Sterling and Wilson IPO review (May apply)

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Review By Dilip Davda on August 1, 2019

• SWSL is the world's largest solar EPC solution provider.

• It has to its credit the single largest global solar plant of 1177 MW capacity at Abu Dhabi.

• Rising demand for solar power globally, the company is poised for bright prospects ahead.

• Investment for the long term may be considered in this unique mega player.

 
ABOUT COMPANY:

Sterling & Wilson Solar Ltd. (SWSL) is a global pure-play, end-to-end solar engineering, procurement and construction ('EPC') solutions provider, and were 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 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 conceptualizing to commissioning. It also provides operations and maintenance ('O&M') services, including for projects constructed by third-parties. The company commenced 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, SWSL became the largest solar EPC solutions provider in each of India, Africa and the Middle East according to IHS Markit in 2018 and currently have a presence across 26 countries. As of March 31, 2019, it had 205 commissioned and contracted solar power projects with an aggregate capacity of 6,870.12 MWp. SWSL's order book, which it defines as the value of solar power projects for which the company has entered into definitive EPC contracts minus the revenue already recognized from those projects, was Rs. 3831.58 cr. as of March 31, 2019.

 
The company offers a complete range of customized solutions for solar power projects. Its customers include leading independent power producers ('IPPs'), developers and equity funds. SWSL adopts a consultative approach to its customers' solar energy needs and capabilities, which enables it to provide customized solutions to meet their requirements. The company follows a 'hub-and-spoke' business model where it manages the complete supply chain from India, including the design and engineering functions, and engage a few suppliers and third-party subcontractors and procure part of the raw materials for operations locally in each of its markets, where there is a cost advantage or to comply with local regulations. SWSL seek to leverage this business model to procure products and services solutions for customers at competitive prices. Its customers also benefit from the company's relationships with key stakeholders, such as, suppliers, project lenders and consultants, which help it execute projects for customers efficiently and at competitive prices. In Fiscals 2018 and 2019, its revenue from operations outside India accounted for 59.11% and 69.82% of total revenue from operations, respectively. The company often receives repeat orders from customers and as of March 31, 2019 customers in India and outside India for whom it has executed more than one project constituted 83.26% and 64.35% of total commissioned solar capacity, respectively.

 
As of March 31, 2019, all of the company's design team is based in India, which it believes provides a cost advantage over its competitors. SWSL's design and engineering team of 154 employees continually seeks to improve the efficiency of solutions and services. The company believe that its design and engineering solutions, coupled with robust quality compliance checks on PV modules help it in achieving more than the contractually agreed performance ratio for the solar power projects it constructs. In Fiscals 2018 and 2019, SWSL did not pay liquidated damages related to performance ratios under EPC contracts as it achieved the contractually agreed performance ratios under those contracts.

 
SWSL is enjoying a 16.6% market share in solar power EPC projects in India and is at No. 1. The company at No. 2 is having a market share of 5% and thus there is a wide gap between the first two market players, as informed by the management.

 ISSUE DETAILS/CAPITAL HISTORY:

For listing benefits and providing a partial exit to existing stakeholders, SSWL is coming out with a maiden IPO of approx 40064103 equity shares of Re 1 each (based on upper price band) via book building route. It is having a secondary issue by way of Offer for Sale to mobilize Rs. 3125 crore. It has fixed a price band of Rs. 775- Rs. 780 per share. The issue opens for subscription on 06.08.19 and will close on 08.08.19. Minimum application is to be made for 19 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. Issue constitutes dilution of 25% of the post issue paid-up equity capital of the company. This being OFS, its paid-up equity capital will remain the same at Rs. 16.04 cr. post IPO. SWSL has reserved 75% for QIBs, 15% for HNIs and 10% for retail investors.

 
SSWL has issued initial equity at par in 2017. It converted further equity pursuant to the scheme of arrangement at par (having a face value of Re. 1) in 2018.

 
The average cost of acquisition of shares by the promoters is Rs. NIL and by the selling stakeholders is Rs. NIL.

 
BRLMs to this issue are ICICI Securities Ltd., Axis Capital Ltd., Credit Suisse Securities (India) Pvt. Ltd., Deutsche Equities India Pvt. Ltd., IIFL Securities Ltd., SBI Capital Markets Ltd., IndusInd Bank Ltd. and Yes Securities (India) Ltd. Link Intime India Pvt. Ltd. is the registrar to the issue.

 
FINANCIAL PERFORMANCE:

On the financial performance front, as the company got demerged from the group in April 2017, as EPC division of the group it (on a combined and consolidated basis) posted turnover/net profits of Rs.2746.47 cr./ Rs. 125.36 cr. (FY16) and Rs.1650.06 cr. / Rs. 31.43 cr. (FY17).

 
Post demerger for the period 09.03.17 to 31.03.18 it earned a net profit of Rs. 450.54cr. on a turnover of Rs. 6884.42 cr. For FY19 it has posted a net profit of Rs. 638.23 cr. on a turnover of Rs. 8449.93 cr. For the demerged period performance, it has posted enhanced other income of Rs. 209.53 cr. for FY19 against Rs. 12.71 cr. for FY18.

 
For the first year starting from 09.03.17 to 31.03.18, it posted fully diluted EPS of Rs. 29.97 and for fiscal 2019 it has posted an EPS of Rs. 39.85. RoNW for the said periods were 118% and 62% respectively. The issue is priced at a P/BV of 12.24 based on its NAV of Rs. 63.70 as on 31.03.19.
 
If we consider FY19 earnings and attribute it on post-issue equity capital, then asking price is at a P/E of around 19.6. Thus issue appears fully priced in the given current market status.

 
COMPARE WITH LISTED PEERS:

As per offer documents, SWSL has no listed peers to compare with.

 
MERCHANT BANKER'S TRACK RECORDS:

On BRLMs' front, eight merchant bankers associated with the offer have handled 48 public issues in the past three fiscals, out of which 18 issues closed below the issue price on listing date.

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