Sterling and Wilson Solar IPO for Rs 3,125 crore kicks off; should you subscribe?

Sterling and Wilson Solar IPO (initial public offer) for Rs 3,125 crore opened for subscription today. A Shapoorji Pallonji subsidiary, Sterling and Wilson Solar is among the largest global solar engineering, procurement and construction (EPC) solutions provider. Sterling and Wilson Solar emerged as 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) with a market share of 4.6 per cent for the year, according to a report by IHS Markit. Even as investors may be mulling to subscribe to the issue, we take a look at key details of the public offer.

Issue details

Sterling and Wilson Solar’s public offer consists of an Offer for sale (OFS) of Rs ,3125 crore out of which up to Rs 2,083.33 crore worth shares will be sold by  Shapoorji Pallonji & Co and the remaining Rs 1,041.67 crore is being sold by Khurshed Yazdi Daruvala. Since it’s a complete offer for sale, Sterling and Wilson Solar will not receive any proceeds from the issue. The company has fixed a price band between Rs.775 – 780 per share. The minimum bid lot has been fixed at 19 Shares and in multiples thereafter. The issue will remain open till 8th August 2019.

Strengths of the issue

Taking stock of the strengths, Axis Capital noted that Sterling and Wilson Solar has is the largest global solar EPC solutions provider in a fast growing solar industry. Further, the firm is a comprehensive end-to-end EPC solutions provider with a global execution track record with a dedicated design and engineering team focused on innovation and developing efficient and cost effective engineering solutions. The firm also has a strong parentage and ability to leverage global “SP” brand. Strong growth and financial performance backed by an asset-light business model, Experienced key management personnel, project management and operations team are also among the notable strengths of Sterling and Wilson Solar.

Risks and Concerns

Brokerage ICICI Direct has said that loss of key customer could significantly reduce revenue for Sterling and Wilson Solar. Further, the firm faces risks if solar PV and related technology are regarded as unsuitable in the future. Any restrictions in supply or quality defects could cause delays, uncertainty in winning bids for solar project, and inability to estimate costs under fixed-price contract also pose key concerns, noted ICICI Direct.

Financials

Taking stock of Sterling and Wilson Solar, Centrum Broking said that the revenue grew by 19.9% to Rs 8,240 crore, while the EBITDA margin stood at 7.8% (stable vs last year). Notably,  Sterling and Wilson Solar’s net profit grew by 41.3% to Rs 639 crore. The Cash & cash equivalents stood at Rs 455 crore and debt to equity at 2.6 times (vs 0.9 times in FY18). Short term borrowings increased to Rs 2,228 crore (vs Rs 184 crore last year) owing to demerger, higher buyer’s credit and loans (working capital). Post IPO, the management plans to make the business debt-free, said Centrum in its report.

Valuations

Given the currently tepid environment, many brokerages have advised investors to invest only with a long-term perspective. Based on FY19 consolidated numbers, the issue is priced at a P/E of 19.6x, noted Motilal Oswal. “The company is likely to benefit from i) being the largest global EPC contractor in an industry that is seeing a massive thrust towards renewable energy ii) an asset-light business model, and iii) strong parentage. However, considering the current market environment and absence of past comparable financials, investors can Subscribe only from a Long Term perspective,” said Motilal Oswal. According to Angel Broking, the issue is priced expensive given no significant competitive or technology advantage. “Lack of listed peers makes comparison difficult. High growth rate in Solar PV installation is expected to slow down post 2019. Considering the fact that industry is highly competitive with no meaningful barriers to entry, we have a NEUTRAL view on SWSL,” said the firm.

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