About
SW Solar is the leading pure-play global solar EPC solutions provider in the world and a major Solar O&M player globally, with rich operational experience and significant presence worldwide. The company continues to dominate the solar EPC space and augment geographical presence, while maintaining a domestic leadership position. A global leader in EPC services for utility-scale solar, floating solar and hybrid & energy storage solutions, company has a total portfolio of over 18 GW and manages an operation and maintenance (O&M) portfolio of around 8.2 GW as of June 2024 solar power projects, including projects constructed by third-parties.
From Conceptualisation to Commissioning with an asset-light business model, the company has established a presence in 28 countries and has expanded operations in the key markets of India, Southeast Asia, the Middle East, Africa, Europe, Australia, and the Americas.
History and Turnaround
● Company commenced operations in 2011 and was earlier a part of Shapoorji Pallonji Group. In 2022, Reliance Industries Limited (RIL) acquired a 40% stake in the Company through its subsidiary Reliance New Energy Limited (RNEL). The association with RIL has further strengthened its position as a Global EPC and a leading Solar O&M player.
● Before the COVID-19 pandemic, the company primarily focused on international EPC projects, generating over 80% of its revenue from exports. Most of these contracts were fixed-price, which prevented the company from passing on increases in raw material costs and rising operational expenses. As a result, when the pandemic struck in 2020, the company faced severe financial distress, with debts of approximately ₹2,200 crore and significant losses in its international operations, putting it on the brink of bankruptcy.
● The losses in international operations stemmed from several factors, including rising operational costs such as increased prices for solar modules, higher logistics expenses and one of their Chinese module suppliers didn’t honour their contracts. Additionally, an Australian vendor filed for bankruptcy which resulted in a loss of approximately 100 crores for the company. The burden of debt became a double-edged sword, further jeopardizing the company’s financial health and pushing it close to the brink of bankruptcy.
● Since its listing, the company’s stock price plummeted by 90% during the COVID period, reaching a low of ₹69 due to its near bankruptcy situation.
● After a long gap of 4 years, recently Q4FY24 company has posted profit and still continues to be profitable.
● After Covid, Company has raised 1100 crore via preferential issue from Reliance New Energy Ltd in December 2021 making it a strategic partner. Also with another Rs. 1,500 crores via QIP in December 2023, Promoter indemnity receipts of up to 300 crores, and Inflows from settlement with customers helped the company to repay its debt and turnaround.
● Now More than 80% of the revenues comes from the domestic market, which shows a shift in the strategy of the company.
Industry Overview
As of March 24, the current cumulative renewable capacity stands at 4,163 GW and the global renewable energy industry is well-poised to add approximately 3,700 GW of new renewable capacity between 2023 and 2028. The growth shall be driven by improving economics and favourable policy implementations in over 130 countries, in addition to the sector’s ability to diversify energy resources, transform energy security and combat climate change.
As per the IEA, by 2028, renewable energy sources are anticipated to account for over 42% of global electricity generation, with the combined proportion of wind and solar PV doubling to 25%.
During the COP28 in Dubai in December, 2023. The pledge was taken which aims to triple global renewable energy capacity to at least 11,000 GW by 2030. Despite the existing policy and market challenges, projections indicate that global renewable capacity is on track to reach 7,300 GW by 2028. Moreover, in an accelerated scenario, global cumulative capacity is expected to double to 8,130 GW by 2028.
Industry Challenges
As per industry reports, the key challenges in the renewable energy industry are being mentioned as follows:
Grid Integration: The intermittent nature of renewable energy sources presents a unique challenge for integrating them into the existing power grid. Fluctuations in energy supply due to weather conditions require advanced energy storage solutions and upgrades to grid infrastructure to accommodate distributed generation.
High Initial Cost: One of the primary challenges in the renewable energy industry is achieving cost competitiveness with traditional fossil fuel-based energy sources. Despite significant declines in the costs of technologies in the solar and wind segment, the initial investment for installation has remained high. Continued support for research and development is essential to drive down costs, improve efficiency, and encourage widespread adoption of renewables.
Continuous Technological Upgrade: Constant research and development are vital for overcoming technological limitations in the renewable energy sector. Innovations in solar panel design, wind turbine technology, and energy storage systems can enhance efficiency and reliability, making renewables more viable.
Lack of Skilled Workforce: The renewable energy industry faces a shortage of skilled workers with expertise in technologies, grid integration, and policy development. Collaborative efforts between governments, educational institutions, and industry organisations are required to promote training programmes and initiatives to build a capable workforce.
Indian Industry Overview
The solar energy industry in India contributed 38.8% of the renewable energy basket as of March 2023, showing robust growth over the last five years. Between FY18 and FY23, the solar power sector added 54.8 GW capacity, with a CAGR of approximately 25.27%. In FY23, solar capacity additions reached approximately 12.78 GW, with about 2.2 GW from rooftop solar projects driven by state-level incentives, and the rest from utility scale. According to CRISIL’s MIA report, the EPC market for solar and wind in India is projected to reach approximately 2580 billion by FY28, up from 780 billion in FY23.
India, apart from being the third-largest energy consumer in the world, also stands out for its renewable energy capacity. Ranking fourth in its installed capacity for renewables, it is geared to ensure that at least half of its energy needs by 2030 is met through renewable sources.
The Indian Renewable Energy Sector is driven by government initiatives, low-cost finance, declining solar power costs, open-access solar project expansion, and increasing rooftop installations, India stands at a unique vantage point to become a key global player in solar energy production. The addressable market for solar EPC is set to grow at 14-15% per annum. India stands 4th globally in Renewable Energy Installed Capacity and has set an enhanced target at the COP26 of 500 GW of non-fossil fuel-based energy by 2030.
FY24 Business Performance
● IN FY24 company has significantly deleveraged their balance sheet and as a result Net Debt as of March 2024 was 116 crores, considerably lower than 1966 crore a year ago. With no debt repayments due till Q3-FY2025.
● The O&M gross margins stood at 16.01%.
● In FY2024, the company experienced a strong momentum in order booking, ending the year with 6023 crore order inflows, totalling ~3.3 GW. The unexecuted order book increased 65% to 8084 crores as of March 2024.
● Company has won two international BOS orders worth EUR 132 million from Plentitude in Spain and Enfinity in Italy, marking the first international orders after a gap of 3 years. These orders are in line with revised risk matrices and are helping the company mitigate the risk of module price exposure.
Q1FY25 Results and Performance
● Rev at 916 cr vs 515cr YoY
● PBT at 15cr vs loss of 96cr YoY
● PAT at 5cr vs loss of 96cr YoY
Company continues to make profit for the 2nd quarter continuously.
Margins Guidance
● They believe our gross margin will hover in the 10% range as seen in the domestic EPC margins for the Q1FY25
● In International EPC Projects. Margins are around 10%-12%
● The OM gross margins would be close to 24%
● EBITDA margin to be in the range of 5%-7%
Future Ahead
● Currently, the Company is actively pursuing projects totalling 23 GW in India and 5 GW in the international geographies.
● Company has expanded into new businesses like round-the-clock renewable energy projects with battery storage and focus on large solar PV + BESS projects.
Key Catalyst in Future
● The Nigeria project which is funded by Exim Bank of U.S.A in the African continent has a revenue potential of ~1.5 to 2 Bn USD for the company. As per the officials, the final terms have been negotiated and procedural steps are in progress which would take nearly 6 months to achieve financial closure due to various US institutions also involved. Also, post order signing, the company expects the project to take six months for execution, and revenues will be recognised next FY26.
● The O&M portfolio grew from 7.67 GW in March 2024 to 8.2 gigawatts as of June 2024 whose fruits are expected to come in 12-18 months and thus can lead to Margin expansion
● The Company has created a particular SBU for Reliance and Reliance overall has renewable energy targets of 100 GW by 2030 (Solar being major) which is a very huge opportunity for the company.
● Solar + BESS (Battery Energy Storage System) is also a huge opportunity for the company with BESS margins to be very high (For example the BESS EBITDA margins for Gensol Engineering, a similar company, is around 90%)
● A Special Dividend Opportunity in SW Solar in Future
Note 58 to the Standalone Financial Statements of the company which details the Company’s exposure in respect of its investment in a wholly owned subsidiary, loans given together with accrued interest thereon and other receivables aggregating to 2733.10 crores as at 31 March 2024. (Also mentioned in Q1FY25 results) The Company is confident that these amounts are recoverable based on the projected cash flows of the wholly owned subsidiary and amounts recoverable under the indemnity agreement with the Promoter Selling Shareholders.
With Current outstanding shares of 23.3 crore, taking into consideration that this amount is received in future then the company can have either the option to retain the cash for business growth or a special dividend opportunity may rise.
This amounts to roughly a special dividend of around Rs 110 per Share, but in my view, the company may not fully pay the cash received from the subsidiary into dividends. So, one can expect a dividend of around Rs.50 in future. But since these claims are in Arbitration and various legal proceedings it may take even more than a year to fully solve all their claims as many of their suits filed are pending for hearing in the year 2025.
Current Situation
● Earlier company used to do only BOS(Balance of system) type EPC contracts but they have taken a couple of projects in the domestic market with modules with extreme caution.
● In int projects, now the company is able to pass on the price risk.
● Projects in excess of 1GW have a typical execution timeline of 15-18 months. And the IPP projects in India, typically over 200 megawatts have a timeline of 10 to 14 months (Avg Execution time - 12-15 months)
● After taking a project, What you need are Letter of Credit limits for 90 to 120 days for critical equipment supplies. So all in all, put together, it said it could be around 40% to 50% at the peak of any project. It does not mean that if I need INR 8,000 crores of turnover, I need to have 50% of the limit at all points in time. It is a churn - the % may change.
● Bank guarantees are 20% of the project value typically
● A lot of the deferred tax was utilized in the previous year. As of the June quarter, we have utilized about INR10 crores. We still have another INR30 crores of deferred tax, which will get utilized.
Key Risk
● One of few companies which has 3 promoters. So that itself is something very rare. And then the promoter continuously selling, pledging (Reliance New Energy and Shapoorji and Pallonji Group and Khurshed Daruvala)
● Overhang of contingent liability
● Exposure to volatility in raw material prices and project execution risk
● SW Solar generally operates in larger EPC projects where the turnaround time is higher and there is higher risk related to receivables and other operational costs.
Technical Analysis
As of 20 September 2024, On a Weekly chart, 20-50 Moving Average crossover signals a bullish trend, with the price trading comfortably above both averages. A very important support level is around in the range of ₹623-₹650, where strong demand has emerged. Based on this, it’s unlikely that the price will dip below this level unless there’s a severe market correction.
With the RSI at 59, the stock is in a neutral to slightly bullish zone, indicating potential momentum building up. Historically, H2 tends to be stronger in terms of results and order flows, which could further fuel the stock’s price rise.
Importantly, the chart shows that the stock has broken out of a 5-year consolidation range, surpassing its IPO price. With improving business fundamentals and a stronger balance sheet, there’s a solid foundation for the stock to continue its upward trajectory.
#Renewables #SolarEPC
