Sterling and Wilson Renewable Energy Limited (SWSOLAR) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Sterling and Wilson Renewable Energy Limited Q1 FY '27 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements do not guarantee the future performance of the company, and it may involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. Today on the call, we have Mr. CK Thakur, Global CEO; and Mr. Ajit Pratap Singh, CFO, from Sterling and Wilson Renewable Energy Limited and SGA, who are their IR partner. I now hand the conference over to Mr. CK Thakur for his opening remarks. Thank you, and over to you, sir.

Thank you, and good morning, everyone. Let me begin with an update on our business operations and outlook. The most significant milestone of the quarter has been on the international front. In June, this financial year, we received a letter of award for our 50-50 joint venture with Hassan Allam Construction, one of the leading construction company in Egypt and the wider MENA regions for the West Minya Solar Power Project in the Minya government of Egypt. This is a landmark mandate, a 1,000 megawatt AC solar PV plant integrated with 600-megawatt hour battery energy storage system valued at approximately USD 560 million. Once completed, it will rank among Egypt's largest utility scale renewables development. For us, it marked the third gigawatt scale order win in the space of 9 months, a clear signal, both of the rising ticket size of the projects and of the confidence that marquee developers place in our ability to execute complex storage integrated solar at scale. The joint venture will undertake the full engineering, procurement and construction scope spanning the photovoltaic general facilities. The battery store infrastructures, grid connection, transmission works and all associated balance of the plant. With this order win, we concluded Q1 FY '27 with highest even EOV of INR 13,000 crores, driving a strong visibility for revenue growth for forthcoming quarters. At this point, I would like to draw your attention to the fact that current EOV comprises 6 turnkey projects, 3 each in India and international markets, which are yet to commence execution. The total value of these 6 projects is approximately INR 9,000 crores. These orders were owned during the second half of financial year '26 and Q1 FY '27. We expect these orders to start contributing more meaningfully during the second half of the fiscal year. Since these are the large projects, we also expect the working capital cycle of the company to significantly improve as the customers' advances for these large projects start flowing through. Moving to the market outlook. The domestic solar EPC market remained a bit slow for a second consecutive quarters due to geographical tensions, volatile commodity prices and high domestic module prices, which deferred new projects of ours. Activity on battery storage market has been increasing exponentially with both stand-alone base projects getting awarded and hybrid solar projects with battery storage. We believe there is significantly large market. We remain patient to get profitable orders out of this. We continue to remain patient and are only pursuing margin-accretive projects. The bid pipeline continues to remain extremely robust at 27.7 gigawatt, of which almost 90% is in India focused. The current bid pipeline is purely focused on the solar PV market and also the BESS projects which is another large opportunities in itself. In value terms, we expect the BESS market ordering activities to be almost equal to the size of the PV market. We anticipate ordering activity to pick up from this quarter in the domestic market, and we are confident of maintaining our market share, which, in our view, should enable us to deliver 10% to 15% growth in revenue, this fiscal despite the high base of financial year '26. On the international market outlook, we continue to remain very optimistic on the Africa and Middle East markets and certain geographies in Europe. We currently have 3 ongoing projects in Africa and Middle East, which should commence execution during this quarter. In all our international projects, we continue to judiciously evaluate the risk and rewards and are mindful of not being exposed to the commodity prices and equipment price increase risk. As I have indicated in previous calls, all international solar projects undertaken thus far have been completed successfully within the projected margins. Moving to the operations and maintenance segments. We have now achieved a record 18.3 gigawatt peak of peak capacities under operations. We anticipate this full portfolio to start contributing fully from third quarter to this fiscal year. The O&M business provides us a steady annuity stream and good gross and EBITDA margin due to a very low overheads. Our engagement with the Reliance Group continues to be deeper. As you have seen, the Reliance Group articulated at its recent annual general body meeting an ambition to build one of the world's largest integrated renewable energy hubs in the Kutch region of Gujarat, a development spread across 5.5 lakh acres designed to deliver round-the-clock power at gigawatt scale by integrating solar generation with battery storage and targeted to generate in excess of 40 billion units annually, equivalent to close to 3% of India's current power demand. The Reliance Group has already commissioned its integrated new energy manufacturing ecosystems and the first phase of its 40 gigawatt, our battery Gigafactory is on track for commission this year with a stated pathway to 120 gigawatt hours. We are working very closely with Reliance Group on technical configurations and execution readiness. While the timing and quantum of specific orders will necessarily follow their rollout schedule, we remain confident of becoming large shareholders of Reliance initiative. I want to close my remarks with a point of philosophy because in this business, the discipline that matters is not merely winning orders, but exiting projects without negative surprises. We continue to protect ourselves through back-to-back pricing arrangements with our supply chain. We remain deliberately selective staying away from the mandates that carry land major write-off way or resource risk outside our control and we run the business as we always have on the negative working capital model. That conservatism is in our considered view precisely what we -- what will separate the durable players from the rest as the cycle matures. With that, I'll hand over to Ajit to take you through the financials of the company.

Thank you, CKT sir, and very good morning, everyone. I'm pleased to report a significant milestone in our unexecuted order value exceeding INR 13,000 crores, which is a first in the company's operating history post-COVID era on the back of strong order inflows. While our first quarter performance may not be very exciting from a top line perspective, the unexecuted order value and expected execution time lines give us confidence to close this fiscal year with around 10% to 15% growth in overall top line. This implies a strong pickup in top line growth in the forthcoming quarters. For Q1 FY '27, our revenue came in at INR 1,590 crores, and it was lower both sequentially and year-on-year due to lower rate of execution, primarily in the international EPC segment. Due to fag end of completion of 4 of our international projects in South Africa, Spain and Italy, we were mindful in new international business due to earlier challenges faced in international market. Now with the success story of 4 successful international projects, we have bagged 3 new projects, 2 in South Africa and 1 in Egypt, where the execution and revenue flow is likely to start soon. So as CKT alluded during his opening remarks, a significant proportion of our UOV is yet to commence execution, post which our top line growth is also expected to pick up. A bright spot in our Q1 results was the performance of O&M segment, where the top line grew around 40% year-on-year due to the significant increase in O&M portfolio size. We expect continued improvement in O&M top line as the complete portfolio is yet to contribute fully. We anticipate full contribution of 18.3 gigawatt to commence from Q3 FY '27 onwards. On the gross margin front, our Q1 FY '27 gross margins were around 9.9% compared to 10.5% in FY '26. We expect the EPC gross margin to range between 8% to 10%, depending on the project mix of turnkey and BoS. On the O&M side, we expect gross margins to stabilize at around 20% level. Our operational EBITDA, which is operating its revenues less recurring overheads amounted to INR 78 crores this quarter, and the operational EBITDA margin was around 4.9%. Our reported quarterly EBITDA was also positively impacted by ForEx gains and amounted to INR 96 crores. Our Q1 PAT grew 36% year-on-year to INR 53 crores, aided by lower effective taxation rates. Now coming to the balance sheet. Our net debt levels have remained largely stable this quarter. Our gross borrowings declined by approximately INR 130 crores this quarter due to scheduled repayments of term loans. Our net working capital was at negative INR 260 crores compared to negative INR 329 crores in previous quarter. As CKT mentioned earlier, with the improved collections from the new large projects, we anticipate the working capital cycle to continue to improve. We continue to make good progress on fresh limits on non-fund and fund-based requirement. We have cumulatively been able to obtain fresh credit lines to the tune of more than INR 3,200 crores to let the growth momentum in the business. With this, we can now open the floor to questions and answers.

[Operator Instructions] The first question comes from the line of Kunal Shah with DAM Capital Advisors.

Yes. Now despite the order inflow momentum being strong, so the revenue has declined 10% Y-o-Y, and we've not been able to achieve the targeted INR 20 billion to INR 25 billion run rate for revenues on a quarterly basis. Could you just explain what happened during the quarter? And versus the last quarter guidance of 15% growth for F '27, now you're mentioning about 10% to 15%. So is there some bit of miss that we are seeing in terms of execution?

We have given the guidance of growth of, say, around roughly INR 2 billion quarter-on-quarter basis or INR 2.5 billion quarter-on-quarter basis. The assumption was that revenue would be coming from the projects in hand and the new orders where we were announced L1 in Q3 and Q4. So this the NTP dates or LOA for these projects were delayed for the specific reasons and the contributions from those new orders could not add to this quarter's revenue streams. Also, the revenue -- I mean the UOV from the existing orders that we had all those projects were during the advanced stage of the execution. And most of the supplies were taken into the previous quarters. So -- and we were expecting that the revenue contribution from the new orders will come initially through the supply from here. And therefore, our assumptions was absolutely on the right track and you could have got it. Unfortunately, all new orders launched were delayed. And therefore, I mean, this is the seasonal phenomena that the revenue has been -- I mean, has dipped. So I mean, in the subsequent quarters, we don't anticipate maybe the second quarter also would see the slight slow, but then third and second half of the years could be definitely bright.

Understood. Also secondly, with this mega order from Egypt, could you just explain the life cycle of this particular project? And when will the execution start?

Yes. So that's the landmark project for us. And the project is for 13 to 15 months time after the NTP, 2 months LNTP period and the NTP of this project, we are expecting in September. With this September NTP, we are expecting that the revenue contribution from this project will add to the last quarter of the financial year.

Okay. Understood. And just last bit on the orders from Adani or potential parent orders or the Egypt one, none of the company-specific banking limits would be used for these 3 projects, right?

For this Egypt order, there could be part amount which we use from existing credit lines and partly, we can get the new credit lines for project-specific requirement. For Adani, there is no specific requirement for using credit lines because supplies are primarily from their side. So -- and from a parent company, we've still not closed the terms. So it would be speculative if you say anything in terms of requirement of credit lines. But broadly, we anticipate that there may not be requirement of using any credit lines.

The next question comes from the line of Yash Jhurani with Qode Advisors.

Sir, how much of our INR 13,000 crores with UOV is exposed to, say, the ALMM list to sell? And with domestic sales being like at around 130%, 160% premium and a 6-month certification backlog, what is the risk of that our execution ramp slips off into say these next few quarters?

Yes. So basically, the Coal India orders that we announced last time where we are at L1, the NTP or LOA still you are expecting. This is a turnkey project. And here -- and you know that as per the policy guidelines, any project which were bidded after 1st September 2026, they are all under DCR category. So the Coal India orders is one that is under DCR category. Interestingly, we have already locked the price, the price at which we have -- I mean we submitted our bids. So despite the fact that the market is not stabilized, the DCR market, there are a lot of speculations all around. But the Coal India would be the first orders where the DCR models demonstration will come. And fortunately, we have locked the price, and we don't anticipate any impact on to the model price increase because of the market upside.

Understood, sir. Just a follow-up for that. So for future orders and tenders that we will bid, the DCR cost tariff shock, will it break any project IRRs for you guys?

Not really. Not really. I'd say that our margins are -- I mean, as you have given the guidelines that it depends on the mix of the orders that we are getting. So a full turnkey or BoS. Some seasonal impact in 1 quarter could happen. But overall, at the end of the year, if you see then our margin will remain in basically 8% to 10%.

And for BESS it has its own, say, localization pressure. So how exposed is your BESS margin to the duty charges on the imported sales?

No, I could not really get your questions. Can you come back again, please?

The BESS projects have their own localization pressure in terms of the sales that are currently being imported. So just wanted to understand how exposed is our BESS project IRR or the order, say, on the duty charges which are put on the imported sales, what kind of margin do we expect from that segment if any, say, regulations come into place?

Absolutely. I got it. Yes. So this is basically you are talking about the BESS projects. So basically, we are currently executed 1 BESS project, which is the BESS supply is not in our scope, which is being supplied by the client free of cost. So there is no impact of such regulatory changes and all. We are doing only this project. In future if the BESS project comes with the turnkey orders, including the BESS supply in our scope. So whatever price we will consider kilowatt hour price, will consider then the current market scenario and all. As of now in the existing orders, we are not exposed to any such risk.

The next question comes from the line of Faisal Hawa with H.G. Hawa & Company.

Sir, are you going to work on any kind of projects over the sea in this financial year or any orders coming up for that? And secondly, sir, did you say that the second quarter will be also slow because of revenue not being recognized and execution being slow?

So the first question is your over the sea -- you're floating -- are you talking about the floating solar plants?

Correct. It is mentioned in the presentation also.

Yes. Great. You may be aware that, I mean, we are doing one of the India's largest floating plants with NTPC and DVC joint venture as a client in their one of the biggest time in Tilaiya, Jharkhand, and after that, I mean, there was one more tender in the market that we lost to somebody, maybe KPI in Gujarat through SECI. This quarters, there are a few tenders which are coming, right? And they are large size, including, again, the NTPC, DVC ventures and plus some of the state government. And having executed on large projects, we are well positioned to participate in these tenders, and we are expecting, yes, some of the -- I mean, some portions of the orders definitely will come to us. Second question that the revenue in the second quarter. So yes, so what I said that in second quarter, there were 2 factors; one that the new orders that I have mentioned even if I'm expecting the LOA to come in this quarter -- this quarter, but then the revenue realizations will happen in subsequent quarters only. So on the existing UOV in the hands, to that extent, it will be impacted and plus the rainy season, the monsoons, right? So that also will slightly attend. But nevertheless, the number that we have achieved in this quarter, I'm confident of achieving I mean, in the similar range for the next quarter as well. Quarter 3 and quarter 4 would be definitely be very, very high because by that time, all the new orders will come into the execution stage and I am expecting that the significant contributions from those orders will come to revenue.

Just to add what are the efforts that we are making to reduce the central office expenses and the overall fixed costs that we are having. And second is, sir, is there any way that we can mitigate the risks of this international order that we have also got?

What was the first -- so the first part of the question again, I just missed, the fixed cost?

Fixed cost, particularly our center office expense because that is what?

Yes. So all these order increase see whatever manpower strength and the other things are augmented to take up this kind of the new orders they are all costed into the project. And miniscule augmentations happens at the head office. And if you see our manpower strength and other things. So and the number also. So this quarter overhead is also -- I mean lesser than the last quarter, in fact. So we are pretty well on to managing the overhead at the company levels. On the international side, the risk, I don't foresee because all the -- market surge and everything and a few of the items which we believe that, that could be getting impacted were all tied up back to back. So there's no risk of -- and having executed the 4 projects in international markets as we have been telling in the previous calls also. So the team has been well positioned to understand the market before times and position themselves to take care of all those. So both the projects in Africa, Europe. I mean, successful we have completed within the prescribed governs and above -- all you can say above the targeted margins. We're pretty confident that there should not be any miss on the new projects that has come to us now.

Okay. And sir, what is the hedge rate in this quarter for us out of total amount of projects that have been bidded out in India? How much have we won? And what is the kind of bid pipeline we see for the coming year in India in terms of INR crores?

Yes. So unfortunately, this quarter, we were expecting that the order in the tune of over INR 20,000 crores could have been finalized, right? But -- and then those were the spill over the order from Q4. Unfortunately, the total orders that were concluded was only INR 6,400 crores, including both the PSU and the IPP. Some of the new interims have gone aggressive and we remain patient to see the profitable orders. And since we had already a very great visibility of the revenue streams out of the new orders that we got and the UOV that we had from the existing one. So we definitely have not gone that aggressive. And that's basically we decided not to go that aggressive. But since these 2 quarters have been sluggish, the projects that have been announced in the quarter 3 and the projects that are anticipated to be announced in quarter 4, overall value, if you say that is still -- I can clearly see that the order worth of around INR 45,000 crores to INR 50,000 crores, right? So let's say, around 35 gigawatt orders on the 25 gigawatt on the utility scale and around 35 gigawatt hour on the BESS side. So those kind of order pipeline is clearly seen. So I'm expecting that this quarter and the next quarter, our shortfall will be definitely catching up. So a huge pipeline, significant orders we've seen, and we are anticipating our share to remain intact.

The next question comes from the line of Jayesh Shroff with Cask Capital.

My question is now that you have already reduced the top line guidance from more than 15% to 10% to 15%. And you were also alluding to the fact that second quarter, of course, because of monsoon and other factors is also going to be as low as the first one. That means that your execution in H2 will need to be greater than maybe INR 2,600 crores, INR 2,700 crores or maybe around INR 2,600 crores. And on top of it, you will have Reliance starting their projects, which will also demand faster execution. So are we geared up for such kind of execution scale? I mean, wouldn't that be a bottleneck going ahead?

No, absolutely not. So in fact, as per our guidance, we were geared up to achieve over INR 2,000 crores of revenue in this quarter as well. Unfortunately, the market scenario, I mean came into the play, and we could not get the support from the orders that we had, right? But then the team was absolutely in place. And we are completely geared up. For even Reliance initiatives, also, we are in the process of augmenting the team. We have more than the core team strength that we have in place. So we are absolutely fine tuned to take up this kind of -- and we have no other options also. We have to achieve I mean the kind of the revenues in the second half of the year, as you have explained. So we have no other option. We you have to.

Okay. Just 1 more clarification. This order -- I mean, top line guidance of 10% to 15% is ex Reliance, right?

Yes, that's right.

Yes.

Okay. So that means that we have to do maybe around INR 3,000 crores around quarter 4 types. So that's what I'm saying, see, you've guided for execution of more than INR 2,000 crores. But here, we are talking of close to INR 3,000 crores. So that is why I asked that question that will that not become a bottleneck in execution?

Point well noted, and we are mindful of this point that our target for quarter 3 and quarter 4 is going to be heavy. We're mindful of this thing. So we are well prepared for that.

Okay. So that -- I mean, management is confident in reassuring on that, that will not come as an excuse or whatever, I mean, a bottleneck to downgrade the top line growth any further.

Boss, we have no option. I mean we have to perform at that level.

Q4 of FY '25, we did more than INR 2,500 crores.

Yes, we have stated already.

You stated in FY '25, Q4.

And then the significant contribution will come in Q3 and Q4 from international orders also. So with domestic and international mix. So achieving the target of over INR 2,500 crores, I don't foresee any challenge in that.

Okay. You -- I mean we at least stabilized on the operational front and our gross margins also closer to 9.5%, 10%. Now we are talking of the guidance between 8% to 10%. So is there some downgrade there? Or why we are talking of 8% to 10%?

So why we are talking is basically, I mean, in the beginning, I have told you, sir, if the margin basically comes from the mix of orders that we get. So the turnkey orders in terms of absolute numbers for turnkey orders, while the percentage margin will remain low, but in absolute numbers, it will be high, right? Whereas you have the BESS project that was for BoS project, on the BoS project side, we have margin of let's say around 10%, correct? So it all depends on -- in the next few quarters, the kind of orders the opportunity is huge for even both the turnkey and the BoS. But at this moment, I can't tell you that, I mean, all are through the RA process and all. So it will all depend on the kind of order mix that you will have and that would be between 8% and 10%. That's what we have guided.

I mean I'm sorry for asking this maybe a very dumb question, but will it have any bearing on our EBITDA margins also, I mean, because of maybe a lower gross margin?

So our overheads in terms of the absolute number will not increase. In terms of percentage, it should come down a little bit from the current number, because we are growing in terms of revenue. And of course, if the gross margin is getting impacted negatively, there will be some impact on EBITDA margin as well.

Marginal impact, yes, yes.

Okay. Otherwise, in case of a stable margin, your operating leverage scenario should play out?

Absolutely. That's right.

The next question comes from the line of Adwait Javkar with EquiPoise Capital Management.

So now you explained that revenue was impacted due to delays in the projects. So do these delays increase the risk of bank guarantee invocation or contract termination? If yes, what is the maximum financial impact in the worst-case scenario?

No, not really. So since the new orders that we said that had been delayed, so those orders contract date itself has not started because we are anticipating the LOA to come. Now the project time lines will start from the date of LOA. So there's no question of the bank guarantee invocations or any further risk on such orders.

Okay. And the second question is, there are total claims are around INR 1,800 crores, so realistically, when do you expect a meaningful portion of these claims to be resolved or recovered?

Indemnity.

Not indemnity. Basically you claim some -- you have done some claims. So basically, like there are some claims related to arbitration then some INR 508 crores of wrong pull invoke bank guarantee claims, and there are 2 international customer claims. So at what time you are expecting that this will be recovered?