Sterling and Wilson Solar IPO opens today: Should you subscribe to it?

Sterling and Wilson Solar (SWSL), the solar engineering, procurement and construction (EPC) solutions provider, is set to launch its initial public offering (IPO) on Tuesday (August 6). SWSL is promoted by the Shapoorji Pallonji Group and is the demerged Solar EPC Division of Sterling and Wilson (SWPL). The company commenced operations in 2011 as the Solar EPC Division of SWPL and demerged from SWPL with effect from April 1, 2017. 

Here's a look at the key things you need to know before you decide to invest:

Company details

SWSL is a global pure-play, end-to-end solar EPC solutions provider, and was the world’s largest solar EPC solutions provider in 2018 based on annual installations of utility-scale Photo-voltaic (PV) systems of more than 5 megawatt (MW), according to the company's DRHP (draft red herring prospectus). The company provides EPC services primarily for utility-scale solar power projects with a focus on project design and engineering and manages all aspects of project execution from conceptualising to commissioning. 

It also provides operations and maintenance (O&M) services. The company operates in around 26 countries and is the largest solar EPC solutions provider in each of India, Africa and the Middle East, according to IHS Markit in 2018. 

It functions on an asset-light business model, under which its customers are responsible for sourcing and acquiring real estate while it typically lease equipment required for the operations.

About the IPO

The issue is entirely an OFS (offer for sale) with around 40.1 - 40.3 million shares in offering. The offer represents around 24.98 per cent of its post issue paid-up equity shares of the company. The price band of the offer has been fixed between Rs 775 - 780 apiece. At the higher end of the price band, the company aims to raise around Rs 3,125 crore. 75 per cent of the net issue shall be allocated on a proportionate basis to qualified institutional buyers, while rest 15 per cent and 10 per cent is reserved for non-institutional bidders and retail investors, respectively. 

The money raised will be utilised towards funding full repayment of the loans due to SWSL and Sterling and Wilson International Solar FZCO (SW 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.Promoter holds 100 per cent stake in the company and post-IPO this will come down to 75.02 per cent. Public holding will increase from current nil to 24.98 per cent. 

The issue will close on August 8, 2019. 

Financials

As per reports, SWSL reported a 44.4 per cent compound annual growth rate (CAGR) rise in consolidated operating revenue over FY16-19 to Rs 8,240.41 crore in FY19. Revenue was primarily aided by 43.9 per cent CAGR rise in the business from EPC contracts. EBITDA (earnings before interest, tax, depreciation and amortisation) grew at a CAGR of 50.4 per cent during the same period while Reported PAT increased by 72.1 per cent CAGR.

During FY19, revenue grew by 19.9 per cent to Rs 8,240 crore, EBITDA margin stood at 7.8 per cent (stable vs last year) and net profit grew by 41.3 per cent to 639 crore. Cash & equivalents stood at Rs 455 crore and debt to equity at 2.6x (vs 0.9x in FY18).

Key strengths & risk factors

Focus on efficient and cost effective engineering solutions: SWSL’s operations are supported by a competent and sizable design and engineering team that are responsible for designing solutions that are innovative and cost-effective, with the aim of increasing the performance ratio of solar power projects, notes analysts at ICICI Securities in an IPO note. 

Strong relationships with customers, key stakeholders: The company's global network connects its customers to key stakeholders, allowing it to reduce the number of service providers, thus saving time and cost, while also providing enhanced supply chain visibility.

Market leadership through strategic overseas expansion: SWSL aims to maintain market leadership position through strategic expansion, including through roll up acquisitions in the current markets operate and into new geographies that present attractive opportunities.

Delay in project completion and advance receipts from customers and slower-than-expected ramp-up of solar power demand are some of the risk factors. 

Should you invest? 

Most brokerages have assigned 'subscribe' rating to the issue; however they appear a bit cautious courtesy ongoing correction in the market.

At the higher price band, the company is demanding a consolidated P/E (price-to-earnings) valuation of 19.6x (to its FY19 EPS of Rs 39.8), which at discount to its peers average of 33.7x (excluding P/E multiple of Scatec Solar ASA). Based on FY20E and FY21E EPS (earnings per share), SWSL is demanding a P/E multiple of 16.8x and 11.8x, respectively, notes Choice Broking. 

"Thus considering the above observations, long term growth potential of solar energy and the demanded valuation, we feel that the company is better placed at right time. However, with current turbulence in the domestic equity market, we assign a “Subscribe with Caution” rating for the issue," the brokerage firm said in a note.

Echoing similar views, analysts at Centrum Broking say SWSL is well placed to capitalise on the opportunities from the solar power sector. "We suggest that investors can "Subscribe" to the issue from a long-term perspective," they added.

SWSL is likely to benefit from the fact that is the the largest global EPC contractor in an industry that is seeing a massive thrust towards renewable energy, notes Motilal Oswal Financial Services. Other factors that seem favourable are its asset-light business model, and strong parentage. "However, considering the current market environment and absence of past comparable financials, investors can Subscribe only from a Long Term perspective," the brokerage wrote in an IPO note.