IPO Analysis: STERLING AND WILSON SOLAR LIMITED

IPO Rating - 51 (Investment recommended)*

About the Issue

Sterling & Wilson Solar (SWSL), a Mumbai-based world’s largest solar EPC solutions provider, is entering the capital market to raise around Rs 3125 crore. The price band is fixed at Rs 775-780. The total number of shares for sale is between 4.01-4.03 crore, which is entirely offer for sale by its promoter. The company will not receive any proceeds from this issue. The issue constitutes 25.1% of company’s post-offer paid-up equity share capital at the lower price band.

About the company

SWSL is promoted by Shapoorji Pallonji and Company and Khurshed Yazdi Daruvala and is a global pure-play, end-to-end solar engineering, procurement and construction (EPC) solutions provider. The company is the world’s largest solar EPC solutions provider in 2018 based on annual installations of utility-scale photovoltaic (PV) systems of more than five mega-watt peak (“MWp”), according to IHS Markit. SWSL focuses on utility-scale solar power projects and manages solar projects from conceptualising to commissioning. The company also provides operations and maintenance (O&M) services for third-party projects. The company is present across 26 countries.

The company commenced its operations in 2011 as the solar EPC division of SWPL and demerged from SWPL with effect from April 1, 2017. Over a span of seven years, the company became the largest solar EPC solutions provider. As of March 31, 2019, SWSL had 205 commissioned and contracted solar power projects with an aggregate capacity of 6,870.12 MWp. At the end of FY19, the order book, which is defined as the value of solar power projects for which the company has entered into definitive EPC contracts less the revenue already recognised from those projects, was Rs 3831.57 crore as on March 31, 2019.

In FY18 and FY19, the company’s revenue from operations outside India accounted for 59.11% and 69.82% of total revenue from operations, respectively. In terms of repeat orders, as of March 31, 2019, customers in India and outside India for whom the company has executed projects earlier constitute 83.26% and 64.35% of the total commissioned solar capacity, respectively.

The company benefits from brand reputation, industry relationships and project management expertise of the Shapoorji Pallonji (SP) Group and Sterling and Wilson (S&W) Group. The SP Group is a global conglomerate and has over 150 years of experience as an EPC solutions provider in six major business areas and operations across 45 countries. Currently, S&W has over 90 years experience of offering EPC solutions and operates across various industries, including mechanical engineering and plumbing, co-gen solutions, transmission and distribution, turnkey data centres, diesel generators and renewable in 34 countries. For example, SP Group’s presence in the Middle East, Africa and South East Asia assisted SWSL in accessing these markets. 

Currently, SWSL has presence across 26 countries. These countries are expected to show better growth rate in the next four years. For the period from 2018 to 2021, annual solar PV installations could grow at a compound annual growth rate (CAGR) of 11.7% in India, 70.6% CAGR in South East Asia, 22.2% CAGR in the Middle East and North Africa, 42.0% CAGR in the rest of Africa, 30.0% CAGR in Europe, 17.4% CAGR in the United States, 5.4% in CAGR Latin America and 8.1% CAGR in Australia. 

Financials

For the financial year ending March 2019, the company’s total turnover stood at Rs 8240.4 crore compared to Rs 2739.43 crore posted in FY16, an increase at CAGR of 45.44 per cent. The EBITDA of the company during the same period grew by a CAGR of 63 per cent to Rs 852 crore. The margins in the same period increased from 7.1% to 10.3%. Profit of the company during the period grew by a CAGR of 72% and was at Rs 638 crore.

The company has strong balance sheet with no long term liabilities.

Valuation and recommendation

At the upper price band, the issue is asking for market cap-to-sales (FY19) of 1.5 times, which looks attractive, especially looking at the revenue growth of the company in the last three years. The price-to-earnings (FY19) and EV/EBITDA of the company comes at 20 times and 22 times, respectively, which looks attractively valued. There are no listed entities in India whose business portfolio is comparable with that of the company’s business. Therefore, we advise our readers to subscribe to the issue with long term investment horizon looking at the company’s strong order book, balance sheet along with reasonable valuation.

*40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment