Sterling & Wilson Solar (S&W) has become a rare success story in the Indian renewable energy sector by becoming the first company in many years to successfully complete an IPO. The share sale was structured as an offer for sale by the company’s promoters; the company itself has not raised any money from the IPO. The promoters have raised INR 28.8 billion (USD 411 million) against their final target of INR 31.3 billion, revised downwards from the original target of INR 45.0 billion: INR 14.8 billion was raised from the IPO itself and another INR 14.0 billion was raised through private placement with anchor investors including Nomura, Schroder, Fidelity, ADIA, HSBC Global, Neptune, MIT, ICICI Prudential and Reliance Mutual Fund. The company had to incrementally scale down the IPO and reduce its price expectations in wake of a slowing economy and recent volatility in the stock markets.
- S&W enjoys strong leadership position in solar EPC with dominant position in India, Africa and Middle-east and presence across 26 countries;
- The company faces a formidable challenge of maintaining its business growth and profitability in a highly commoditised market;
- There is high investor appetite for renewable energy stocks but the market is not ready for IPPs because of concerns around their high leverage and poor returns;
S&W is the largest solar EPC contractor in the world with a market share of 4.6% in 2018, more than double the second ranked player. It has consistently been the largest solar EPC domestically with market share ranging between 9-13%. But 60-70% of the business is international – spread mainly across Africa, Middle-East and SE Asia. The latter is highly prized due to higher gross margins (about 10% in comparison to less than 5% in India). Revenues and profits have grown at a CAGR of 44% and 50% over the last 3 years. But it is difficult to analyse company financials in detail as it is a newly incorporated entity with a carve out of solar EPC business from the parent entity.
S&W has achieved rapid growth in solar EPC through aggressive expansion in other geographies and price leadership. At the final sale price of INR 780, it is valued at INR 125 billion (USD 1.8 billion), 19x FY 2019 earnings but much lower than the company’s original valuation target of INR 180 billion. S&W now faces a formidable challenge of maintaining its market leadership and profitability in a highly commoditised market. Stagnation in solar capacity growth globally over the next 3-4 years partly because of the slowdown in China, the world’s largest solar market, is also not going to help.
S&W IPO has managed to ride a wave of market optimism around the solar sector combined with attractions of a capital light and internationally diversified business model. The development is both welcome and instructive as it follows unsuccessful attempts by many developers (ReNew, Acme, Sembcorp and Mytrah amongst others) to launch an IPO in the last two years. We believe that the stock market is not ready yet for IPPs, who will have to consider other opportunities for rotating their capital.