk that the business could face. SWS’ outstanding order book as on March 31, 2019, stood at Rs 3,832 crore, and letters of intent worth Rs 3,908 crore. Even the operating climate for solar power has become more predictable and cost effective in the recent years.   

SWS’ financials have been healthy in recent times. Gross margins at over 12 per cent and operating profit margin at 10 per cent, respectively, in FY19 is in-line with market standards for an EPC player. The balance sheet may not look so good yet, given SWS has a payable of Rs 2,227 crore and Rs 1,900 crore to receive from its group firms. As these are largely on account of the demerger exercise and will be squared off within 90 days from IPO according to the company filings.

While fundamentals are supportive of the IPO, priced at 17 times FY19 earnings on a diluted basis, the issue seems to a bit expensive considering the current market conditions. The key risks though are delays in project completion and advance receipts from customers, which is a systemic risk. According to the offer document, 35.76 per cent of SWS’ shares held by SPC shall be pledged in favour of HDFC pursuant to a financing facility that was availed by the promoter. With the Street turning unfavourable towards promoter pledge, it needs to be seen how this would be accepted by investors. Sterling & Wilson on Monday allotted shares worth Rs 1,406 crore to anchor investors. Some of the institutional investors allotted shares were Nomura, Schroeder International, and Fidelity Funds.

Sterling and Wilson raises Rs 1,406 crore
 
Sterling and Wilson on Monday allotted shares worth Rs 1,406 crore to anchor investors. Some of the institutional investors allotted shares were Nomura, Schroeder International, and Fidelity Funds. The solar engineering and construction firm’s IPO opens for the public on Tuesday. The IPO is an offer for sale by promoters Shapoorji Pallonji and Khurshed Yazdi Daruvala. The price band for the IPO is Rs 775-780 per share.