Markets
Sterling & Wilson needs to deliver on growth in H2FY25 to maintain a good run
Summary
- Sterling & Wilson has been under financial stress, having made losses in the past two fiscal years because of high overheads and interest costs.
MUMBAI : Sterling & Wilson Renewable Energy Ltd’s shares have gained about 12% this week thanks to the company’s robust projection for H2FY25 after clocking 36% revenue growth in the three months ended September (Q2FY25). The management has guided that H2FY25 revenue to be three times H1FY25 revenue thanks to strong order backlog and improved financial position.
However, Sterling needs to keep a watch on its costs as it operates in a low-margin business, and any cost escalation can substantially dent its profits.
The solar engineering, procurement and construction (EPC) company has a total order book of over ₹10,000 crore or 2.7x trailing twelve months revenue. The market has seen a significant uptick in ordering activity, with order inflow of over ₹2,000 crore in Q2FY25, up from less than ₹500 crore in Q4FY24. For FY25, management has guided for a total order inflow of ₹8,000 crore.
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“We expect the V-shaped earnings recovery to play out in H2FY25, accelerating to a hockey stick curve on a strong global outlook," said analysts at Nuvama Institutional Equities in a 15 October report.
Business recovery
About 20% of the company's orders come from Europe and South Africa, giving it a foothold in these markets. It had also signed an MoU with the Nigerian government, along with a domestic firm, for a renewable project of over $2 billion two years ago. While the agreement is not yet finalized, the management has expressed confidence in signing the deal soon. In a strategic move, Sterling has also taken up two turnkey EPC projects, which include the supply of solar modules. While this exposes the company to the risk of solar module price fluctuation, it also opens up a bigger market opportunity with a higher margin.
In Q2FY25, Sterling’s earnings before interest, taxes, depreciation, and amortization (Ebitda) were up more than ten-fold, aided by strong revenue growth and lower project and employee costs.
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The company has been under financial stress, having made losses in the past two fiscal years because of high overheads and interest costs. Recently, Sterling received a loan of ₹500 crore from Ireda to accelerate project execution. Earlier, a qualified institutional placement of ₹1,500 crore in December helped it lower the debt level from over ₹2,000 crore at the end of September 2023 to ₹330 crore now. This was the third quarter of profits for the company, accompanied by an improvement in its financial position.
Amid this, the stock has gained close to 50% so far in 2024. According to Nuvama, the stock is trading at 20x FY26 estimated earnings-per-share against its peers, which are trading at 36-42x one-year forward earnings per share estimates. Hereon, investors will watch if Sterling is able to deliver over the next two quarters in keeping with the company’s guidance.
