In an interaction with Shweta Papriwal, Editor, IIFL, Mr. Bikesh Ogra, Global CEO and Director, Sterling and Wilson Solar Limited, said "We have increased our presence in key developed markets like Australia and US where we are seeing a decent traction. We are also looking at increasing our presence in Europe and Latin America markets to further diversify our order book.”
Can you provide a brief overview of your business profile?
Sterling and Wilson Solar Ltd (SWSL) is a Shapoorji Pallonji (SP) Group company. Sterling and Wilson Solar Ltd (SWSL) is a pure play global EPC player in Solar with presence over more than 25 countries. We provide EPC services primarily for utility-scale solar power projects with a focus on project design and engineering and manage all aspects of project execution from conceptualising to commissioning. We also provide Operations and Maintenance (O&M) services, including for projects constructed by third parties.
SWSL commenced operations in 2011 as the solar EPC division of Sterling and Wilson Private Limited (SWPL) and was demerged from SWPL with effect from April 1, 2017. Over nine years, we have spread our reach to more than 25 countries and as at Dec 2019, we had 230 commissioned and contracted solar power projects with an aggregate capacity of 9.2GW and O&M portfolio of 7.4GW as of January 2020. We were ranked number one EPC player in 2018 as per IHS Markit report with market share of 4.6%.
What are the growth prospects of global solar power sector?
Climate change concerns, rising air pollution, concerns on energy security and energy access, and rising volatility in oil prices, have all led to the need for alternative low-carbon technology options such as renewables especially solar energy. Among all renewable technologies, solar power installations have been dominating the renewables industry for many years.
Solar Power has been one of the revolutionary renewable technologies over the last decade. According to International Renewable Energy Agency (IRENA), by the end of 2018, the total installed capacity of solar power reached 480 GW, representing 20% year-on-year growth compared to 2017 (386 GW) and a compound annual growth rate (CAGR) of nearly 43% since 2000. In 2018, solar power yet again dominated total renewable and power capacity additions, adding twice as much capacity as wind and more than all fossil fuels and nuclear together.
As per IHS Markit, Solar share in the annual power additions is expected to increase from 25% in 2018 to 38% in 2022. Despite these, solar share in total installed capacity will be 10% by 2022 and considering PLF factor, the solar share will be just 2% -3% of total installed capacity. Hence, there are good long-term prospects for Solar sector.
What are the inherent strengths of your company?
SWSL is the only pure play global solar EPC player with a significant presence and operational experience across geographies. Our strong track record of executing complex & large-scale EPC projects coupled with quick decision-making process has led to timely execution of project and repeat business. We have adopted a hub-and-spoke business model wherein we manage the complete supply chain from India and Dubai, including the design and engineering. We have strong relationships with customers, suppliers and lenders which help us to get the win repeat business. Additionally, we have a strong design and engineering team of 175 people based in India, which gives us cost arbitrage in geographies, where resource costs are high.
Given, also the strong parentage of Shapoorji Pallonji Group, we benefit and have the ability to bid for projects of very large capacities, which becomes an added advantage, compared to our competition. We have an asset light business model with negative to low working capital requirements and very low fixed overheads.
What is the current fixed cost structure of the Company? Do you see any operating leverage with increase in revenue?
As a percentage of our revenues, our fixed costs stood at 3.8% of our revenues in FY19. Since we have adopted a hub-and-spoke business model wherein we manage the complete supply chain from India and Dubai, including the design and engineering functions, we do tend to save and get the leverage on fixed costs. We have presence across the globe with resources predominately present in India, Dubai, Australia and US. We engage with local third-party sub-contractors for the execution of the project at the site, obviously under our direct supervision. This provides us the flexibility to quickly move in and out quickly from a particular country without any major fixed costs being incurred. We clearly see an operating leverage from FY21 onwards with a substantial increase in revenue in FY21.
What is your current order book and executable timeline of the same?
Our Gross Unexecuted Order Value (UOV) as on 12th February 2020 was ~Rs13,000cr which comprises of UOV as at Dec 2019 and new orders received in Q4 until 12th Feb. Of this UOV, projects with UOV more than Rs5,100cr are already entered in execution phase whereas projects with UOV of more than Rs7,700cr are about to commence / enter execution phase. Considering the COVID-19 situation, there are some delays in the commencement of these projects, but we are hopeful of situation improving and expect the unexecuted UOV to be fully executed over the next 14-20 months.
What is the reason behind the subdued performance in 9MFY20 viz-a-viz 9MFY19?
Firstly, I would like to state that being an EPC company, the revenue, order inflow, and gross margins could be lumpy due to geographical mix and stage of execution of the projects in any particular quarter. Hence comparison on YOY or QOQ basis, would be inappropriate, as well as the performance for a quarter may not be representative for the full year.
One of the reasons for the subdued revenue growth in 9MFY20 is that during 9MFY19 we were executing 1.2 gigawatts project in Abu Dhabi and the execution was in full swing and thus the revenue recognition was higher to that extent. Secondly, there has been delay in commencement of a large project in Middle East and delay in the announcements of the feed-in tariff in Vietnam by almost a year. However, the point to note is that in spite of these delays, the gross margins in 9MFY20 has been higher at 13.1% compared to 9.3% during the corresponding period in the previous year. We expect to end the year with gross margins in the range of 11% -12%.
What is the growth outlook for FY21?
As stated above, Our Gross Unexecuted Order Value (UOV) as on 12th February 2020 is ~ Rs13,000cr which comprises of UOV as at Dec 2019 and new orders received in Q4 until 12th February. As indicated in our earnings call, we expect to do Rs. 1,500 crore to Rs2,000cr in the last quarter of FY20 due to impact of COVID-19 on the execution of the projects across the globe. The comforting part is that Chinese vendors, who constitute a substantial part for the Supply chain of a Solar project, have started production of the modules and other equipments and have already started to supply. Whilst, we are experiencing slowdown in the projects for certain geographies, we are fully geared up to expedite the work as the situation normalizes in countries. We are evaluating the current situation and the growth outlook will depend upon how quickly the situation normalizes.
Are there any new countries / markets that the company is targeting to enter?
We have increased our presence in key developed markets like Australia and US where we are seeing a decent traction. We are also looking at increasing our presence in Europe and Latin America markets to further diversify our order book. Our plan to enter the South Korean Market, may get deferred by 6 months owing to Covid-19 outbreak.
How do you see O&M traction building up over the next 5 years? What are the margins on O&M business?
Our O&M business continues to see strong traction. Our portfolio on the O&M side has increased from 5.5 GW as of March 31, 2019 to around 7.4 GW as of January 31, 2020. Third-party O&M contracts constitute around 40% of our O&M portfolio, and O&M revenue has more than doubled to around Rs132cr in the nine months FY20 compared to Rs59cr during the similar period in the FY19. The share of O&M business now stands at 3.7% of 9MFY20. We have been increasing our focus on O&M portfolio in last two years as it provides steady cash flow with better profitability margins. Overall margins for O&M, on an average basis, would be in the region of about 35% to 40% on blended basis with little higher margins in certain International geographies.
What is the status of inter-corporate deposits taken by the promoter companies?
The promoters have repaid Rs1,500cr since listing date till 31st March 2020 as per the revised repayment schedule provided by the Promoters. As per the repayment schedule, the promoters will facilitate repayment of Rs500cr on or before 30th June 2020 and the balance amount of approximately Rs650cr on or before 30th September 2020.
I would also like to especially bring to your attention we have amended the Articles of Association of the Company which prohibits the Company from giving any kind of loans to promoters or their affiliates post listing.
What will be the likely impact of COVID-19 on the growth prospects of the company?
Majority of Solar modules and other equipment’s are sourced from China from where the supply has been disrupted since the month of February 2020 due to coronavirus pandemic. Since the middle of March month, Chinese companies have started manufacturing and the dispatches have also started. The Chinese factories are currently running at 70%-80% capacity utilization. These equipments, are not off-the-shelf products but are customised according to the specific requirements of the project. Thus, these need to be inspected by our consultants and employees based in China, in addition to inspection by customers because of which we are seeing certain delays.
We give utmost priority to the safety and the health of employees, consultants and subcontractors working in the project. Whilst, we are experiencing slowdown in the projects for certain geographies, some of the countries have projects fully under construction. We are monitoring the situations continuously and are fully geared to expedite the projects execution as soon as the situations normalizes in the countries where the projects have been halted owing to the lock downs.
What has been the impact on ongoing project cost and margins due to COVID -19?
There is no major impact on project cost and margins due to COVID-19 as this event has been classified as force majeure which absolves us from any claims by the project developers on account of delay in project execution. Delay in projects will likely have an impact of 1% to 1.5% on margins on account of site related overheads. These overheads are spread across the complete tenure of the project and hence the impact will be much lesser for projects with 2 to 3 months of shut down. Obviously, we are reaching out to our customers to see how best they can compensate us, on these losses as well.
There has been a significant drop in oil prices in last few months. Will this have any impact on the solar capacity additions of the IPP players?
The Power purchase agreements (PPA’s) for the solar projects are signed for a duration of 25 years or more. The significant dip in the oil prices may last for a year or so. However, we would surely see a rebound in the oil pricing sooner or later. That would change the complete dynamics of the electricity pricing.
Besides, countries are focusing on increasing share of renewable energy to total energy generation. We all know that developed countries are shutting down thermal power plants and coal mining. Among, all the renewable energy sources, solar power, off late has been the most cheap and reliable source of energy. Let me highlight few points which support our belief that solar power is the future of the world:
- Solar share in the annual power additions is expected to increase from 25% in 2018 to 38% in 2022. Despite these, solar share in total installed capacity will be 10% by 2022 and considering PLF factor, the solar share will be just 2% -3% of total installed capacity.
- Levelized cost of energy (LCOE) of solar has fallen to levels below coal-based plant. A report released last year by the International Renewable Energy Agency (IRENA) predicted that electricity generated by onshore wind and solar will be consistently cheaper than any fossil fuel source starting 2020.
- Falling module prices and more efficient technologies has been helping to make solar energy more viable.