Renewable Energy

India I Equities Company Update

Change in Estimates  Target  Reco 

16 October 2024

Sterling & Wilson

Rating: BUY
Credit ratings upgrade to drive execution; retaining a Buy Target Price (12-mth): Rs870
Share Price: Rs583
A pure-play global solar EPC and O&M service provider, Sterling &
Wilson’s record Q2 orderbook of Rs105bn and the upgraded credit rating
will help it achieve its FY25 revenue target of Rs80bn. Further, RIL’s Key data SWSOLAR IN
52-week high / low Rs828 / 253
plan to set up a 100GW RE capacity (predominantly solar and battery Sensex / Nifty 81820 / 25057
storage) by 2030 to meet its net-zero goal could offer EPC opportunities 3-m average volume $16.2m
of Rs1.1trn over FY26-31 (opportunity of ~Rs300bn in EPC for the Market cap Rs136bn / $1617.9m
company; ~Rs24bn in O&M services). We maintain our estimates and Shares outstanding 233m
retain a Buy rating with an unchanged TP of Rs870.
Steady growth, but below our estimates. The company’s Q2 EBITDA rose
12x y/y to Rs182m, lagging ARe of Rs856m. PAT at Rs86m came behind ARe
of Rs668m, vs. a loss of Rs545m in Q2 FY24. Lower revenue recognition due Shareholding pattern (%) Jun’24 Mar’24 Dec'23
to the monsoons resulted in the difference in estimates. The company’s H1 Promoters 13.27 13.29 13.29
FY25 revenue was Rs19.5bn (up 52.7% y/y); EBITDA was Rs428m vs. a loss - of which, Pledged - - -
of Rs357m in H1 FY24. Its PAT was Rs134m vs. a loss of Rs1.4bn in H1 FY24. Free float 86.7 86.7 86.7
- Foreign institutions 21.5 19.5 16.3
Domestic EPC drove revenue growth. In Q2, EPC revenue grew 37% y/y - Domestic institutions 9.1 6.3 6.2
to Rs9.7bn (domestic: Rs9.3bn; international Rs360m) and O&M services, 16% - Public 56.0 60.9 64.2
y/y to Rs597m. EPC EBIT increased 62% y/y to Rs868m and O&M EBIT,
37% y/y to Rs162m.
Ratings upgrade to allow quick access to bank credit. Recently, the
company’s long-term rating was upgraded to ACUITE BBB (investment grade)
and short-term rating to ACUITE A3, which will enable quick access to credit. Relative price performance
The company also received loan of Rs5bn from IREDA to accelerate project 1,000
execution. 800
` 600
Outlook, Valuation. The stock is trading at a P/E ratio of 24.8x and
400
EV/EBITDA of 20.1x FY26e. We retain our Buy rating with a 12-mth TP of
Rs870, given the impressive turnaround and growth opportunities. Risks: 200

Adverse government policies, keen competition. 0

Feb-24
Dec-23
Nov-23

Jan-24

Jun-24
Jul-24
Aug-24
Sep-24
Mar-24

May-24

Oct-24
Oct-23

Apr-24

SWSOLAR Sensex
Key financials (YE Mar) FY22 FY23 FY24 FY25e FY26e
Source: Bloomberg
Sales (Rs m) 51,989 20,150 30,354 77,791 1,02,999
EBITDA (Rs m) -9,135 -11,300 -226 4,499 6,686
Net profit (Rs m) -9,221 -11,885 -2,097 3,978 5,479
EPS (Rs) -48.6 -62.6 -9.0 17.1 23.5
PE (x) NA NA NA 39.3 28.5
EV / EBITDA (x) NA NA NA 35.0 23.2
P/BV (x) 17.4 NA 16.5 11.6 8.3
RoE (%) -119.5 -363.6 -59.8 34.7 33.9
RoCE (%) -74.2 -70.9 3.0 20.5 22.1
Avishek Datta
Dividend yield (%) - - - - - Research Analyst
Net debt / equity (x) -0.1 -7.4 0.1 0.1 -0.1 +9122 6626 6732
[email protected]
Source: Company, Anand Rathi Research

Anand Rathi Share and Stock Brokers Limited (hereinafter “ARSSBL”) is a full-service brokerage and equities-research firm and the views expressed therein are solely of
ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient. Disclosures and analyst
certifications are present in the Appendix.

Anand Rathi Research India Equities

16 October 2024 Sterling & Wilson – Credit ratings upgrade to drive execution; retaining a Buy

Quick Glance – Financials and Valuations

Fig 1 – Income statement (Rs m) Fig 2 – Balance sheet (Rs m)
Year-end: Mar FY22 FY23 FY24 FY25e FY26e Year-end: Mar FY22 FY23 FY24 FY25e FY26e
Share capital 189.7 189.7 233.2 233.2 233.2
Net revenues 51,989 20,150 30,354 77,791 1,02,999 Net worth 8,977.9 -2,440.5 9,458.5 13,436.1 18,915.2
Growth (%) 2.3 -61.2 50.6 156.3 32.4 Debt 4,350.6 20,149.5 4,766.6 22,462.1 17,462.1
Direct costs 58,829 30,083 29,328 71,915 94,800 Minority interest -109.3 -152.2 -141.6 -121.6 -81.6
SG&A 2,296 1,367 1,251 1,376 1,514 DTL / (Assets) -1,008.8 -981.1 -639.4 -767.3 -920.7
EBITDA -9,135 -11,300 -226 4,499 6,686 Capital employed 12,400 16,765 13,677 35,243 35,608
EBITDA margins (%) -17.6 -56.1 -0.7 5.8 6.5 Net tangible assets 352.0 383.7 514.2 646.2 681.0
- Depreciation 147 147 167 133 243 Net intangible assets 73.1 58.7 48.0 57.6 69.1
Other income 947 1,109 854 647 1,397 Goodwill - - - - -
Interest expenses 767 1,449 2,185 607 1,024 CWIP (tang. & intang.) 0.7 0.8 - - -
PBT -9,102 -11,787 -1,723 4,407 6,816 Investments (strategic) - - - - -
Effective tax rates (%) -0.6% -0.4% -22.3% 10.2% 20.2% Investments (financial) - - - - -
+ Associates / (Minorities) -63 -54 11 20 40 Current assets (excl. cash) 28,524.9 29,527.6 38,411.9 48,943.4 61,041.4
Net income -9,221 -11,885 -2,097 3,978 5,479 Cash 5,040.4 951.8 3,391.9 21,099.6 18,801.3
Adj. income -9,221 -11,885 -2,097 3,978 5,479 Current liabilities 21,591.0 14,157.2 28,688.8 35,504.3 44,984.7
WANS 190 190 233 233 233 Working capital 6,934 15,370 9,723 13,439 16,057
FDEPS (Rs) -48.6 -62.6 -9.0 17.1 23.5 Capital deployed 12,400 16,765 13,677 35,243 35,608
Contingent liabilities - - - - -

Fig 3 – Cash-flow statement (Rs m) Fig 4 – Ratio analysis

Year-end: Mar FY22 FY23 FY24 FY25e FY26e Year-end: Mar FY22 FY23 FY24 FY25e FY26e
PBT (Adj. OI and interest) -9,102 -11,787 -1,723 4,367 6,443 P/E (x) NA NA NA 39.3 28.5
+ Non-cash items 147 147 168 133 243 EV / EBITDA (x) NA NA NA 35.0 23.2
Oper. prof. before WC 2,057 592 1,611 4,499 6,686 EV / Sales (x) 3.0 8.7 5.2 2.0 1.5
- Incr. / (decr.) in WC -9,943 -7,080 5,682 3,716 2,618 P/B (x) 17.4 NA 16.5 11.6 8.3
Others incl. taxes -57 -164 -354 RoE (%) -119.5 -363.6 -59.8 34.7 33.9
Operating cash-flow -16,898 -18,292 5,384 783 4,068 RoCE (%) - after tax -74.2 -70.9 3.0 20.5 22.1
- Capex (tang. + intang.) -132 -92 -10 274 289
Free cash-flow -16,765 -18,200 5,394 509 3,779 DPS (Rs) - - - - -
Acquisitions - - - - - Dividend yield (%) - - - - -
- Div. (incl. buyback & taxes) - - - - - Dividend payout (%) - incl. DDT - - - - -
+ Equity raised 10,901 - 14,747 - - Net debt / equity (x) -0.1 -7.4 0.1 0.1 -0.1
+ Debt raised 181 842 8,950 17,696 -5,000 Receivables (days) 55 143 100 70 66
- Fin investments 264 -70 -118 - - Inventory (days) - - - - -
- Misc. (CFI + CFF) - - - (80) (453) Payables (days) 100 118 181 90 76
Net cash-flow 2,377 -4,096 2,477 18,285 -768 CFO: PAT (%) 183.3 153.9 -256.8 19.7 74.3
Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research

Fig 5 – Price movement Fig 6 – Non-valuation chart

(Rsbn)
(Rs)
900 300

800 249 245

250
700
600 200
172
153
500 150
400
100 81
300 75 81
60
200 50 44 49
33
100 7
0
0
FY22

FY23

FY24

FY25e

FY26e

FY27e
Feb-21
Dec-20

Jun-21
Aug-21

Dec-21

Jul-22
Sep-22
Nov-22
Jan-23

Jul-23
Sep-23
Nov-23
Jan-24

Aug-24
Mar-22
May-22

Mar-23
May-23

Mar-24
May-24
Oct-20

Apr-21

Oct-21

Oct-24

Order booking Order backlog

Source: Bloomberg Source: Company, Anand Rathi Research

Anand Rathi Research 2

16 October 2024 Sterling & Wilson – Credit ratings upgrade to drive execution; retaining a Buy

Results highlights

Fig 7 – Quarterly trend

(Rs m) Q2 FY25 Q2 FY24 Y/Y % Q1 FY25 Q/Q % H1 FY25 H1 FY24 Y/Y %
Gross sales 10,305 7,595 35.7 9,151 12.6 19,456 12,745 52.7
Cost of raw materials, components
7,294 4,674 6,415 13,709 7,073
consumed, and services rendered
% of revenue 70.8 61.5 70.1 70.5 55.5
Direct project costs 1,975 2,264 1,714 3,689 4,428
Employee benefits 474 558 469 943 1,145
% of revenue 4.6 7.3 5.1 4.8 9.0
Other expenses 381 84 306 687 457
% of revenue 3.7 1.1 3.3 3.5 3.6
Total expenditure 10,123 7,581 8,904 19,027 13,102
EBITDA 182 15 1134.7 247 -26.4 428 (357) NA
EBITDA margin 1.8 0.2 2.7 2.2 -2.8
Depreciation & amortization 38 43 40 78 77
EBIT 143 (28) NA 207 -30.7 350 (435) NA
Other income 340 172 128 468 246
Interest 282 643 188 471 1,264
PBT 201 (500) NA 147 37.0 347 (1,453) NA
Current taxes 80 11 1 80 11
Deferred tax 35 35 98 133 35
Tax expense 115 46 99 213 46
% of PBT 1.1 0.6 1.1 1.1 0.4
Profit after tax 86 (545) NA 48 78.5 134 (1,498) NA
PAT margin 0.8 -7.2 0.5 0.7 -11.8
Minority interest 15 - (6) 22 (1)
Profit from discontinued operations - - -
Net profit 101 (545) NA 42 142.5 156 (1,499) NA
Source: Company, Anand Rathi Research

Q2 FY25 segment performance

◼ In Q2, the company’s EPC revenue grew 37% y/y to Rs9.7bn. Of
this, domestic EPC contributed Rs9.3bn and international EPC
Rs360m.
◼ O&M services generated Rs597m, which grew 16% y/y.
◼ EBIT for the EPC business increased 62% y/y to Rs868m and for
the O&M business, 37% y/y to Rs162m.

Anand Rathi Research 3

16 October 2024 Sterling & Wilson – Credit ratings upgrade to drive execution; retaining a Buy

Fig 8 – Revenue breakup

(Rsm)
12,000 11,242

10,000 9,701
8,586
8,000 7,077

6,000 5,254
4,675
4,000

2,000
475 516 575 538 565 597
0

Q1FY24

Q2FY24

Q3FY24

Q4FY24

Q1FY25

Q2FY25
EPC Business Operation and maintenance service

Source: Company

Debt concerns subside

◼ Net debt for H1 FY25 was Rs3.1bn (due to the Rs5bn loan received
from IREDA), up from Rs1.4bn in FY24, but substantially down
from Rs19.2bn in FY23.
◼ The reduction in the company’s net debt was driven by stronger
business revenue, better cashflow management and timely
fundraising.

Fig 9 – Net debt movement

(Rsm)
12,000 11,780

9,151
9,000
7,595

5,829
6,000 5,150

3,000

0
FY21

FY22

FY23

FY24

H1FY25

Net Debt Movement

Source:Company

Conference call highlights

◼ The company’s credit rating was upgraded to investment grade, which
would allow increased access to credit from banks.
◼ Utilization of the Rs5bn loan received from IREDA is underway.
◼ The 4GW Khawda project is on track for completion by FY25.
◼ Management is confident of meeting its FY25 revenue target of
Rs80bn, with H1 revenue at Rs19.5bn.
◼ The pilot project for RIL is progressing, with completion expected by
Q3 FY25 and a larger rollout by end-FY25.
◼ Strong sector tailwinds are likely from relentless RE capacity
expansion by PSUs and private players.

Anand Rathi Research 4

16 October 2024 Sterling & Wilson – Credit ratings upgrade to drive execution; retaining a Buy

◼ Excluding orders from RIL and Nigeria, the company anticipates a

15-20% revenue CAGR in the medium term.
◼ The company is positioned to capitalize on significant growth
opportunities.

Fig 10 – Order inflows

(Rsm)
30,000
26,400
25,000 24,210
21,700
20,440
20,000

15,000
12,191
10,000

4,880
5,000

Q1FY24

Q2FY24

Q3FY24

Q4FY24

Q1FY25

Q2FY25
EPC Order Inflow

Source: Company

Anand Rathi Research 5

16 October 2024 Sterling & Wilson – Credit ratings upgrade to drive execution; retaining a Buy

Valuations
Greater demand supported by ambitious capacity added helped to sharply
turn around the company’s balance sheet. Given the steady growth in
business prospects, we value the company according to the DCF method.
At the CMP, the stock quotes at 34.2x/24.8x FY25e/26e P/E. We retain
our Buy rating and the 12-mth DCF-based TP of Rs870.

Fig 11 – DCF table

FY23 FY24 FY25e FY26e FY27e FY28e FY29e FY30e FY31e FY32e
EBITDA (Rs m) -11,300 -226 4,499 6,686 11,908 15,916 18,799 20,082 21,086 22,141
Current tax (Rs m) 67 -27 -222 -1,023 -2,405 -3,205 -3,856 -4,130 -4,337 -4,554
Total capex (Rs m) -164 -286 -274 -289 -507 -428 -354 -385 -300 -300
Chg. in net working capital (Rs m) -8374 5837 -3656 -2545 -8393 -8310 -6173 -4090 -2130 -2236
Total free cash flows (Rs m) -19,771 5,299 347 2,828 603 3,972 8,416 11,477 14,320 15,051
PV of cash flows 383 2,828 546 3,261 6,258 7,732 8,740 8,323
WACC, % 10.38 -1 0 1 2 3 4 5 6
Terminal growth rate, % 5
Terminal value 343,054
Terminal EV / EBIDTA 13.4
PV of terminal value 141,065
PV as % of EV, % 70

Enterprise value 201,878

Net debt as on Mar 26 (882)
Equity value 202,761
Value per share 870
WACC, % 10.4

Risk-free rate, % 7.0

Beta (what beta is this, levered or
0.8
unlevered
Rm 5.0
Cost of equity % looks to be low any equity
10.7
investor would want to have more than this

Cost of debt, % 10.0

Debt / Capital 10
Tax rate, % 25
Source Company, Anand Rathi Research

Fig 12 – FY26e earnings sensitivity to execution and margins

Scenario 1 Scenario 2 Base case Scenario 3 Scenario 4
EPC execution (Rs m) 10% lower 20% lower 99,511 10% higher 20% higher
execution execution execution execution
EPS (Rs/sh) 20.0 16.5 23.5 27.0 30.5
EPC gross margins (%) 9.0 9.5 10.4 11.0 11.5
EPS (Rs/sh) 18.6 20.4 23.5 25.6 27.4
Source: Company, Anand Rathi Research

Risks
◼ Adhoc changes in government policies.
◼ Keen competition.

Anand Rathi Research 6

16 October 2024 Sterling & Wilson – Credit ratings upgrade to drive execution; retaining a Buy

Anand Rathi Research 7