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Sterling & Wilson Renewable Energy Ltd

| Q3 FY26 Earnings Conference Call

BULLISH SENTIMENT

Report Source

⬤23rd Jan 26

Summary : Sterling and Wilson Renewable Energy achieved record Q3 revenue and significantly increased order guidance, driven by strategic partnerships and a strong outlook in India's renewable and BESS sectors, despite past legal and margin challenges.

Management Perspective positive : Management expressed happiness with order achievements, confidence in project delivery, and a strong outlook. Phrases like 'eventful and exciting time,' 'happy to announce,' 'confident of delivering,' and 'strong inroads' indicate a positive tone. They also reiterated confidence in winning court cases and maintaining margins.

Concall Report Analysis & Insights

Business Overview

  1. Achieved highest ever Q3 top-line performance since listing, with INR2,092 crores revenue.
  2. Nine-month revenue grew 48% year-on-year to INR5,602 crores.
  3. Secured INR3,086 crores of new orders in Q3, including a gigawatt-scale Adani Green project.
  4. Unexecuted order book stands at INR10,413 crores, providing strong revenue visibility.
  5. Operations and Maintenance (O&M) portfolio reached 10 gigawatts, providing steady annuity stream.

Future Growth Prospects

  1. Increased order inflow guidance to over INR11,000 crores for FY26, a 60%+ year-on-year growth.
  2. Entered a multiyear strategic partnership framework agreement with Adani Green Energy Limited.
  3. Strong BESS credentials established with a 790-megawatt hour Serentica project win.
  4. Actively pursuing large multiyear, multi-gigawatt RE rollout with Reliance, beyond current guidance.
  5. India's BESS capacity is projected to grow significantly, needing 34.7 GW by FY27.

Management Insights

  1. "We have been able to deliver on the key order inflows guidance, which is a critical lead indicator of the company's business health."
  2. "We are increasing our order inflow guidance to more than INR11,000 crores in this fiscal."
  3. "Our strategy to only work as per our terms and risk appetite in the international market is bearing fruit."
  4. "We are increasingly engaging in projects that are part of multiyear capacity rollouts, involving repeatable scopes."
  5. "We expect the EBITDA margins to be in the range of 5% plus and gross margin around 8% to 10% in the future."

Signs of Skepticism

  1. Management's confidence in winning all pending US court cases, despite past losses in the Conti matter.
  2. The exact timing and financial impact of the anticipated Reliance multi-gigawatt rollout remain somewhat vague.
  3. O&M margin dip attributed to a 'one-off' defect liability, but the recurrence of such events is a concern.
  4. The expectation of module price stabilization after a period of turbulence, which is subject to market forces.

Risk Factors

  1. Aggressive bidding from smaller new EPC entrants in PSU projects observed in recent quarters.
  2. Potential for module price fluctuations due to changes in China's export rebates.
  3. Around 40 gigawatts of tendered projects in India still await PPA signing or land acquisition.
  4. Contingent liabilities from past legal cases, though management believes major ones are resolved.
  5. Operational O&M margins impacted by one-off defect liability expenses in an Australian project.

Good To Know

  1. The Global CEO, Mr. C.K. Thakur, marked his first anniversary in the role.
  2. The company has raised approximately INR2,500 crores in fresh funds this fiscal, including fund-based and non-fund-based limits.
  3. Received full indemnity payment from Mr. Khurshed Daruvala; expecting Shapoorji Group payment by January 31.
  4. Conti legal matter, which was not covered by indemnity, resulted in an additional INR30 crores charge for legal fees.

Key Drivers

  1. Adani strategic partnership secures future orders.
  2. Increased order inflow guidance signals strong growth.
  3. Growing BESS market offers new opportunities.
  4. Reliance project traction to boost order book.

Key Analyst Discussions

Competitive Environment

  1. New EPC entrants are aggressively bidding, especially in PSU projects.
  2. Company prioritizes quality of earnings over aggressive bidding, focusing on margins.
  3. Adani Green partnership involves 4-5 major EPC players, including Sterling & Wilson and L&T.
  4. Module price risk is now transferred to clients until Notice to Proceed (NTP) date in new contracts.

Market Trends & Consumer Behavior

  1. India's renewable energy sector outlook is fundamentally constructive with rising installed capacity and lower costs.
  2. Significant capital reallocation is expected in the power value chain due to BESS capacity requirements.
  3. Domestic module manufacturing capacity is growing, expected to meet Indian market demand.
  4. Module prices experienced turbulence due to changes in Chinese subsidies, but market is expected to stabilize.

Financial Highlights

  1. Gross margins are expected to remain in the 8% to 10% range, with EBITDA margins targeted at 5% plus.
  2. Operational EBITDA for 9 months is up 115% year-on-year to INR289 crores.
  3. Interest costs increased due to INR500 crores IREDA loan and INR100 crores NBFC loan in Q3.
  4. O&M margins dipped to 18% in Q3 from the usual 20-25% due to a defect liability expense in Australia.
  5. Tax expenses were low due to booking exceptional losses from the Conti case, allowing for tax loss set-offs.

Product Composition

  1. BOS (Balance of System) orders generally yield better percentage margins than turnkey orders with module supplies.
  2. The 790-megawatt hour BESS project for Serentica is valued at approximately INR170 crores.
  3. BESS project margins are expected to be around 10%, similar to other EPC works.
  4. Company is building capacity to handle large projects like Adani and anticipated Reliance rollouts.

Strategic Considerations

  1. The Adani framework agreement is for 5+ years, targeting a minimum of 1 gigawatt of EPC orders annually.
  2. Traction for the Reliance multi-gigawatt project is expected to start in Q4 FY26 or Q1 FY27.
  3. International projects in South Africa and Europe are progressing well, with focus on profitable terms.
  4. Company aims for 15-20% of overall revenue or order book to be international, with a primary domestic focus.