Sterling and Wilson Solar Ltd’s initial public offering (IPO) will test investor appetite for large issues.
After receiving an approval to raise ₹4,500 crore, the promoters of the company have decided to sell shares worth ₹3,125 crore.
At the higher end of the price band of ₹780, the price-to-earnings ratio works out to about 20 times FY19 earnings. As such, there are no direct listed peers for Sterling and Wilson in India. Nonetheless, these valuations are similar to Larsen and Toubro Ltd (L&T), and significantly higher than KEC International Ltd, both of which derive sizeable overseas revenues from EPC (engineering procurement and construction) work, although from different sectors.
Even so, Sterling and Wilson’s shorter execution cycles limit the working capital requirement, thereby offering superior returns. Furthermore, sizeable revenues come from overseas, where execution risks are comparatively lower. The promoters’ presence in a number of markets, industry relationships and project management expertise helps Sterling and Wilson Solar, which partly explains the IPO valuations.
“It is not easy for a normal EPC company to build such capability," says Deepak Agrawala, executive director (investment banking) at Elara Capital (India) Pvt. Ltd.
Revenue and profit, on an average, have grown 44-72% per annum in the last three fiscal years. The robust growth and steady profitability underscores Sterling and Wilson’s competitive advantage in utility scale projects.
That said, given the short execution cycles of solar power projects, it is crucial that the order book is replenished quickly. Note that excluding other income, the company’s profitability has remained stable despite the steady decline in tariffs across the globe. This was helped by high exposure to overseas projects, which are more remunerative than projects in India.
Even so, Sterling and Wilson’s Ebitda margin (excluding other income) of 7.8% is lower than 11.6% clocked by L&T and 10.5% by KEC for FY19. Ebitda is short for earnings before interest, tax, depreciation and amortization.
Further, as projects in the overseas markets are increasingly being awarded through competitive bidding, suppressing tariffs, analysts fear profitability of the industry stakeholders will be compressed or capped.
According to one domestic market observer, the pressure ultimately comes on EPC. “We are living through a revolution in the costs of renewable power technology. Lower costs will boost wind and solar generation’s share of the power mix from the current 6% to a much higher level in coming years. This will create both opportunities and disruption in the industry," Alex Whitworth, research director at Wood Mackenzie, said in a recent note on renewables in Asia-Pacific.