India’s Bankruptcy Littered Solar Industry Sees A Sunny Spark in Sterling & Wilson IPO

Despite becoming the third-largest market in the world for solar energy installations, the experience of Indian solar companies has been quite nightmarish with a number of companies seeing liquidation (Moser Baer, Indosolar) due to the massive competition unleashed by the dominant Chinese solar companies. While the Indian solar manufactuers have suffered, the other players in the supply chain have not exactly flourished.

Due to the brutal competition in India’s reverse auction solar markets, developers and EPC players have also struggled due to the low prices. Developers have to regularly quote very low prices which makes many people question the sustainability of these 25 years long solar projects, while EPC players are also put under the hammer as they are made to survive with wafer-thin margins. Many EPC players are also faced with stringest conditions in their contracts where they have to pay large penalties for small time delays many of which are not under their control. The renewable energy industry also faces huge challenges from the uncertain regulatory and policy scenario, the most recent one being the threat of the Andhra Pradesh government to renege on its PPAs with solar and wind developers citing the losses of its distribution utilities.

Sterling and Wilson which is one of the worlds’ largest solar EPC contractors is coming out with a reasonable size IPO which values it shy of the $2 billion mark. The company belongs to the Shapoorji Pallonji Group, which is one of India’s oldest conglomerates with a long history of constructing major infrastructure projects in India as well as abroad. The company is known as one of the best EPC contractors in the solar industry and earns more than 70% of its revenues from outside India. Given the cutthroat competition in India, it is a smart strategy by the company management which allowed it to aggressively expand outside India. The company has a 36% and a 40% share in the solar EPC utility market in Africa and the Middle East, respectively which are fast-growing markets for solar energy.

Sterling and Wilson has been growing at a very rapid pace and has revenues of almost $1.2 billion with a net profit of $90 million. The company is pricing its shares at 20 P/E which seems okay, given the rapid revenue and profit growth seen by it. However, one would question a high P/E given the sector that the market operates in, which is the construction sector. This sector does not get high valuations because of the typically low return ratios. Also, the construction sector faces challenges in terms of order sizing and payment issues. One would also question if the company can grow at the same pace as it has in the past. That said, Sterling and Wilson is well run and has a “sterling brand reputation” in the market with the backing of the Shapoorji group which is the largest shareholder of Tata Sons making it extremely strong financially. I would invest in the company if its valuation was lower.