Key Catalyst in Future
● The Nigeria project which is funded by Exim Bank of U.S.A in the African continent has a revenue potential of ~1.5 to 2 Bn USD for the company. As per the officials, the final terms have been negotiated and procedural steps are in progress which would take nearly 6 months to achieve financial closure due to various US institutions also involved. Also, post order signing, the company expects the project to take six months for execution, and revenues will be recognised next FY26.
● The O&M portfolio grew from 7.67 GW in March 2024 to 8.2 gigawatts as of June 2024 whose fruits are expected to come in 12-18 months and thus can lead to Margin expansion. Management has claimed to have 28% Margin in O&M segment.
● The Company has created a particular SBU for Reliance and Reliance overall has renewable energy targets of 100 GW by 2030 (Solar being major) which is a very huge opportunity for the company.
● Solar + BESS (Battery Energy Storage System) is also a huge opportunity for the company with BESS margins to be very high (For example the BESS EBITDA margins for Gensol Engineering, a similar company, is around 90%)
● A Special Dividend Opportunity in SW Solar in Future
Note 58 to the Standalone Financial Statements of the company which details the Company’s exposure in respect of its investment in a wholly owned subsidiary, loans given together with accrued interest thereon and other receivables aggregating to 2733.10 crores as at 31 March 2024. (Also mentioned in Q1FY25 results) The Company is confident that these amounts are recoverable based on the projected cash flows of the wholly owned subsidiary and amounts recoverable under the indemnity agreement with the Promoter Selling Shareholders.
With Current outstanding shares of 23.3 crore, taking into consideration that this amount is received in future then the company can have either the option to retain the cash for business growth or a special dividend opportunity may rise.
This amounts to roughly a special dividend of around Rs 110 per Share, but in my view, the company may not fully pay the cash received from the subsidiary into dividends. So, one can expect a dividend of around Rs.50 in future. But since these claims are in Arbitration and various legal proceedings it may take even more than a year to fully solve all their claims as many of their suits filed are pending for hearing in the year 2025.
Current Situation
● Earlier company used to do only BOS(Balance of system) type EPC contracts but they have taken a couple of projects in the domestic market with modules with extreme caution.
● In int projects, now the company is able to pass on the price risk.
● Projects in excess of 1GW have a typical execution timeline of 15-18 months. And the IPP projects in India, typically over 200 megawatts have a timeline of 10 to 14 months (Avg Execution time – 12-15 months)
● After taking a project, What you need are Letter of Credit limits for 90 to 120 days for critical equipment supplies. So all in all, put together, it said it could be around 40% to 50% at the peak of any project. It does not mean that if I need INR 8,000 crores of turnover, I need to have 50% of the limit at all points in time. It is a churn – the % may change.
● Bank guarantees are 20% of the project value typically
● A lot of the deferred tax was utilized in the previous year. As of the June quarter, we have utilized about INR10 crores. We still have another INR30 crores of deferred tax, which will get utilized.
Key Risk
● One of few companies which has 3 promoters. So that itself is something very rare. And then the promoter continuously selling, pledging (Reliance New Energy and Shapoorji and Pallonji Group and Khurshed Daruvala)
● Overhang of contingent liability
● Exposure to volatility in raw material prices and project execution risk
● SW Solar generally operates in larger EPC projects where the turnaround time is higher and there is higher risk related to receivables and other operational costs.
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